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.
Seems like the right place to post this:
The bad law Steven Mopsick is referring to on his blog is McBride.
Anthony Parent from IRS medic has a blog entry about this case:
http://www.irsmedic.com/2012/12/11/fbar-defendant-jon-mcbride-speaks/#
It seems Mr McBride was truthful, and should not have deserved the 200k of FBAR penalties.
It is upsetting that Antony Parent is using this to advertize OVDI and instigate more fears: even if you’re not willful, you can still pay FBAR fines.
Seems like this case was involving high balances though.
note these guidelines from the Internal Revenue Manual, Part 20. Penalty and Interest, Chapter 1. Penalty Handbook, Section 1. Introduction and Penalty Relief.
Those guidelines are not being met in the application of FBAR (which had been delegated to the IRS from FinCen during 2002ish time period) and the OVDP programs and FATCA.
http://www.irs.gov/irm/part20/irm_20-001-001r.html#d0e1042
—————-
20.1.1.1.1 (11-25-2011), Background
1…… With the increasing number of penalty provisions, the IRS recognized the need to develop a fair, consistent, and comprehensive approach to penalty administration.
2…. Those recommendations were, in part, that the IRS should: 1. Develop and adopt a single penalty policy statement emphasizing that civil tax penalties exist for the purpose of encouraging voluntary compliance,
20.1.1.2 (02-22-2008)
Purpose of Penalties
1.Penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code.
2.For most taxpayers, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. Efforts made to fulfill these obligations constitute compliant behavior. Most penalties apply to behavior that fails to meet any or all of these obligations.
3.The following factors support the public conviction that the tax system is fair and the penalty is in proportion to the severity of the noncompliance. Penalties encourage voluntary compliance by:
•Defining standards of compliant behavior,
•Defining consequences for noncompliance, and
•Providing monetary sanctions against taxpayers who do not meet the standard.
20.1.1.2.1 (11-25-2011)
Encouraging Voluntary Compliance
1.Taxpayers in the United States assess their tax liabilities against themselves and pay them voluntarily. This system of self-assessment and payment is based on the principle of voluntary compliance. Voluntary compliance exists when taxpayers conform to the law without compulsion or threat.
2.Compliant self-assessment requires a taxpayer to know the rules for filing returns and paying taxes. The IRS is responsible for providing information to taxpayers, which includes:
•Written materials that clearly explain the rules, and
•Forms that permit the self-computation of tax liability.
4.Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury and indirectly fund enforcement costs. However, these results are not reasons for creating or imposing penalties.
5.Penalties advance the mission of the Service when they encourage voluntary compliance. The IRS has formalized this obligation to the public in its mission statement.
6. Voluntary compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code.
9.IRS personnel may educate taxpayers and encourage their future compliance by:
A.Discussing causes for the delinquency and listening to taxpayers’ reasons and concerns for noncompliance,
B.Ensuring that taxpayers understand their filing and paying responsibilities, and
C.Being alert to information received in discussions with taxpayers that indicate possible reasons for abatement of a penalty.
Has anyone heard anything from the ABA Tax Section Webcast on Opting Out and FBAR Litigation that should have taken place yesterday?
http://federaltaxcrimes.blogspot.com/2012/12/aba-tax-section-webcast-on-opting-out.html
Actually, Jack just updated his blog with a summary of the webcast.
http://federaltaxcrimes.blogspot.com/2013/01/report-on-webinar-on-opting-out-and.html
Proposed New FBAR Form And Explanation (3/15/13) on http://federaltaxcrimes.blogspot.ch/
update on Proving Wilfullness in Civil FBAR Cases by Steven Toscher and Lacey Strachan
April 2013
http://www.taxlitigator.com/main/index.php?option=com_content&task=view&id=12&Itemid=26
My husband and I entered OVDI 16 months ago and made the unorthodox move of including a reasonable cause letter with our submission (sanctioned by our lawyer). He now has informed us that the IRS is moving some OVDIans into Streamlined. This is good news that the logjam is breaking, it’ll be interesting to see what happens to us, when only a capital gain on the sale of our house is the only tax considered owed and clearly reasonable cause if a factor.
@bubblebustin – Don’t get hopeful that the Streamlined Program will end your case quickly. While you may not receive any penalties (great), once you are put into the Streamlined Program you go to the back of the queue. I asked to opt out into the Streamlined Program if I was eligible. I have been informed that I am now at the back of the queue with about 2000 Canadians in front of me that the Streamlined Committee has to process first. Apparently, the Streamlined Program is managed in a first come, first serve manner. OVDI participants who go into the Streamlined Program have to be reviewed by the Committee. The agent cannot make the determination of no penalties. The Committee has to decide this. So in my case, after two years of waiting to opt out, I have just been moved into another program where the wait time is just as unclear as in OVDI. Let your lawyer know this so perhaps he can find some way that will move you through the system faster when the moment comes that you are moved into the Streamlined Program.
