FBAR Reasonable Cause Statement – Certified Tax Specialist
FBAR Reasonable Cause Statement – Certified Tax Specialist
If you have foreign accounts that you have not reported on your annual FBAR (Report of Foreign Bank and Financial Account Statement) or IRS Tax Return Form 8938 (Statement of Specified Foreign Financial Assets) the IRS is empowered to seek extensive fines and penalties against your account, which could reach 100% of the account value in a multi-year audit where the taxpayer is found to be willful.
FBAR Reasonable Cause
For some taxpayers who were non-willful in failing to comply with IRS and DOT rules for Reporting Foreign Accounts, Foreign Income, Foreign Assets, and Foreign Property, submitting a Reasonable Cause Statement in lieu of submitting to the Streamlined Offshore Disclosure Programs may be a viable option.
*We are the only State Bar Board Certified Tax Law Firm that specializes exclusively in IRS Offshore Voluntary Disclosure Law.
Sean M. Golding, JD, LL.M. EA– Board Certified Tax Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure Matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS Offshore Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
I Never Knew About Foreign Reporting Requirements
Chances are that if you are reading this article, you have recently learned about certain IRS international tax compliance laws (FBAR, FATCA, 8938, 3520-A, 5471, 8621, etc.) which are causing you to lose sleep. The IRS, DOT, DOJ and U.S. Government overall has made enforcement of Offshore Tax and Reporting requirements a key enforcement priority.
Not only has Offshore Tax Evasion has become a mainstay on the IRS Dirty Dozen Tax Scam list, but with the implementation of FATCA (Foreign Account Tax Compliance Act) and other intentional tax compliance programs, the chances of the U.S. discovering your foreign accounts has increased exponentially.
I am Scared, What can I Do?
While dealing with the IRS is scary, if you were non-willful in your actions then much of the fear you are experiencing is unnecessary. Yes, the IRS and US government (in fact the world as a whole) is cracking down on international tax fraud and Offshore Tax Evasion (FATCA and CRS). And, even if you never had any intent of being out of tax compliance, you may get caught in the IRS wave of “New and Heightened” Offshore Enforcement laws…but there is hope.
When you are non-willful, your two main alternatives are entering the Streamlined Domestic/Foreign Offshore Procedures or submitting a Reasonable Cause Exception Statement.
The most familiar and common option for individuals and businesses that have unreported foreign accounts or unreported foreign income is to enter offshore disclosure. Offshore Disclosure is a general term to describe various methods for getting back into US government tax and foreign account reporting compliance.
Golding & Golding have written numerous articles and blog posts for our website, as well as widely known journals and books regarding the nuances and intricacies of offshore disclosure. All in all, the biggest (and only) negative to offshore disclosure is the penalty.
Depending on the facts and circumstances of your case, your country of residence, and your risk management – there are two main programs that have various penalty schemes.
Streamlined: Under this program, you are certifying that you are non-willful in your failure to comply, and the traditional penalty (see below) will be reduced to either 5% or a complete penalty waiver if you qualify under the strict definition of foreign residence for the streamlined program.
OVDP: The Offshore Voluntary Disclosure Program is the traditional program, which is often reserved these days for individuals and businesses who were willful (a.k.a. knowingly failed to report their foreign income and/or foreign accounts). There are other reasons for entering OVDP — even if you were non-willful — but that is beyond the scope of this article. There are three penalty alternatives:
- 27.5% Penalty if you go through the program and none of your money is in a “bad bank.”
- 50% Penalty if you go through the program and any of your money was ever in a bad bank during the compliance period.
- Opt-out and try your luck at penalty reduction.
*If you were willful, we do not recommend the Reasonable Cause Alternative.
Reasonable Cause Examples
If you were completely non-willful in your failure to disclosure and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd. Here are three examples in which paying any penalty for your undisclosed foreign accounts may seem unfair.
Example 1: 80-year-old Michael travels worldwide and has 3 accounts in different countries. He only uses the foreign money when he is in the foreign country at issue, he never transfers the money to the US, and there is usually a relatively small amounts of money in each account. The only issue for Michael was that at one point, Michael thought about purchasing a home overseas and left the money in the foreign account for a significant period of time (including 12/31). Foreign taxes were fully paid on the money deposited into the account and foreign taxes were paid on the income the account generated. His only mistake was that he did not report the account and/or the foreign income on his U.S. Tax Return.
Example 2: Michelle, a widow who had never been in trouble with the law, moved to the United States over 30 years ago but has a $1 million USD foreign pension from a private employer through the early 1970s. She has never accessed the account nor has she contributed (or anyone else contributed) since arriving in the United States. The account/earnings are not taxed in the US until distributed, there have been no distributions, and Michelle never reported the account on an FBAR or 8938.
Example 3: David has a foreign account, which he received as an inheritance. He never touched the money, and even though the account earns minimal annual income, there is no tax for passive income in this particular country. He has no other ties to the country and has not used any of the money. David’s son has special needs and he needs to access a large chunk of the money in a short period of time. He has not reported the account on an FBAR or 8938.
Reasonable Cause – Viable Option
As you can see from the aforementioned examples, none of these individuals had any intent to perform tax evasion (aka they were “non-willful”). Moreover, the amount of income earned is relatively minor compared to the outstanding amount in the foreign accounts. In addition, in the case of Michelle, the majority of her money is it a pension account which is not even taxed by the US. Thus, even under the streamlined program she would be paying $50,000 in penalties for an account in which all of the money was earned and reported timely in her foreign country and all foreign taxes were paid on the contributions.
