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.
@all
my .02
I’ve never filed neither 1040s nor FBARs. After finding out about my obligation to do so last year in July I contacted an Erolled Agent that is located nearby. After a short talk about my situation he advised me to just file for 2010 without any explanation because I owed no taxes. I let him fill out and co-sign the forms for me. The documents were sent out by the end of August 2011 and I haven’t heard a word from them yet. The only problem is I’m not sure if that is good news or bad! 😉
I wonder if the IRS catagorizes documents for reviewing according to by whom they were filled out. Filled out by yourself, a tax attorney, an Erolled Agent or a CPA. Maybe the IRS is more willing to pick a fight with a person who filled on their own than with an attorney?
Maybe 30yrs vet has an answer?
I wish I could address everyone individually. I am going to stick my neck out and predict that as soon as everyone in Washington “signs off” on the current draft of the FATCA WITHOLDING REGULATIONS (which is what was due on January 31,– the form 8938 regs which most of you are concerned about, were published in December) there will probably be an IRS Notice announcing the Service’s position on certain deemed compliant factual scenarios which will cover almost all the accidental American fact patterns and many of the situations described on this blog..
I am also going to stick my neck out and predict (but not necessarily advise) that anyone who chooses to engage the IRS on FATCA and either decides to start filing what is required prospectivly or blows them off until they force themselves into your lives–as long as there is no unreported income which, for whatever reason is due and owing, I do not see the IRS piling up penalties and pursuing any one if they either just start filing if there is an obligation to do so.
Remember, both our government’s have a keen interest in collecting the taxes their respective legislatures have ordered them to collect.
As for the US, the government is looking for people WHO ARE LEGALLY SUBJECT TO IT’S JURISDICTION, and to just pay up if you owe the money or forget about.
When the Bank Secrecy Act came in 1970 and they stared to enforce it 2004, and FATCA followed it in 2010, a whole new concept was introduced with regard to the way our tax was reported to the government. Since the honor system, which is still the basis of our voluntary self reporting system, didn’t seem to be working , the government was now saying, “let’s see what you’ve got and we’ll let you know if we have any questions.” What is new here is there doesn’t have to be a “taxable event” for FATCA to apply. Up until now, there had to be a sale or exchange, dividends, receipt of interest, or earnings from a job before we had to tell the government about it .The theory of FATCA is, if you are going offshore with your property, Uncle wants to see where you are going with it and what you are doing with it.
The corollary to having the inalienable right to “life, liberty, and the pursuit of PROPERTY” is, under that pursuit of wealth, comfort, and a better life for our children, there is the sense, or at least the hope that educated and enlightened citizens would voluntarily report what they earned so that the government could buy the goods and services it needs for our protection and benefit. I am not complaining here, or defending what we have now. It’s just the way it is.
The IRS is extremely limited in what it can do and as a law enforcement agency and it tries to get the most bang for its buck.
Even if there were no Voluntary Disclosure Program, the IRS just doesn’t have the people to do a whole bunch of criminal investigations. That leaves the civil fraud penalty! Probably not, because the IRS has the burden of proof in Tax Court and when I remember having to prepare fraud cases for trial as an IRS trial attorney I recall they were a real pain in the neck to prepare and twice the work of the other cases we had where someone was trying to prove to the Tax Court that they really could live on $50,000 and still afford to pay $25,000 a year to charity. When it came to bringing fraud cases to Tax Court, young IRS trial attorneys are urged to work on the ones we were pretty sure we could win. Slam dunks so to speak– cases where someone’s combination of greed and stupidity were just far enough along the continuum of behavior for the Tax Court Judge to agree with the Commissioner’s hunch that the taxpayer we were torturing for a year or two had been willfully and purposefully arranging their financial affairs in such a way that they were hiding money from their accountant and sometimes their wives, but nonetheless making sure it didn’t show up anywhere on their tax returns which they knew were false and fraudulent when they signed them.