@Not that Lisa! and bubblebustin,
Bloody hell — how much waiting, being in limbo can a body take?
Yeah, you would think that the fact that OVDI participants have waited at least around 16 months would allow OVDI cases to be treated with priority if they go into the Streamlined Program. It would only take a simple stamp or code to be associated with the file. However, the IRS, again, in its attempts to be fair (remember “One Size Fits All”?), is continuing to unfairly treat innocents in OVDI by subjecting them to even longer unreasonable waiting times. I opted out over two months ago. I was expecting the opt out process to take 2-4 months. I find it hard to believe that in the next two months, the IRS will process the 2000 cases that entered the Streamlined Program before I did.
To add insult to injury, I was also informed today by an agent that due to the sequestration, many IRS employees will be told to go home for 10 days without pay. They have no choice in this matter. This does not help the situation at all.
@Not that Lisa, Calgary
It’s not likely that our case will move to streamlined because of the cap gains FBAR factor (because even though that year would be out of the realm of the 3 years of returns needed for Streamlined, it would fall within the 6 years of FBARS required to file, 2008) and the fact that our filing required “sophisticated tax planning” concerning my husband’s business.
Let me ask this: what would happen to someone in OVDI who owed more than $1500 in US tax only in 2007, for instance and showed no evidence of sophisticated tax planning? Would the IRS move them to streamlined knowing that doing so would leave him with NO tax liability?
@not that Lisa
🙁
@bubblebustin, re; ..”He now has informed us that the IRS is moving some OVDIans into Streamlined. This is good news that the logjam is breaking”…
Thank you for the update. And I am hoping that they come to their senses about the issue of the egregious and extortionate taxes assessed via the US imposed capital gains tax on the sale of your permanent residence – your home right here in Canada. Otherwise, you and other Canadians are paying a US tax and possibly penalties on a piece of Canadian real estate – your home – which is not taxable in Canada, and which should enrage any thinking Canadian politician or fellow citizen.
How many will face the same thing in Canada (and around the globe) – only because the US arrogantly reserves the right to tax Canadian homes – usually our biggest asset – which with luck, appreciates in value over decades – and is often the sole nest egg that seniors and their families count on to fund longterm care (if they have been lucky enough to have afforded a family home)? And, as you pointed out, if the Streamlined process has been available to begin with, the tax years in question would not have included the year of your house sale. So some are taxed and penalized by the US and some, more fortunate solely based on the vagaries of timing, are not.
@Not that Lisa,
Thank you for sharing with us some clue as to the state of things. Interesting about some information about the size of the backlog, and the ‘Canadians’ in the Streamlined queue.
I had thought (but don’t know where I might have read) that somewhere that the IRS had originally promised a certain total turn around time for the ‘Streamlined’ process? Ex. 120 days in total start to finish? Does anyone else remember something similar?
@bubblebustin – I believe they would move someone to Streamlined knowing that doing so would leave him with no tax liability. The new FAQs say this is possible. However, ultimately, I believe it will depend on your agent and participants should not rely on an agent to opt them out into the Streamlined Program. They should have a clear idea of what path they want to follow.
My agent has acted in the interest of fairness within the limitations set by OVDI rules. In OVDI, before tax penalties, over the 8 years, I owed about $10k (one of those years was filed timely and compliantly). I was told by the agent that the IRS was going to deny a position I took as it was not allowed in OVDI and if I stayed in OVDI, I would have to pay another $20k in tax. Almost immediately after that, my agent kindly pointed out (multiple times) that if a taxpayer chooses to leave the program in something called opt out certain years would be considered closed. When I took the hint and asked about opt out, the agent said, “Well, now that you ask…” and had already done the calculations and told me my tax owed would drop to $300. The agent even made a statement that in the case of the FBAR penalties that it was my decision what to do, but the math showed I would be better off outside the program. My agent is very experienced in international individual tax and this has helped.
I also have a type of account that totally baffled the IRS. They did not know how to classify it. The first Technical Adviser said that it was likely a trust, but was not sure. My agent told me that response was unacceptable and refused to settle for this and wanted a definite answer so that I was not filing forms needlessly. In the end, after making it to high levels of the IRS, it appears the account will probably be considered a Foreign Trust, thus requiring 3520 forms. Yuk. When the agent told me this, the agent also said that as the IRS had had no clue what this account was, they would assure that any penalties are waived. So yes from my experience, the IRS is not all about imposing penalties. I say that with the caveat that it depends a lot on your agent.
