This is a response to @Mona that I did over on another discussion thread. Petros has suggested I make a post out of it as a stand alone, which I am doing with some amendments to my previous rushed comments.
Mona said to Roger… ” I still think that they should allow for reasonable cause. I do see what you’re saying though, especially with the possible fbar penalties. But outside of the ovdi and ovdp programmes, do you know of anyone who genuinely hadn’t known about fbar and pleaded reasonable cause still being hit with draconian fines? There don’t seem to be any cases specifically mentioned on any of these blogs.”
Here is my response:
Prior to 2008, penalties for FBAR filing failures were rare, but that was before the task of applying those penalties was transferred from FINCEN to the IRS. Now, for “reasonable cause”, the IRS says to Canadians there will be no penalties if no taxes are owed. However, as we know, the IRS definition of what is reasonable, and your definition are probably world’s apart. What if you owe $100? Does that allow them to ignore their “reasonable cause” non penalty suave they have applied to soothe your fears? I have learned long ago to not make any assumptions as to what they should “logically” do, as I have been wrong too many times.
We can only speculate on what they will do based upon what limited evidence we have in the past 2 years as to what they have done. The Internal Revenue Manual does give guidance as to what the IRS should do, if it follows its own manuals, but even that gets muddled depending on the Examiners ability to navigate that maze of qualifiers and technical definitions and depending on who the technical adviser is.
The problem with FBAR penalties which are less than the “in Lieu of” penalty, or less than the maximum penalty within the OVDP and OVDI, is the lack of visibility. It is only by anecdotal information sharing that we determine or judge how the IRS is acting for those who “Opt Out” or assert “reasonable cause.” There is no data base or clearing house one can look to and see how the IRS is handling these cases, or even how many there are.
Currently I only know of 4 where no penalties were asserted in the OVDP. I hope there were more, but this is all I have heard about. One in a pre FAQ35 withdrawal as reported on Phil Hodgen’s blog by someone called Damsel in Distress pre ‘Opt Out’ days. There was another I heard about by Asher Rubinstein. Post “Opt Out” procedures, (after June 1, 2011) there has only been two reported. One, by a Sally reported on Townsend’s blog, and one by Moby again reported here, and on Townsend’s blog. There maybe others, and if anyone knows of any, I wish they would share. There has to be, but how would you find out? Perhaps by a extensive survey of attorneys around the nation who have been handling OVDP / OVDI who would be willing to share their results. Now that I think about it, that would probably be a worthy project if someone had the time and energy to get the various attorneys to respond!
The thing that concerns me, and concerned the Tax Advocate Service (TAS), is that there are many who should have been given relief, but probably rolled over and paid the “in lieu” of 20% penalties. They really should not have, but fear of the unknowns forced their hand and kept them in the programs that they should have Opted Out of. However, in the original 2009 OVDP, there were no procedures for “Opting Out” until June of 2011.
Of course, there are others that have been reported where a lesser penalty than maximum ‘wilful’ penalty has been asserted, like in my case. Some attorneys trumpeted success at obtaining lower penalties during the OVDP, but after examination, those were only granted using the FAQ35 relief in the OVDP which of course was later rescinded. There is no such relief in the OVDI, except to “Opt Out”.
The FAQ 35 relief mentioned is where the IRS have hit you with “only” a ‘non willful’ $5k per unified FBAR penalty per year, but that still is a significant cost anyway you look at it. For me that was $25K, which is a hellva lot better than the $172K they wanted, but was still harsh. I had to make a business decision to suck it up, take it and move on (if you call blogging about this stuff “moving on”). But…., think about what that means, in practical terms. The IRS is saying, we agree you were not willful, but we basically don’t think your “reasonable cause” argument is good enough, so we are going to fine you $5K each year anyway, because we can!
And, that for you dear Canadians should give you some pause in thinking you might have relief under the “reasonable cause” argument. You might find yourselves surprised. I hope not, but there are the sober considerations you need to keep in mind, it seems to me.
So, when it comes to how the IRS is going to treat you as Rumsfield has said, “there are many known unknowns”, but with it comes to FBAR penalty application it often is operating in the unknown unknown realm due to the lack of transparency in what they do. We are left to speculation, based upon logic of what we think “should happen”, and that is fraught with problems.
In answer to your question Mona, No… “there don’t seem to be any cases specifically mentioned on any of these blogs” where draconian penalties have been applied. However, what is your definition of draconian? Is $5k per year non draconian? Therefore, I have to caution you, that lack of specific cases reported on blogs means nothing as related to evidence of what could or would happen in individual cases. For one thing, it is too early in the process yet to know or get good anecdotal reports on how the IRS is going to treat Canadians. Secondly, for each person that comments on a blog like this one, there are probably 10 that don’t bother to inform anyone. But there I go, speculating about who reports or doesn’t and which blog they report on! My point is there is no clearing house of information related to FBAR penalties, and so I just do not know how we can assert anything yet about what will happen. I do hope with time, your desire for logical results will be proven in fact. Time will tell. But time is the enemy too. Will the IRS acceptance of “reasonable cause” diminish with time, as they assert that you have had plenty of time to become aware of your failures, and thus your feet dragging to file your FBARs is no longer reasonable? Is that an unknown unknown?