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.[1]
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.
What about the US ambassador saying, “Sit tight”! Obviously, up to this point my intent was not criminal, but an attempt to prevent the IRS from committing a crime against me.
What would NOT be reasonable cause would be the following examples:
1. A prosperous Toronto attorney or CPA with offshore bank accounts in different countries who said he had never heard of an FBAR.
2. Lying to your return preparer when he asked you flat out if you had an offshore bank account.
3. Purposefully not disclosing your offshore bank accounts on a return preparer’s questionnaire knowing full well you had some.
4. The higher the level of education and business experience of a taxpayer, the harder it is to successfully argue he didn’t know about FBARs.
5. The degree of activity in the offshore account is relevant. Someone who is actively using his offshore account in a trade or business will find it hard to get the Service or a court of law to agree he had no knowledge of the requirement to file an FBAR. This would be opposed to someone who inherited the account and didn’t know about and/or didn’t use it.
6. The source of the money in the account is from an illegal activity.
7. The government can show a series of ffirmative acts of concealment such as placing the account in the name of a nominee or using one of those silly trusts like they have in Liechtenstein or Andorra, or Nevis.
8. The very fact that the account is in a known tax haven country like the Cayman Islands, or a place like the Channel Islands.
9. The whole set of facts and circumstances just don’t pass the smell test.
10. A false statement on a tax return such as checking the box “no” in answer to the question. “do you have any foreign bank accounts?”
My God…how many people with GreenCards left bank accounts in the country of origin prior to moving to the USA?…
@markpinetree
I’ll try to find a link but there was a blog posting I found discussing a case of a green card holder that was deported for a fairly minor FBAR violation.
@Everyone
If I had to take a stab at it. If you are a US “Person” and have also had “issues” with CRA in terms of disclosure I suspect you could have some real problems with the IRS. The other thing with FBAR is fines were increased dramatically by Congress back in 2004 thus the US Treasury and IRS don’t have discretion on the issue that some may think
@Tim I’m guessing you’re thinking of Arguelles v. Mukasey from 2008? Bryan Dooley posted briefly about that case a couple of days ago on his blog here.
@markpinetree yes, and they can get hit even if the family’s primary breadwinner doesn’t come to the US. I’ve seen a few cases in South Korean newspapers with similar fact patterns: a Korean housewife gets a family reunification or other greencard and takes her kids to the US temporarily so they can learn English, while her husband remains in Seoul in a professional job to support the family. While the wife is in the US, her husband buys an apartment in Seoul as an investment property and rents it out by “jeonse” (meaning the tenant pays a deposit of ~50% of the property value, but no rent — it’s a traditional lease-like scheme in South Korea). In the end the IRS hits the wife with FBAR fines that are large multiples of the property value, and also penalties for not reporting the income/interest from investing the “jeonse” deposit money.
My layman’s guess is that this has something to do with (a) a joint account, or (b) how California’s community property laws interact with federal tax (e.g. see Pub. 555; most Koreans go to Los Angeles and so unwittingly fall into this) even though the husband was a non-resident alien. But the newspapers never go into enough detail for me to tell. (And I may be misunderstanding something; keep in mind these are stories about the US that was reported in Korean and now I’m translating it back into English to tell you about it, it’s a giant game of Telephone). Anyway this is one of those things I mean when I talk about structures which are perfectly ordinary and given simplified tax treatment in the countries where they occur, but to which the US applies all sorts of insane reporting requirements which result in disgusting fines.
Steven J. Mopsick: 10. A false statement on a tax return such as checking the box “no” in answer to the question. “do you have any foreign bank accounts?
How about some harried honest Canadian trying to push out inscrutable paperwork to pay zero taxes? Who thought “All my banks accounts are in Canada. That’s not foreign. That’s where I live. OK. No.”
If the question reads – Do you have any bank accounts located outside the United States? – that would be a different matter.
“Foreign” is ambiguous. To many of us the United States is foreign, and strange, and becoming ever more so. Those who reside within the U.S. cocoon are incapable of having any idea.
@USX:
Townsend’s blog has a recent report on the famous Williams case which the government now is appealing, much to the chagrin of most of us minnows. Basically, the court decided in Williams vs. United States, that the failure to check “yes” was not an indication of wilfulness. But the US government wants to be able to eliminate this decision from the case law and has appealed it. Williams, by the way, was no minnow.
http://federaltaxcrimes.blogspot.com/2012/01/government-appeal-of-williams-fbar-case.html?utm_source=BP_recent
see also http://federaltaxcrimes.blogspot.com/2010/09/government-fails-to-prove-willfulness.html
@ Steven
I actively use my so-called “foreign” investment account just to get by on a day to day basis. It beats asking my kids for money to buy groceries. The money in it was all funded from my late husband’s life insurance; it doesn’t come from any inheritance unless you could say, I inherited the money from my late husband.So does #5 apply – I should have known to report FBAR’s – how could I be expected to know that – I have been a Canadian since 1973 when I renounced my citizenship in the U.S. Let’s get real here!