Reasonable Cause – Process
An individual should never attempt offshore disclosure without the assistance of a qualified attorney. With that said, it is even more important to ensure that if you are even considering a reasonable cause submission, that you do so only with the help of an attorney. That is because only with an attorney do you receive the benefit of the attorney-client privilege.
Unlike the Streamlined Program or OVDP where there are strict procedures to be followed, a reasonable cause submission is different. It should be noted that a person can submit a reasonable cause application for any number of different reasons; it is not limited only to offshore money and reporting foreign accounts.
With a reasonable cause submission, the attorney will carefully evaluate and analyze the facts and circumstances of your case in detail. He or she should sit down with you either person or via teleconference if you are non-local and assess the pros and cons of the potential submission in order to determine what the benefits and detriments may be to a reasonable cause disclosure. Thereafter the attorney will amend the returns, prepare the necessary forms, and draft a persuasive Reasonable Cause Letter.
At Golding & Golding, we are Tax Attorneys (with Masters of Tax Law) and Enrolled Agents credentialed by the IRS (Highest Credential awarded by the IRS), so we handle your entire submission (Taxes, Legal, and Audit Defense) in-house, for a flat-fee.
Benefits of Reasonable Cause
The main benefit of reasonable cause is that if it is accepted by the Internal Revenue Service then there is a good chance that penalties will be waived. As a result, when you report your foreign accounts and you can show that your failure to report them prior was due to reasonable cause, you will not be penalized for un-filed forms, including:
- FBARs (FinCEN 114) – Report of Foreign Bank and Financial Accounts
- FATCA Form 8938 – Statement Of Specified Foreign Assets
- 5471 – US Ownership of Foreign Companies.
- 8621 – US Ownership of Passive Foreign Investment Companies
- 3520 – Foreign Trust Beneficiary
- 3520-A Foreign Trust Ownership
This may result in a significant savings versus offshore disclosure – especially when you have significant unreported accounts and assets overseas and minimal income.
Detriments of Reasonable Cause
Reasonable cause does not come without its risks. If the reasonable cause statement is rejected, then you may be subject to fines and penalties that are higher than would have been issued under the Streamlined Program.
Nevertheless, if penalties are issued, then you are entitled to appeal the penalties and thereafter file with the US Tax Court if you are still unsatisfied with the appeals process. Of course, this may take a lot of time and effort – not to mention attorneys fees depending on the seriousness of the fines and the facts of your case – which is counterintuitive.
Common Questions to Consider – Reasonable Cause
Before convincing yourself that you should be spared any penalty, it’s important to look at the facts and circumstances of your case in the most objective light as possible.
Here’s a list of questions you may consider before making your decision:
- How many forms did you fail to report?
- How much unreported foreign income did you have?
- For how long did you fail to report these forms?
- Did you work with a CPA, Enrolled Agent, or Tax Accountant and prepare your returns?
- Did the CPA, Enrolled Agent, or Tax Accountant ask you about your foreign accounts or Foreign Income?
- Have you otherwise filed your U.S. tax returns timely?
- Did you pay Foreign Tax on the Foreign Earnings (unless exempt in the Foreign Country)
- Are you originally from the United States and how long have you been in the United States filing tax returns?
- How much unreported foreign income do you have?
- Did a foreign financial institution inform you of your requirement to get FATCA or IRS Tax Compliant?
- Are you prepared to go the distance and appeal the matter or even bring it the Tax Court if it is rejected?
To help you better understand the process, we have also pasted below a popular blog article we authored outlining the difference between OVDP and the IRS Streamlined Program, which is provided for you below:
OVDP vs. Streamlined
In order to assist you better understand the distinction between the two different IRS foreign account disclosure programs, we are providing the following summary for your reference:
If you or your business has unreported or undisclosed foreign accounts, offshore assets, or foreign income, then you may be considering whether you should enter the Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program, and what the definition of “Willful” is.
Whether or not a person enters Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program will depend on the facts and circumstances of each taxpayer’s situation. No two tax situations are identical, and the failure to properly submit to the correct program can have serious consequences for the unsuspecting taxpayer.
Why Comply with IRS Foreign Disclosure Laws?
Because if you fail to comply with FATCA (Foreign Account Tax Compliance Act) as well as general IRS Foreign Disclosure Laws, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as:
- Collect Taxes for prior tax years
- Collect Interest on outstanding tax liability for prior years
- Penalize you for the failure to report foreign accounts on the tax return (Schedule B and 8938)
- Penalize you for the failure to report foreign gifts (3520)
- Penalize you for the failure to report foreign Trusts (3520 and 3520A)
- Penalize you for the failure to report ownership in Foreign Corporations (5471 and 5472)
- Penalize you for the failure to report ownership in a PFIC (8621)
- Genera Negligence and Fraud Penalties
- Investigate you for Criminal Tax Fraud & Criminal Tax Evasion if you willfully failed to report your assets & foreign income.
The reason why international tax law compliance has taken center stage is because under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries are actively reporting the bank and financial accounts of US citizens and US legal permanent residents to the IRS and U.S. Government.
If a foreign country is interested in working with the United States, the foreign country will enter into an “ Intergovernmental Agreement” (IGA) with the United States. These agreements are reciprocity agreements, which means that not only will the foreign country report the information to the IRS, but the IRS will also reciprocate by providing the same information to foreign country tax authorities.