That leaves the FATCA/FBAR penalties. Remember, they were enacted to catch real bad guys. There has to be some wrong doing. You don’t get hit with a $10,000 automatic penalty just because you were standing in the wrong place. This is still America and if the government is being stupid we get to say it. You just have to do so in the right way and it’s usually to your advantage to do it in a way that doesnt make the person working there feel like crap.
I think all the fuss over FATCA for individuals (but not for the banks) is going to result in a big stall in the pipeline until the National Office cuts the field some slack to start waiving penalties altogether. There certainly should not be any penalties if there is no unreported income. If there is unreported income then the government has the right to ask how much, is there a pattern of behavior, and for how long has it been going on. Then in practice, what the IRS chooses to go after is all a question of degree.
While I was working for the Acting Chief Counsel in Washington I had the honor of visiting your CCRA headquarters in Ottowa on IRS business and had a real sense of the difference in the feel for the place as opposed to what I was used to in Washington. Pretty cool place. Calm. Quiet. I have had the good fortune and privilege to fish around Vancouver, and we always feel an affinity for Canadians, whether we meet you in your home, ours, or abroad. We see you as “laid back” like some parts of California, and Oregon, and Waghinton State.
I read a little about Isaac Brock and got the feeling he was probably a really good guy. He died defending his adopted country because he chose to make a stand for what he thought was right. I don’t think FATCA is really the hill anyone wants to die on. I would respectfully ask some of you to just take a step back and remenber who you are . My prediction is the government is going to do the right thing here so that Canadians can get back to what you were doing before there were FBARs and FATCA
Respectfully submitted,
30-Year IRS Vet
@steve
I hope you aren’t suffering from sleepless nights like most of us on this site, considering the time stamp of your last post 4:07 AM?? I would like to thank you for participating with the rest us on this blog! THANKS
Pingback: FATCA is not Queenston Heights, says 30-year IRS veteran | The Isaac Brock Society
@All Anybody have any experience having a foreign attorney in your country of residence write cover letters for you, evoking the local protections and your situation? This might make a self-prepared submission (or notice to the IRS as to why you will not file their forms) look less suspicious.
Oh my, it looks like I’m a little late to the party.
NONE OF THE FOLLOWING IS LEGAL ADVICE (lawyer disclaimer)
It is important to remember that “reasonable cause” is determined by an examination of ALL of the circumstances. No one factor is typically determinative. Accordingly, a taxpayer can’t simply state one fact and hope to prevail on reasonable cause. For example, the argument that is limited to: “I didn’t know of my filing obligations, so please reduce my penalties” will likely fail because it does not state all of the facts and circumstances.
That being said, the following reasons, without more, will typically not support the reasonable cause defense (as an aside, I have heard all of these in my practice):
a) I’m a Canadian Citizen
b) I pay taxes in Canada
c) No body told me I had to file/pay
d) I couldn’t afford to pay the taxes/penalties
e) I forgot
f) I didn’t file one year and no one contacted me, so I thought I didn’t have to continue filing
g) I left the US 10 (or 5 or 15 or 50) years ago
h) I have moral, religious, objections to filing
i) I took an oath to a foreign soverign (expatriation only gets you out of filing once it is effective)
j) I can’t vote in the US (because I don’t have a passport/social security number and haven’t registerd to vote) so paying taxes constitutes taxation without representation
k) the US constitution/CDN constitution does not obligate me to file or pay taxes (VERY BAD ARGUMENT)
l) I voted in a foreign election
Again, depending on ALL the facts and circumstances, the foregoing can help support a valid reasonable cause argument. However, none of them will likely stand on their own.
Everyone interested in this topic should look at the Internal Revenue Manual, which discusses reasonable cause at length.
http://www.irs.gov/irm/part20/irm_20-001-001r.html#d0e1042
Well….IMHO the IRS is going to have to put some water in their wine when it comes to reasonable cause. Regardless of what their definition is.