@Steven: When many of us became Canadian citizens 40, 50 or 60 years ago, US told us clearly we were renouncing our US citizenship. US Consulate urged me to carefully consider because they told me in strong, clear and definite language my action was permanent and irreversible.
We all had every reason to believe–based on advice from US–that our decision was legal, binding and final.
At no time until the US began its attempts at money grabbing did they ever even hint that we were still US citizens. And they dare to call us “cheats?!?”
In any case, that is my “reasonable cause.” I have every reasonable cause to believe what the US told me 40 years ago was accurate, reliable and irrevocable. Many others have the same reasonable cause. They had no right to change our situation without our informed knowledge or consent–which I, and I’m sure many others–would not have given them.
Writing that, I’ve made a decision. I will not formally relinquish–I did that 40 years ago and have never looked back. I will not file income tax returns or FBAR. I will not do anything to alert US or IRS as to where I am. The only problem will be my need to continue to visit my elderly mother. If IRS finds me, they can try to collect through CRA (which has been very clear tthat won’t happen!)
I will fight this to my death. Unfortunately, the toll this is taking on the health of seniors and near seniors may hasten our deaths (and I’m not trying to be melodramatic by saying that). Maybe that’s what they want. Then, they can go after our estates when we’re not around to put up a fight.
Tiger, Arrow and others, let’s be a team in this. Let’s try to decide how we can work together to solve this. Calgary411, can you give me the name of the lawyer you worked with who confirmed you renounced 40 years ago before you got caught up in the US tricks to get you back into their minefields.
Steven, this anger is not directed at you. It just seems IRS and US are not being reasonable in any way about this.
Blaze wrote: “Writing that, I’ve made a decision. I will not formally relinquish–I did that 40 years ago and have never looked back. I will not file income tax returns or FBAR. I will not do anything to alert US or IRS as to where I am.”
Steven: This is why the Isaac Brock Society is here. This is why I and few others created this site. We have created it to encourage Canadians to stand on the protections that the Canadian government has offered them.
Now, is my case going to get turned into a “protester case” because I, as a Canadian citizen, have encourage Canadians to tell your country to shove off? I have indeed actively encouraged people like Blaze to tell the IRS where they can put their citizenship, their 1040s, their FBARs, their Fact Sheets, and their OVD programs?
@USXCanada great point!
@everyone
The real problem is that the neither the IRS nor the US. embassy has made any effort to educate people about this. Now, they are coming in to try to assess penalties.
Mr. FBAR is a:
“potentially cancerous tumor” that has turned into a major public health issue. To put it simply: FBAR is now destroying the health, wealth and lives of U.S. citizens living outside the United States. Furthermore:
– neither the IRS nor the U.S. Treasury has made any effort to educate people about FBAR (Example the website of the U.S. embassy in London as of the date of this post, makes no reference to FBAR in its tax information section)
– U.S. consulates and Embassies have not made a coordinated proactive effort to educate U.S. citizens about FBAR (We pay taxes, we want services)
– U.S. citizens who have been filing tax returns that clearly indicated that an FBAR should be filed have not been “flagged” by the IRS for “remedial education” (how about just sending a letter)
– U.S. passports contain information about the obligation to file tax returns but not information about the obligation to file FBARs
– The rules and legal obligations surrounding FBAR are NOT found in one place
– there is speculation that it may have been related to the resignation of an influential banker in Switzerland
http://renounceuscitizenship.wordpress.com/2012/01/26/looking-for-mr-fbar-in-search-of-fbar-fullfillment-and-consciousness/
@Blaze
You should get some professional advice on the “state” (no pun intended) of your U.S. citizenship. I have written post after post on this: you are quite possibly not a U.S. citizen. The U.S. cannot retroactively restore U.S. citizenship to people. I think the misunderstanding is that in 1991 the U.S. State adopted an administrative presumption that those who became dual citizens did not intended to relinquish U.S. citizenship. They then gave those who had previously lost their U.S. citizenship the benefit of that presumption. So, if you lost your U.S. citizenship when becoming Canadian in the 70s, you can get it back of you want it, but you don’t have to take it back.
