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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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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

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abatement, penalty abatement, Chicago Tax LawyersThe IRS, naturally, does not like to remove a penalty it has assessed. No matter how unfair these penalties may seem, you will still have to put in some work to get a civil penalty abatement to stick. That said, there are a fair number of reasonable causes upon which you can base a compelling argument:

Ordinary Business Care and Prudence

This category of abatement justification simply means "you did your best to pay your taxes, but couldn't for reasons beyond your control." Generally speaking, if you're not already a regular and conscientious taxpayer, you will not get the IRS to agree to this basis for abatement. But if you really did do everything in your power, and you've been compliant with your filing and payments for the past several years, you may be able to convince them that they should eliminate the penalty…this time.

Death, Serious Illness, or Unavoidable Absence

The "medical causes prevented me from paying" argument, if it's provable and true, is probably the most successful form of abatement request. It applies to individuals exactly like you'd expect, but it can also apply to businesses and institutions if there's only one person in charge of taxes, and if the businesses exercised 'ordinary business care and prudence' to try to get the taxes paid anyway and failed.

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