In my case I have lived in Canada all of my life, payed my tax, law – abiding etc etc. My only true “reasonable cause” was that I was unaware of these filing obligations….thats about it!
If I was one of the 2% that never filed, then I could understand there denial of my reasonable cause argument…however i am not one of the 2%, but rather one of the 96% that has not filed, or was unaware (Canada).
As Canadians we have enough on our plate just keeping CRA happy. We also don’t bathe ourselves in US legislation or what the new IRS FS has to say…so…yea….being unaware is a good enough argument for me, and if they want to fight me on that point then we will just have to see what happens.
@Roy Thanks again for your input. This is very useful.
If what you are saying is true, then the United States did negotiate with Canada in bad faith. Minister Flaherty proclaimed victory when the IRS Fact Sheet came out in early December. But the Fact Sheet was just full of IRS bullsh-t, using terms that in English mean one thing, but in IRS-speak mean something totally different. Please, we need to get our government back to the negotiating table before we, loyal Canadians, continue to get clobbered by these bad-faith negotiators.
@ Steve Mopsick
Given your predictions, for those of us who have not yet taken any action would you reccommend waiting a while and see what new information / guidance comes out?
I asked this on another thread – along with a description of my situation but that thread seems to have died off: http://isaacbrocksociety.com/2012/01/13/ask-your-questions-about-us-expat-tax-fbar-and-fatca-discussion-thread/ (post on February 3, 2012 at 8:52 am)
Even after doing a lot of “drudgery” as JustMe wisely advised, how does one even make an informed decision with so much conflicting advice, opinions, and personal exerpiences? @nobledreamer’s reply from the IRS is not at all encouraging for other expat dual citizen minnows.
Thanks.
@Howard,
My advice, for what it is worth:
If you are tax compliant in your country of residence, have not been cheating the (your) Government out of tax dollars for regular income, accrued interest etc… then hire an Accountant and file your 6 years of returns and FBARs.
End of story….
I am still in awe why ANYONE would go into the OVDI program when they are perfectly legal and legit, less not being informed by the US Government.
I suppose OVDI means some good income for specific ‘professionals’….IMHO
As far as I am concerned I filed as per the Dec IRS Fact sheet.
NOT filing is NOT an option. Especially now, where as every day goes by,..reasonable cause will become an old leather shoe…because lets face it, the information is out there, you know your obligation, therefore you should file.
That is as much of an ‘informed’ decision that I can contribute.
Many people still do not have a clue of the requirements for US citizens! I still find someone every week or so who is a US citizen or married to one who has never, ever heard of the requirements. They left the US 40 years ago why would they even take a second glance when they see IRS in a newspaper headline? And that is assuming they did see it. They do their own taxes. Or in some cases, the accountant has never told them about it.
Most of those people that I do inform are choosing to ignore it…
“I did not know” this is my reasonable cause. U.S. ambassador Jacobson said “We are not unreasonable. We are not unsympathetic. We are not irresponsible.” Could a reasonable person expect me to file US tax returns if I did not know it was required? For that matter would a reasonable person even think they must file a tax return to a foreign government? Reasonableness is a two way street. Does anyone think that thousands of Canadian citizens will be sending cheques to the United States if they think the taxes and/or fines are unreasonable? If the IRS wants to be responsible and reasonable, they could start by publishing some clear instructions, and offering real help for people who have no knowledge of the US tax system. I have made three or four phone calls now to the IRS and have gotten wrong and conflicting information. I have also gotten “WE DON’T KNOW!”. If the IRS does not know then who on earth could know?
I wonder how long it will be before Mr. Jacobson resigns. He has been made into a bald-faced liar by the administration. I wonder how that feels.
I initially took the word of Mr. Jacobson. I thought that the evidence of reasonableness would come in the form of an official statement. I thought that “sit tight” indicated that whatever that statement was, it would be made in a timely manner. It’s now getting close to four months since his speech and we are still waiting. I was all set to renounce last fall, I did “sit tight” for a while, and put off renouncing. After what I thought was a “reasonable” amount of time to wait, I made an appointment to renounce.