See this post.
http://renounceuscitizenship.wordpress.com/2011/11/13/expatriating-acts-the-status-of-your-u-s-citizenship/
This is NOT legal advice, but it may encourage you to get some legal advice.
@renounceuscitizenship
I know who you talking about in Switzerland i.e. Kashya Hildebrand. Kashya(born in the US) but a Swiss citizen isn’t the banker her husband was and interestingly the bank they use in Switzerland has NOT been implicated in any of the “Issues” over there that other banks have been having. It (Bank Sarasin) though is very “exclusive” if you know what I mean.
I tried to get a blogger named Bruck Krasting’s attention to this site on this particular blog post of his.
http://brucekrasting.blogspot.com/2012/02/dojs-latest-beat-down-on-swiss-banks.html#comment-form
@renouncecitizenship: I agree I need to talk to a lawyer–but it needs to be a knowledgeable one. I consulted a US Immigration lawyer in Ontario who told me because Consulate did not give me a CLN, I am still considered US citizen. Like you, I believe that is wrong because I have undertaken many expatriating acts: Become a Canadian citizen, worked for a foreign governement (provincial govs), signed an Oath Of Allegiance to the Queen on two separate occasions when I joined OPS. I have gotten copies of the Oaths from my personnel files and have requested information from my citizenship file from CIC.
Once I have all that info, I hope to find a knowledgeable lawyer.. Any suggestions?
It ticks me off that I should have to pay a lawyer. The Consulate was very clear 40 years ago. I would not and could not again be a US citizen. But, I’d rather pay a Canadian lawyer to protect my unalienable rights and keep that $ in Canada than pay IRS.
I had already read everything you had posted. Many thanks. That helped to confirm what I had always understood.
Even US Embassy website contains the information that to lose US citizenship, a person must “apply for the foreign citizenship voluntarily, by free choice and with the intention to give up US citizenship.” (Check, Check, Check) The website also points out challenges of dual citizenship and says “The country where a dual national is located generally has a stronger claim to that person’s allegiance.” Isn’t that exactly what most of us are saying?!?
http://canada.usembassy.gov/consular_services/dual-citizenship.html
Their arrogance in assuming I want to be a US citizen infuriates me. Thinking they have any right to my money–all earned, saved, invested and taxed in Canada–is beyond arrogant.
@Blaze: when you are done send your lawyer bill to Hillary Clinton.
@all
Here is the letter I wrote that accompanied the 4 years of 1040 returns I sent in mid-December, followed by a letter I received from IRS yesterday regarding the 2007 return. I modelled the letter on the points made in the December 7 info statement that fit my situation (am a perfect “example 4”).
Dear Sirs,
Enclosed are my US tax returns for 2007, 2008, 2009 and 2010. I am a United States citizen from birth (xxxxx) and lived in the US until I immigrated to Canada on xxxx, xx, 1982. I married my (Canadian) husband on xxx.x, 1982 and became a Canadian citizen on xxx,xx,, 2008.
I was not aware I was required to file US tax returns. I have been filing and paying my taxes in Canada and it simply did not occur to me that I was also supposed to file US tax returns.
I first became aware of this regulation in mid-September 2011. I promptly asked my accountant to begin preparing these returns. I received them in their final forms on Wednesday, December 7, 2011.
I have complied with all tax filings and payment obligations in Canada. I have no record of criminal penalties of any kind. I had no willful intent to evade or escape any taxes due to the United States.
I hope that my situation will meet your definition of reasonable cause and respectfully request the abatement of any penalties.
Regards,
*********
I can’t seem to copy/paste the letter but the relevant paragraph:
“We are sorry but the information submitted does not establish reasonable cause or show due dilligence. Therefore, we must deny your request for penalty adjustment.”
It is listed as a “failure to file” penalty on a standard
854C letter which is standard to notify a taxpayer about his/her right to appeal. The first relevant point is that I owe no taxes so this is really weird. According to my CPA sis, while we expect our letters and returns to be dealt with in the manner of Dec 7 IRS IS, fact is the return address was probably not noted, scanned into the computer which then generated the letter. It is obvious that someone did read my letter but seems there is a
disconnect with what followed.
The second bizarre thing about it is that there is no figure anywhere to indicate what the amount of the penalty is. Nada. My sis says normally there will be a large section where the amount of tax owing is indicated followed by the computation of the interest and penalties. Nothing like that at all here. And the letter clearly indicates this is in regard to a 1040 filed for 2007. Included is another copy of the letter and a voucher which is to accompany the payment.
