Penalty abatement, reasonable cause, and the facts that support reasonable cause
The Isaac Brock is a wonderful forum for discussion. It is also a wonderful resource. A resource that will alert you to issues that may be relevant to your compliance. Some readers are clearly grappling with the best way to come into compliance . This involves tax or information returns or both. The Isaac Brock Society has been fortunate to have had contributions from two lawyers: Roy Berg in Alberta and Steven Mopsick in California. Their thoughts and contributions have been greatly appreciated.
In the December 2011 FS the IRS made it clear that penalties could be abated if the taxpayer were able to show “reasonable cause”.
To use the language of Mr. Mopsick:
For those in the second category, here is a thought from a 30 year IRS veteran attorney. The name of the game here is the abatement of civil penalties (assuming your tax problems do not arise from an illegal activity). Under widely recognized IRS procedures, civil penalties can be abated upon a showing of reasonable cause. That could mean reliance on the wrong advice of a professional, or ignorance of the law, say for someone who has lived in Canada all their lives and is an “accidental” US citizens who never had any reason to know about FBARs or FATCA.
In the words of Mr. Berg:
Certain arguments under “reasonable cause” are supported by case law and statutory law (e.g., reliance on advisors, information unavailable, ignorance, etc.), but the elements of these defenses must be set forth in the accompanying letter. Without addressing the elements of the defense, the IRS can easily deny the defense.
Likewise, certain arguments under “reasonable cause” are NOT SUPPORTED in the law. If you don’t use the correct argument, the IRS WILL deny the defense and assert penalties.
Further, if the facts used to support reasonable cause argument are false or misleading, that can constitute criminal conduct.
Finally, as Mr. Mopsick notes, there are additional penalties ($5,000 in fact) for advancing a frivolous position.
Everyone needs to be advised to proceed with extreme caution.
The message is clear. That said, there remains the question of “what are the facts that will support an argument for “reasonable cause”.
And: what are the facts that will NOT support an argument for “reasonable cause”?
Facts that may support reasonable cause
On the issue of facts that WILL support “reasonable cause” I recommend the following post by Roy Berg where he writes that:
Late on December 7, 2011 the IRS issued Fact Sheet 2011-13 (“Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.”), which provides important guidance on two matters for taxpayers residing outside of the U.S.: first it gives insight into the type of facts that would support a “reasonable cause” argument for the abatement of penalties. Second, it clarifies the procedure to bring current unfiled returns, thereby confirming the IRS’s disdain for “quiet disclosures.” The guidance provided by the Fact Sheet makes clear the importance of engaging a professional who is experienced in these matters.
Facts likely to support a “reasonable cause” argument for the abatement of penalties
Many of the penalties faced by individuals who haven’t filed their U.S. returns may be reduced to zero provided the taxpayer can prove reasonable cause for not filing. Reasonable cause is a legal doctrine, the application of which is determined by all of the facts and circumstances surrounding the taxpayer’s failure to file. Particular facts that support its application are found in case law, administrative interpretations, the statutes, and the treasury regulations.
The taxpayer was unaware of his U.S. filing obligations
Depending on the particular facts, one of the theories that may support a finding of reasonable cause is that the taxpayer was unaware of his filing obligations. The Fact Sheet lists several facts that the IRS will, apparently, weigh more heavily than others in determining whether being unaware is sufficient to support the “reasonable cause” argument, including:
- The taxpayer’s education;
- Whether the taxpayer has previously been subject to the tax for which the return has not been filed;
- Whether the taxpayer has been penalized before;
- Whether there were recent changes in the tax forms or law the taxpayer could not reasonably be expected to know; and
- The level of complexity of a tax or compliance issue.
The Fact Sheet then gives several examples, the facts of which support a finding of reasonable cause, the most telling of which is Example 4. Under Example 4 the IRS concludes that reasonable cause is shown based on the following facts:
· The taxpayer complied with tax filing and payment obligations in his country of residence;
· He was previously unaware of his U.S. filing obligations;
· After discovering his U.S. filing obligations he filed his previously unfiled returns;
· He attached a statement to his returns setting forth his reasonable cause argument;
· He had a legitimate reason for maintaining non-U.S. accounts;
· There was no indication that he had taken efforts to intentionally conceal the reporting of income or assets; and
· There was no additional U.S. tax due.
In making the reasonable cause argument, it is critically important to analyze the facts, support the facts with affidavits or other evidence, and to make sure that the facts are supported by existing law. A U.S. lawyer who is experienced with the foregoing is an essential component to prevailing on reasonable cause argument.
A similar article is here.
Facts that will NOT support reasonable cause
My question for Mr. Berg and Mr. Mopsick is:
“What are the facts that will NOT support an argument for reasonable cause?”
Your comments would be most appreciated.
@Robert – if you don’t owe tax, why do you need to do streamlined? If it’s because you had a filing obligation and did not file, then streamlined will work — assuming you’ve decided that coming into compliance is truly your best option. If you already filed and just neglected the FBARs – then just file the FBARs — again after considering the true risks of non-compliance. If you have not filed, but had no filing obligation, then why open that can of worms?
The IRS says that the offshore Foreign Streamlined Procedures are for taxpayers living outside the US who “have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct.”
So you don’t have to owe tax to use Streamlined.