@ True North
http://blogs.ottawa.usembassy.gov/ambassador/index.php/tag/american-citizen/
The good US Ambassador to Canada says on his blog…
Welcome to my blog. I hope to use this space to share my experiences in Canada and give you a sense of the views of my government and our work here.
I also look forward to hearing from you and encourage you to contact me via email, ottawainfo@state.gov.
David Jacobson
Ambassador of the United States of America
Nary a word of US persons in Canada though in his blog. Why is that, Mr. Ambassador?
@ Mach 7
I think you are right. To be honest, I have yet to write any letters to MP’s etc, because I have no faith whatsoever in the system.
To me, this is all very simple. If I owe no tax, didn’t know, am in compliance with my obligations in Canada and I am coming forward on my own, what on earth is gained by my actions being seen as not reasonable? I am following what has been put out on the IRS IS issued particularly to address us. What else or why else, does it have to become more complicated? I cannot afford lawyers and shouldn’t need one. My situation is so very simple. And for anyone who is unfamiliar with my situation, I have never made enough money to have to pay taxes and the only reason I have to file FBAR is because I am forced to list my Canadian husband’s accounts. I simply cannot see why the onus is on me. This should make you laugh, for 2007, after the FEIE, my adjusted gross income was $451. No kidding. I would think the person scanning my return would have had a good laugh at that one. And I have to come up with more than what I’ve been told is reasonable cause? For what purpose? I don’t owe a dime, I’ve been told 5000 Canadian QD’s have been made without incident. This is complete and utter madness. And now once again, my blood begins to boil.
@all
I also very much appreciate that Roy Berg and Steven Mopsick are taking the time to read what we
are saying and are offering their comments.
One thing I don’t understand is how someone like Just Me, who entered the OVDI and is clearly not a “Whale” – was penalized just for owing a bit of tax and had to fight to get the value of his home off the fine and so on. And spend two years in hell doing it while the real cheats are sitting back, doing nothing. It is impossible to imagine (or trust) that once the govt gets their act(s) together, they are going to do something to make this all stop being applied to the wrong people. Why can’t someone just be clear enough to point out/accept that these issues are meant to address Americans, living in America, who are cheating on their taxes by stashing money in foreign accounts? Nobody seems to have any common sense anymore.
@ Mach7
Thanks, that is what my insticts tell me, and I guess is what I will do. It seems the only way to be 100% compliant, and get things genuinely resovled without a lot of “maybes” hanging over your head. Presumably you mean I should file with a letter of explanation/reasonable cause?
How essential is it to do this with an accountant rather than on my own? I’ve seen that some will look over the returns you prepare, saving a lot of money. An expat specialist called Greenbacks offers this – anyone ever heard of them or used them?
@ peg11 and TrueNorth
I agree – ignorance is an excuse. How many expats would even think they’d have to file US returns, and how many would follow US news about IRS rules? Literally every expat I know is totally unaware of US filing requirements, not to mention FBARs, and are incredulous when I’ve told them. In 2009 I found out I had to file and did so for the previous 5 years, and they were accepted without penalty (except for a little interest on small US capital gains) on a simple “I didn’t know I had to file” explanation. I hope those filings will show good faith, and that they will accept as reasonable cause “misplaced trust in an ex-accountant doing me a ‘favor'” (wrongly answering the foreign account question on schedule B, and not asking me about it).
Also- it is almost impossible to find relevant, clear, and consistent guidance in the maze of documents on the IRS website. For example, the info on form 8938 is stored under “businesses and corporations” on their website. Why would expats who do not own businesses even think to look there? When I first noticed the foreign account question when looking at this year’s forms, I had to read it three times before I thought it might apply to me. It seemed to be asking if you own an interest in a bank, like a shareholder… then I started wondering what they meant by “foreign” – foreign to either of my dual cizitenship countries? Silly, I guess, but it just shows how irrelevant US (foreign!) bureaucracy can feel to an expat….