My accountant did not even acknowledge this attachment when answering some of my questions about some entries for this year….my sister says if there is no figure I can ignore it. I am not about to sit on hold for 45 minutes or more at this time of year with no usable 800 number. She is going to make a general inquiry via the Tax Practitioner Priority Hotline, just to be sure.
I wonder if I will get 3 more of these and what on earth will come regarding the 4 FUBARs. 🙁
@nobledreamer
Scary is what it is — IRS robots are communicating with us and they have no heart. 1984 is here. Doesn’t do much for a good night’s sleep. Thank goodness Canada has stated what it has for not dealing with IRS machines.
Sending good vibes for resolution, my friend.
@Blaze when you’re ready you might want to try calling a lawyer at The Accidental American website, he seems experienced in helping people get their CLN’s without having to file tax returns and FBARS:
http://www.accidentaluscitizen.com/renunciation-and-reliquishment/
“…She can seek formal recognition that she relinquished her U.S. citizenship on July 4, 1985, when she took the oath of Canadian citizenship. In other words, she could seek formal recognition of her expatriation and her status as a former U.S.citizen as of 1985, and thus not be liable for any penalty under new U.S. tax initiatives…”
@nobledreamer: I am so angry and distraught for you. Didn’t you just formally relinquish recently? Your experience is exactly the reason I have decided I will not formally I will not formally relinquish, file returns, FBARs, etc. I have made my decision based on clear direction I received from US Consulate 40 years ago that I was no longer US citizen. I have not had a US passport, filed income tax returns or voted since then.
It was not a good idea for me to read of your experiences in the evening. Just like with JustMe, it makes my blood boil.
@ Blaze
I would be most interested in contacting a lawyer who could assist with our cases. Perhaps Arrow would like to join us in this endeavor. Our cases are so similar.
Another thought on filing/not filing and CLNs
I spoke today via email with a dual citizen friend from my University days. Like myself she came to Canada in 1961 as a student, married a Cdn., had a couple of sons, divorced. She took out Cdn. citizenship in 1975. In the 80’s, her two sons decided to pursue their right to American citizenship. Because of this, their mother came to the attention of the State Department who then sent her a CLN. (She did not ask for it). She received the CLN without asking for it and never heard from the IRS. Sometime in the late 80’s or early 90’s, she discovered that she might have a claim to get back her U.S. citizenship, so she applied (U.S. lawyer helped, charged her $2,500 but got her U.S. citizenship back.) She was working at the time in Ontario and as she had a large family in the U.S, she thought she might want to retire there and thus it might be a good idea to have the U.S.citizenship. She dutifully filed tax returns in both countries – never owed in U.S. because of the exclusion of “earned income”. She stopped filing in the U.S eventually as she never owed. She is now retired. She has never heard from the IRS, no contact when she stopped filing. In the case of her sons, they have U.S. and Cdn. passports and are not filing U.S. returns. One son did work in U.S. at one time and filed then but not since his return to Canada.
More and more when I hear stories like this, I believe it is important to stay out of “headlights” of the IRS. I would love to get a CLN but I don’t trust the IRS to leave me alone if I do.
Agreed Tiger. All we have to do is read what happened to Nobledreamer and that is a good indication for continuing to lie low. They told us 40 years ago we were no longer citizens. Why should we have had any reason to think they would change their minds four decades later? They were very clear about it with me. Only problem may be their use of the term “US person” instead of citizen. Yikes–They’re sneaky.
@Nobledreamer, Wow you heard back really fast, this is very interesting. Keep us updated!!
@Nobledreamer, that is very odd. Lucky to have a CPA sis to help too.
I filed about 5 weeks before you and have not heard anything. Definitely hoping that is good news!
@Steven
Your points are all well and good, however you neglect to mention that the United States looks upon Canada as a “tax haven” and an “off shore account”. Therefore, everyone on this form who resides in Canada, and does banking on a day to day basis in a Canadian financial institution would be classified as having NIL “reasonable cause”.
This is the commonsense we are dealing with.
@Nobledreamer
Your situation should be directed to the Canadian Government or at the very least your local MP.
This totally contradicts the December IRS fact sheet that states they had an ‘obligation to inform’ and that no penalties would be attached if one did not owe any tax.
Again…another IRS bait and switch tactic?…they want us to ‘comply’ and get back into the ‘system’ with no direction or information…just threats.
Now…i filed in November, and have not heard a peep. I was also told by my Accountant that i did not need to attach a ‘reasonable cause’ letter to my 1040s…just my FBARs. (This might be a mistake in this ever mounting sea of mis-information…only time will tell).
I have lived in Canada ALL my life, less being born in the US. I have no intention of paying any fines, penalties, or grease money.