I should also add that my agent has told me at least twice that the goal is to get me compliant, get me out of the system and never hear from me again (because I will be compliant in the future). I do not know what my final result will be so I will not wax any more positive than I have already on my experience, but honestly, my lawyer was a lot less pleasant to deal with than the agent. The lawyer made me feel like I was a criminal and that I should be afraid. The agent has been helpful, treated me with respect and gives clear answers. Basically, I am being treated with professionalism, nothing more, nothing less.
@Badger
You’re welcome and thanks!
@not that Lisa!
Thank you for filling us in on what your experience has been so far. If the IRS has been more easy to deal with than your lawyer, its apparent that the inconsistencies lie with the IRS!
Not that Lisa!,
If the IRS was baffled (although a common occurrence), how were you supposed to know? — you didn’t! Where does punitive end and common-sense begin?
@bubblebustin – I think a well known statement that is used to describe the IRS is, “The only thing consistent about the IRS is its inconsistency.”
@Not that Lisa, I thought you mentioned earlier that you did not qualify for the streamlined program because you had filed. Did they change their mind?
What a waste of time and resources for everyone involved. I am sure you wish you had just filed amended returns.
It would be so much more efficient if the same agent was involved in the opt out. Maybe they want someone else to do it in the sake of “fairness”.
Check out @FalseAlarm in this thread on Jack’s blog.
http://federaltaxcrimes.blogspot.com/2013/03/irs-has-new-forms-for-offshore.html
The guy apparently entered OVDI for $300 of tax owed over 8 years. $50 per year. Which lawyer would advise that, as apparently he has one???
@calgary411 – yes, that was my argument when I found out about the possible trust. I said, “Well, even you did not know” and the agent laughed and said that yes, that was true. In the next conversation, after probably checking the rules, the agent told me that there was no way that penalties would be imposed by the IRS because if the IRS did not know what kind of account this was, how could I be expected to know.
This leads me to another point. The only reason this account was analyzed was because I requested it. I never imagined it could be a trust. I had asked my lawyer about the account and his response was that he had no familiarity with this kind of account and I could pay him thousands of dollars to figure out if it was declarable. It is not worth very much. I decided to declare it and just pay the tax on it. When I dumped him, I decided to ask the IRS as it really bugged me that I was paying tax on this type of account. While I don’t like having to file a 3520, filing it will be cheaper than paying the lawyer what he wanted for the analysis.
I hear this more and more, that people just pay the tax because it’s possibly/probably easier/cheaper/more expedient than not to. There’s something VERY wrong about this, like paying protection money!
@chris – yup, I don’t qualify, but the IRS rule is if you request opt out into the Streamlined Program you have to go through that process. I did have a legal opinion on my situation, which has ended up being useless. For my situation, which I will elaborate on after my case is closed, the Streamlined rules were not clear. The legal advice was to request opt out into the Streamlined Program, but also to state that if I do not qualify for the Streamlined Program, then to request that my case be handled under the normal opt out procedures. However, as the agent cannot make the determination whether I qualify for Streamlined or not, only the Committee can, I have to go the full Streamlined way. It appears the legal adviser was not aware of this. So I am now waiting in the Streamlined queue knowing that I will be rejected and at the end will be referred to an agent for an exam. I have not had much luck with legal advice. Honestly, I would have been better off just asking the agent than following the legal advice.
@Not that Lisa! I think you did the right move anyway. They might or might not reject you under the streamlined procedure. At some point, the IRS mentioned that they might accept taxpayers who fall outside of the requirements. If they do accept you, it’s basically a guarantee of no penalty. That’s worth it, after all you already spent in legal fees.
The question is are they going to deny you right away just because you had filed, or are they going to study your facts in detail before making a decision. I guess the worse that can happen is that they spend even more time on your case, to decide that you do not qualify for the streamlined procedure, and you end up being put at the back of the queue for a normal opt out.
Even more waiting 🙁
You might end up beating the record for the longest processing time. Watch for that in the next NTA report to congress 😉
What’s the difference between a streamlined process after OVDI and a regular opt out?
SOL for taxes are both 3 years, 6 years for FBARs. Having gone through OVDI, and because of your facts, you’re guaranteed of no criminal prosecution/penalties. Is the difference the risk of getting some civil FBAR penalty in the case of regular opt out vs none in streamlined?
@Chris – If you opt out into the Streamlined Program and are accepted into it, then you pay no penalties on tax or FBAR. You do not need to make reasonable cause arguments. You just pay your tax.
In comparison, a regular opt out from OVDI puts you into the normal examination world, where FBAR penalties as well as tax penalties can apply. Also, you have no guarantee your reasonable cause arguments will be accepted.
I have a small correction. In the Streamlined Program you just pay your tax plus any interest on the tax owed. It is just the penalties are automatically waived.