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FBAR and FATCA Compliance Revisited: What Constitutes "Reasonable Cause?"

Posted on in Internal Revenue Service

fatca, reasonable cause, Chicago Tax LawyersThe Foreign Account Tax Compliance Act (FATCA) requires every taxpayer with certain amounts of money in a foreign bank account or foreign investment vehicle to report that money to the Internal Revenue Service (IRS) each year. The deadline for filing your Foreign Bank Account Report (FBAR) for 2015 will be June 30th, 2016. If you file late, the penalties for doing so can be severe; especially if it is determined that you did so "willfully."

For most people, however, filing late is not a matter of willfulness; it's a matter of unfortunate circumstance. The IRS recognizes this, and as such they have created what is known as the "Reasonable Cause" Exception IRM 4.26.16.4.3.1 (07-01-2008). Under the "Reasonable Cause" Exception, someone that shows a good faith effort to file in a timely fashion can ask to have their circumstances examined by the IRS to determine whether or not they exercised what the IRS calls "ordinary business care and prudence" in meeting their obligation to file. If they did, and they failed through no fault of their own, they can have their penalties abated.

What is "Reasonable Cause"?  

Unfortunately, there is no hard-and-fast answer to the question of what exactly constitutes "Reasonable Cause." The IRS will examine your specific situation, including the precise events that led to you missing the deadline and your general background to help define what "ordinary business care" would look like for you as an individual. They will, in particular, inquire about:

  • Why you failed to file your FBAR on time;
  • What exact circumstances you consider 'beyond your control' that contributed to your failure to file on time;
  • How many times you have failed to keep up with your tax burdens in recent history; and
  • How long it took you to become compliant the last time you fell behind on your obligations to the IRS.

Ignorance of the Law

One of the most common reasons the IRS hears for a late filing is quite simply "I didn't know I had to file by the deadline!" This is, in part, because many people are actually ignorant of the law (a good many others are not ignorant of the law, but will claim to be regardless). Accordingly, the IRS typically examines a number of factors, including but not limited to:

  • Your education level;
  • Your previous experience filing the FBAR;
  • Your previous experience being penalized for issues relating to the FATCA;
  • Your efforts to conceal information about the account or your foreign income sources;
  • The presence of recent changes to the law or the tax forms;
  • The complexity of a given filing compliance issue;
  • The presence of an informed tax advisor;
  • The legitimacy and delinquency history of the foreign account; and
  • Any other pertinent factors.

It is worth noting that the term "reasonable cause" has been the subject of substantial  litigation, and, as such, there are significant legal precedents already set surrounding the term. Any time you're going to attempt to prove that your delinquent FBAR was late for "reasonable cause," start that process with a competent tax attorney by your side. It's the best way to position yourself for a successful outcome in your case.

At Chicago-Kent Tax Clinic, we offer affordable assistance and representation with FBAR compliance and all other types of IRS and Illinois tax problems from professionals with in-depth experience working both for the IRS and in private practice. For a free consultation with one of our skilled Chicago tax lawyers, contact our office today at 312-906-5041.

Sources:

http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-U.S.-Taxpayers
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