@ nobledreamer
Like you, my income has mostly been pretty pathetic! I don’t think I was even required to file most of the back years because my income was low or non-existent – often just savings interest and dividends of a couple thousand. In fact, I didn’t file for 2010 for that reason. This is how ignorant I am about this stuff: I’m now wondering if I needed to file that year, too, just because of the interest.
@ all
I’m wondering if, between the TAD, the Dec fact sheet, the Canadian response, and some media coverage, the IRS might unofficially be lightening up on innocent expats? It is telling that the fact sheet never once mentions voluntary disclosure.
Finally, in my experience of my back-filings in 2009, I found that phone calls to the IRS helped – even if it meant being on hold for an hour (then getting cut off and starting again!). There is much to be said for being able to explain things to a human, who has to respond to you on the spot. Even little things like asking how the weather is where they are brings it to a human level and makes the whole interaction less antagonistic from the start. ONe caveat: they did not always make notes in my record as they said they would, so ALWAYS be sure to get their code and note the time and date of the call. I’d even be tempted to record the call – would that be legal?
My husband and I are in OVDI and considering opting out after Nina Olson asserted that the OVDI’s Q & A mislead delinquent taxpayers into believing that the IRS would not use the IRM in resolving their cases. We’ve now had a discussion with a case worker at TAS, who gave us cause to be optimistic. What was news to us is that TAS is in fact negotiating with the IRS on behalf of taxpayers within OVDI, and gave us an example or two of how they facilitated a better outcome for them. I asked her about penalties applying to tax owing (we have a cap gain from the sale of our house) and she made it clear that “ignorance of the law” is not an excuse for never having filed. She did however feel optimistic that we may be able to take advantage of the “first time penalty abatement”, in our case. Go to: 21.1.1.3.6.1 (FTA)
http://www.irs.gov/irm/part20/irm_20-001-001r-cont01.html#d0e2260
Why people do not know about FBAR.
are filing your tax returns online then there is a good chance you might
not have heard about FBAR.
to FBAR form and offshore/overseas bank accounts is found in form Schedule
B. You file schedule B if your interest income is more than $1500. If
interest income is less than $1500,tax software will not generate form
schedule B.
will never hear about FBAR and the penalties associated with it.
limit was set when the Bank secrecy act was passed in 1970. In 1970
$10,000 was a very big amount. You could buy a few good cars with $10,000.
But that is not the case now. You cannot buy a new car for $10,000 now.
cannot keep same $10,000 limit even after 40+ yrs.
people have no clue that they have to declare their global income on US
tax returns.
not declare your offshore interest income, because IRS form 1040
instructions, ( most people who file online will not read the
instructions) says each payer that pays you interest should give you form
1099-INT.
/ overseas banks do not issue form 1099-INT for interest income earned
aboard. So you believe that you need not declare interest income because
you do not have a form 1099-INT.So you do not declare offshore interest
income.
the reason why you don’t know about FBAR and don’t declare overseas
interest income. In most cases, even if you declare US
interest income and overseas interest income, it may not be more than
$1500. And chances are you will not file form Schedule B.
not that tax payers are trying to avoid FBAR reporting. They just don’t know
about its existence.
OVDI of 2009, 2011 and current 2012 there is some awareness among tax
payer who have overseas accounts and income. IRS has updated FAQ’s on FBAR
many times. It indicates that IRS is trying to educate people about FBAR
and it also means people did not know about FBAR.
should give benefit of doubt to regular tax payers and waive the FBAR
penalties which are very harsh and also violate 8th amendment
and other rights of the citizens/ residents.
whole process of OVDI is very expensive as tax payer has to take the
services of accountants and attorneys. This will cost thousands of
dollars.
should differentiate between innocent tax payer and multi million dollars
tax evaders. IRS is taking their eyes off the multi million dollar tax
evaders by concentrating on innocent tax payers.
solution will be to reduce the number of years of audit from 6 to 3 years
and impose flat $1000 per year no matter how many accounts you have.
course back taxes with penalty should be paid.
their delinquent FBAR and amended tax returns for 3 yrs and be compliant
with their tax obligations in future. These heavy penalties are scaring
innocent tax payers.
