Reasonable Cause vs Streamlined-What’s the Difference?

Reasonable Cause vs Streamlined-What’s the Difference?

Reasonable Cause vs Streamlined

Reasonable Cause vs Streamlined: The Reasonable Cause vs Streamlined Filing IRS Submission analysis is very complicated. The Streamlined Procedure (Domestic or Foreign) is an IRS program developed in 2014 as a stand-alone alternative to OVDP. This offshore program was developed specifically to assist non-willful taxpayers with safely getting into international tax and reporting compliance. This program came at a crucial time, in light of the aggressive enforcement of foreign accounts compliance and unreported offshore income penalty issuance. Unlike the Streamlined Program, Reasonable Cause is not a “program.” It is not limited to international and offshore cases. In addition, there is no form such as a Certification Form 14653 (SFOP) or Form 14654 (SDOP), which are used for the Streamlined Procedures.

The reasonable cause submission package is prepared by the firm making the submission.

Reasonable Cause vs Streamlined

The Reasonable Cause vs. Streamlined analysis begins with an assessment and overview of the non-compliance.

It starts with the individual, trust or estate being out of offshore compliance. The Taxpayer will not have reported foreign income, accounts, assets or investments to the IRS and/or FinCEN.

It could be because the overseas accounts pre-dated U.S. status, or the person never knew foreign investments such as Life Insurance or PFIC was reportable.

Alternatively, the taxpayer may have inherited foreign accounts and was unaware the estate reporting rules, which commonly revolve around FBAR and FATCA Form 8938.

Non-Willfulness & Reasonable Cause vs. Streamlined

The most important element of either submission alternative is that the taxpayer is non-willful. To date, the IRS has not issued any definitive, bright-line test to determine willful vs. non-willful.

If a person is willful, they do not qualify for either reasonable cause or the streamlined procedure. Rather, they must submit to post-OVDP (aka OVDP Willfulness).

*Since the closing of OVDP in 2018, the IRS also expanded the traditional voluntary disclosure program.

Willfulness Does Not Mean Intent

An important distinction between civil willfulness and criminal willfulness is that with civil willfulness, intent is not required.

Rather, a taxpayer may have failed to comply with offshore reporting, either because he was reckless (aka reckless disregard) or with his eyes closed (willful blindness).

Non-Willful vs. Reasonable Cause

While the concept behind Non-Willful and Reasonable Cause is similar, the application is not the same.

When a person is non-willful, they are essentially acknowledging that they made a mistake or error.

They will provide a summary of their non-disclosure — which is made under penalty of perjury) and seek a penalty reduction to either a single 5% miscellaneous offshore penalty, or qualify for a penalty waiver — if they meet the foreign resident requirements.

Since there is no bright-line test to determine non-willfulness, it is based on a totality of the circumstances.

Conversely, with Reasonable Cause, the IRS has a bit of a higher standard. In other words, unlike the mere totality of the circumstances test, the IRS has certain threshold requirements the Taxpayer must meet.

IRM Requirements for Non-Willfulness

As Provided by the IRS:

First, check to see if the information in your notice is correct. If you can resolve an issue in your notice, there may be no penalty.

Reasonable Cause is based on all the facts and circumstances in your situation. We will consider any reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.

Typical Situations

The IRS will consider any sound reason for failing to file a tax return, make a deposit, or pay tax when due. Sound reasons, if established, include:

  • Fire, casualty, natural disaster or other disturbances
  • Inability to obtain records
  • Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
  • Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so

Note: A lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time. However, the reasons for the lack of funds may meet reasonable cause criteria for the failure-to-pay penalty.

Facts Establishing Reasonable Cause

Facts we need in order to determine Reasonable Cause:

  • What happened and when did it happen?
  • What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/or pay your taxes timely?
  • How did the facts and circumstances affect your ability to file and/or pay your taxes or perform your other day-to-day responsibilities?
  • Once the facts and circumstances changed, what actions did you take to file and/or pay your taxes?
  • In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?

Documents You May Need

Most reasonable cause explanations require that you provide documentation to support your claim, such as:

  • Hospital or court records or a letter from a physician to establish illness or incapacitation, with specific start and end dates
  • Documentation of natural disasters or other events that prevented compliance

We Specialize in Streamlined & Offshore Voluntary Disclosure

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Contact our firm today for assistance with getting compliant.

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