IRS Penalty Abatement & Reasonable Cause Letter – Offshore Assets
- 1 IRS Penalty Abatement Reasonable Cause Letter
- 2 Form 843 & Example Letter to the IRS
- 3 Reasonable Cause Offshore Tax Compliance Examples
- 4 IRS Penalty Abatement & Reasonable Cause
- 5 Hiring an IRS Reasonable Cause Submission Attorney
- 6 How to Find Experienced & Reputable Counsel
- 7 Need a Second Opinion about Reasonable Cause
- 8 Sean M. Golding, JD, LL.M., EA – Board Certified in Tax
- 9 IRS Penalty List
IRS Penalty Abatement & Reasonable Cause Letter – Offshore Assets
IRS Penalty Abatement Reasonable Cause Letter: If you have unreported offshore assets, accounts, and/or investments — along with unreported foreign income — you may be subject to “offshore penalties.” These penalties range in severity, and in some circumstances, they can be downright obscene. Therefore, you may consider the IRS Penalty Abatement Reasonable Cause Letter alternative.
IRS Penalty Abatement Reasonable Cause Letter
While the IRS has developed various forms of Offshore Amnesty, you may still qualify for a different alternative called “Reasonable Cause.”
Form 843 & Example Letter to the IRS
While Form 843 is used to make the “formal request,” there is no “Form” for an IRS Penalty Abatement Reasonable Cause Letter — which is why you will want to be careful making any proactive representation to the IRS, without being represented by a Tax Specialist.
Rather, the Attorney drafts the letter to submit to the IRS.
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.
Reasonable Cause Offshore Tax Compliance Examples
IRS Reasonable Cause 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.
Reasonable Cause 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.
Reasonable Cause 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.
IRS Penalty Abatement & 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?
Hiring an IRS Reasonable Cause Submission Attorney
Due to he nature of an IRS Reasonable Cause Letter, it is important that you retain experienced counsel.
People Can be Whomever They Want to be Online
And that is the problem.
In recent years, we have had many clients come to us after being horribly represented by inexperienced tax counsel. While we are sure it is a problem in many fields, it seems to run rampant in IRS offshore voluntary disclosure.
These Attorneys ‘manipulate’ their past legal experiences, such as working for the IRS — to make themselves sound more experienced than they are. You later find that they never worked as an attorney for the IRS, or even in the offshore disclosure department.
The IRS has nearly 100,000 employees, and just being one of them does not make an attorney qualified to be an effective and experienced offshore voluntary disclosure tax attorney specialist.
IRS Offshore Disclosure is complex enough for experienced practitioners who focus exclusively in the area of law, never mind relative newcomers who are trying to handle more than just offshore voluntary disclosure as part of their everyday tax practice.
We know, because those cases usually end up on our door-step. Examples of recent cases we had to takeover from less experienced Attorneys can be found by Clicking Here (Case 1) and Clicking Here (Case 2).
How to Find Experienced & Reputable Counsel
Nearly all the experienced Attorneys in this field will have 5 Main Attributes:
- Board Certified Tax Law Specialist
- Master’s of Tax Law (aka LL.M.)
- Dually Licensed as an Enrolled Agent or CPA
- Around 20-Years of Private Practice experience
- Extensive Litigation, Trial and related high-stakes experience.
Understanding How Tax Prep & Legal Fees Work in Offshore Disclosure
Need a Second Opinion about Reasonable Cause
Lately, with rumblings of the Streamlined Disclosure Program, aka Streamlined Voluntary Disclosure aka Streamlined Filing Compliance Procedures coming to an end, some younger and inexperienced attorneys are in disarray — and handing out terrible advice to make a quick buck — and putting clients at risk.
If you are unsure about advice you received about Reasonable Cause or the Streamlined Disclosure program, let Golding & Golding offer you a second opinion, with a reduced-fee initial consultation.
Contact Us Today; Let us Help You.
Sean M. Golding, JD, LL.M., EA – Board Certified in Tax
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 and closely related 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 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.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.
IRS Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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