*does anybody know if there has been penalties handed out or had to pay to irs on foreign accounts even though they had been reported in canada, in other words CRA is aware of all assets and in tax compliant > thnx
Some have entered the OVDP program and have paid 5-25% penalties. One of our participants paid a 5% penalty on funds that were in 100% compliance in Canada (he is also a long time resident of Canada). Outside the OVDP, not so much. I’ve heard of no fines of Canadian residents.
Here is Nina Olson’s comment re willfulness: “
If the Ratzlaf standard
for willfulness isn’t satisfied, then Olson said that the taxpayer
should be given a break and permitted to only pay the accuracy-related
penalties. “Such an approach would increase voluntary compliance and
would stop terrorizing the entire country of Canada,” Olson observed.” http://oicattorney.blogspot.ca/2012/11/taxpayer-advocate-fbar-penalties.html
Also see:
http://www.freemantaxlaw.com/Articles/Hats-Off-to-the-National-Taxpayer-Advocate-Office-for-her-Comments-Regarding-the-Reasonable-Cause-Exception.shtml
…..”Recently, the National Taxpayer Advocate, Nina Olson, at an International Tax Enforcement Conference sponsored by the American Bar Association Tax Section in New York, publically criticized the current IRS practices in the Offshore Voluntary Disclosure Program (OVDP) that hinder voluntary compliance by penalizing taxpayers who are entitled to a reasonable cause exception from willfulness according to an article
written by Zsuzsanna Kádár, M.A., J.D., L.L.M. that was published in International Taxes Weekly (11/13/2012).
Specifically, Kádár reports that Olson publically stated that “taxpayers who follow an “opt in – opt out” path in offshore voluntary disclosures (i.e. taxpayers who enter into the OVDP but subsequently opt out of the program’s civil penalty structure) are generally subject to extended resolution times over smaller amounts when compared to traditional
offshore voluntary disclosure participants”……..
Another mention of the comments of the Taxpayer Advocate Nina Olson, and the FBAR, and her proposal to make better distinctions between classes of taxpayers who have not been filing, rather than the OVDI one-size-fits-all blunt instrument being used, and the IRS automatic presumption that all non-filing of FBARs was willful.
….”Olson suggested practitioners rely on the standard of willfulness as established in Ratzlaf v. U.S., (Sup Ct 1994) 510 U.S. 135. In Ratzlaf, the Supreme Court addressed the standard for willfulness in the context of violation of the bank secrecy laws.
The standard applied in the case was “a voluntary intentional
violation of a known legal duty”—in other words, knowledge of the
requirement and the specific intent to disobey the law should be the
standard here.
If the Ratzlaf standard for willfulness isn’t
satisfied, then Olson said that the taxpayer should be given a break and
permitted to only pay the accuracy-related penalties. “Such an approach
would increase voluntary compliance and would stop terrorizing the
entire country of Canada,” Olson observed.”….
http://blog.bcgcompany.com/tax360/2012/12/07/tax-update-12312-offshore-initiative/
Found this discussion in connection with some research on “reasonable cause” and appreciate all the good information. Would be great to get any input on some facts.
Following receipt of a DoL letter requesting additional information on a now dissolved LLC’s 401K plan, the founder of the now dissolved LLC learned that the employee who was charged with filing the Form 5500’s did not do for some periods in connection with the winding down of the LLC (2007) and that the 401K plan in fact remains in place. The founder has engaged the previous payroll service company to file the necessary Form 5500s and has been advised to file a “reasonable cause” letter in hopes of avoiding penalities. The payroll provider has not provided any guidance on what is in fact the “reasonable cause.”
Any guidance on what may constitute reasonable cause in connection with business failures or otherwise would be appreciated.