More Than Reasonable Cause: IRS Penalty Defense Strategies

More Than Reasonable Cause: Other IRS Penalty Defense Strategies

More Than Reasonable Cause: Other IRS Penalty Defense Strategies

In general, when taxpayers have been assessed fines and penalties by the Internal Revenue Service, one of the first lines of defense is reasonable cause. In various situations, particularly those involving international information reporting penalties, if the taxpayer can establish reasonable cause, the IRS must waive or abate the penalties. But proving reasonable cause can be challenging; depending on the specific taxpayer’s facts and circumstances, they may employ different mechanisms to establish reasonable cause. For example, if a taxpayer relies on a tax professional and receives bad advice, this may establish reasonable cause — but not always. Likewise, in some situations, a mistake can also qualify as a reasonable cause (the Internal Revenue Manual provides different options for establishing reasonable cause). But reasonable cause is not a taxpayer’s only mechanism for avoiding or abating penalties. Let’s take a brief look at some of the other ways a taxpayer may be able to eliminate IRS fines.

Statutory Expiration

One of the first lines of defense is when the statute of limitations has already expired. For example, let’s say that a taxpayer failed to report income in a certain year and the failure was not fraud. Generally, the  IRS will have a certain amount of time to assess penalties against the taxpayer, but if that time expires, then the IRS loses the right to assess penalties on that matter — because the time to do so has expired.

Non-Willfulness and Mitigation

For taxpayers who may not be able to establish reasonable cause, they may still be able to mitigate or reduce/eliminate any penalties that have been assessed by proving that they acted non-willfully. For example, when a taxpayer has violated FBAR reporting, if the taxpayer can prove that they acted non-willfully in their non-compliance, they may receive a warning letter instead of being assessed a penalty.

First Time Penalty Abatement

For some taxpayers, it may be their first tax or penalty violation — and with certain violations, such as a failure-to-file or failure-to-pay penalty, the taxpayer may qualify for a first-time abatement.

Similar to the first time abatement, the taxpayer may be able to have their penalty reduced or eliminated if they are able to show that this was the first time they were required to file a Form, such as filing a Form 3520.

In other words, while technically the first time abatement does not apply to Form 3520 penalties if it was the first time the taxpayer was required to about the form, and the fact that it was the first time goes toward a penalty reduction or waiver.

IRS Error

The IRS is not perfect. Sometimes the IRS makes mistakes, and it is important for taxpayers who have been assessed penalties to evaluate the penalties to determine whether the penalties were issued properly.

For example, if the taxpayer was automatically assessed penalties, sometimes the IRS computers make mistakes, and sometimes the taxpayer may be able to argue that supervisory approval is required, and if there was no supervisory approval, then the taxpayer may qualify for a penalty waiver.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.