FBAR Reasonable Cause

FBAR Reasonable Cause

Reasonable Cause & FBAR Late Filing

Reasonable Cause & Late FBAR: When a U.S. Person has an FBAR Filing requirement and they miss the deadline (or file an incomplete FinCEN Form 114) they may become subject to IRS fines and penalties. FBAR Penalties can be willful or non-willful and/or criminal or civil. While the most common issued foreign account reporting fine is for civil non-willful penalties, Courts have been more willing to affirm IRS willful penalties as well. Noting, willfulness in the world of FBAR does not require intent nor knowledge.  To avoid, reduce, or minimize these violations, the Internal Revenue Service has developed various FBAR Amnesty programs and reasonable cause options.

What is Reasonable Cause for Late FBAR?

Reasonable Cause and FBAR is the concept that a U.S. Person who is in violation of the FBAR should not be required to pay penalties for their non-compliance.  Therefore, if the account holder can prove to the Internal Revenue Service that they have reasonable cause, then the IRS may avoid, mitigate or abate (eliminate) penalties. 

How to Prove Reasonable Cause

Taxpayers prove reasonable cause through a well-written and highly persuasive reasonable cause statement.  There are several factors to be aware of, including the type of accounts, number of accounts, total unreported income and account values, country or origin and its relation to the the account holder — along many many other considerations.

IRM 20.1.1.3.2 (Internal Revenue Manual) provides some general insight into Reasonable Cause and the specific factors that may be considered.

      • Reasonable Cause
      1. Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise apply. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but was nevertheless unable to comply with those obligations.

      2. In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of certain civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), policy statements, and IRM Part 20.1, Penalty Handbook.

      3. Reasonable cause relief is not available for all penalties; however, other exceptions may apply.

        1. For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.
        2. If a reasonable cause provision applies only to a specific IRC section, that reasonable cause provision will be discussed in the IRM 20.1 section relating to that specific IRC section. See IRM 20.1.1.1.2 and Exhibit 20.1.1-1Penalty Relief Application Chart.
        3. When considering the information provided in the following subsections, remember that an acceptable explanation is not limited to those given in IRM 20.1. Penalty relief may be warranted based on an “other acceptable explanation,” provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM 20.1.1.3.2.2Ordinary Business Care and Prudence.
      4. The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM 20.1 sections for the rules that apply to a specific IRC penalty section. See IRM 20.1.1.1.2Organization of IRM 20.1.

      5. Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this subsection:

        1. What happened and when did it happen?
        2. During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
        3. How did the facts and circumstances result in the taxpayer not complying?
        4. How did the taxpayer handle the remainder of his or her affairs during this time?
        5. Once the facts and circumstances changed, what attempt did the taxpayer make to comply?
      6. Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.

Exhibit 4.26.16-1 FBAR Penalty Mitigation Guidelines 

      • The Bank Secrecy Act (BSA) allows the Secretary of the Treasury some discretion in determining the amount of penalties for violations of the FBAR reporting and record keeping requirements. There is a penalty ceiling but no minimum amount. This discretion has been delegated to the FBAR examiner.
            • The examiner may determine that the facts and circumstances of a particular case do not justify a penalty.
            • If there was an FBAR violation but no penalty is appropriate, the examiner must issue the FBAR warning letter, Letter 3800.
      • When a penalty is appropriate, IRS established penalty mitigation guidelines to ensure the penalties determined by the examiner’s discretion are uniform. The examiner may determine that:
            • A penalty under these guidelines is not appropriate, or
            • A lesser amount than the guidelines otherwise provide is appropriate.
      • The examiner must make this determination with the written approval of that examiner’s manager. The examiner’s workpapers must document the circumstances that make mitigation of the penalty under these guidelines appropriate. When determining the proper penalty amount, the examiner should keep in mind that manager approval is required to assert more than one $10,000 non-willful penalty per year, and in no event can the aggregate non-willful penalties asserted exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue. Similarly, manager approval is required to assert willful penalties that, in the aggregate, exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue, and in no event can the aggregate willful penalties exceed 100% of the highest aggregate balance of all accounts to which the violations relate during the years at issue.
      • To qualify for mitigation, the person must meet four criteria:
          1. The person has no history of criminal tax or BSA convictions for the preceding 10 years and has no history of prior FBAR penalty assessments.

          2. No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.

          3. The person cooperated during the examination.

          4. IRS did not determine a fraud penalty against the person for an underpayment of income tax for the year in question due to the failure to report income related to any amount in a foreign account.

Reasonable Cause To Abate Penalties

In conclusion, while FBAR penalties can be tough , if a taxpayer can prove reasonable cause in support of their noncompliance , they may be able to reduce or abate FBAR penalties. there are several moving parts when it comes to presenting the IRS with a reasonable car statement package and taxpayers should be careful before making any proactive representation to the IRS.

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