Reasonable Cause vs Streamlined Procedures
Reasonable Cause vs Streamlined Procedures: When a U.S. Taxpayer has not timely reported offshore accounts, assets or income, they are considered to be out of compliance with the IRS. In general, the two most common reporting mistakes involve FBAR and FATCA. To assist Taxpayers, the Internal Revenue Service has developed various different tax amnesty programs to assist filers with getting into tax and international reporting compliance. Two of the most common submission options are: Reasonable Cause and Streamlined Procedures.
Whether one option is better than the other will vary depending on each person specific facts and circumstances. Both programs require the applicant to be non-willful, but there are pros and cons to each program.
Therefore, taxpayers who are out of offshore tax and reporting compliance should consider their different options very carefully before making a submission.
IRS Reasonable Cause Statement Submission
Let’s start with Reasonable Cause.
A Reasonable Cause submission letter for FBAR, FATCA and international tax in general is a very complex and delicate undertaking, There is no “form” for the submission, and you need to rely on the experience of your Tax Attorney.
A Few Examples that May Qualify for Reasonable Cause vs Streamlined:
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.
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.
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.
What does the IRM provide?
When it comes to evaluating reasonable cause vs. streamlined, the Internal Revenue Manual provides some Guidelines for Reasonable Cause:
“Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise apply. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but was nevertheless unable to comply with those obligations.
In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of certain civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the IRC.
Reasonable cause relief is not available for all penalties; however, other exceptions may apply.
For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.
If a reasonable cause provision applies only to a specific IRC section, that reasonable cause provision will be discussed in the IRM 20.1 section relating to that specific IRC section.
When considering the information provided in the following subsections, remember that an acceptable explanation is not limited to those given in IRM 20.1. Penalty relief may be warranted based on an “other acceptable explanation,” provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM 22.214.171.124.2.2, Ordinary Business Care and Prudence.
The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM 20.1 sections for the rules that apply to a specific IRC penalty section. See IRM 126.96.36.199.2, Organization of IRM 20.1.
Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this subsection”
What Happened and When did it Happen?
During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
How did the facts and circumstances result in the taxpayer not complying?
How did the taxpayer handle the remainder of his or her affairs during this time?
Once the facts and circumstances changed, what attempt did the taxpayer make to comply?
When Does Reasonable Cause NOT Exist?
As further provided by the IRS:
“Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.”
The Streamlined Filing Compliance Procedures were created in 2014 by the Internal Revenue Service. The purpose of the procedures are to assist taxpayers who were noncompliant with offshore reporting requirements – but were also non-willful.
As a result of being non-willful, the IRS reduces the penalty structure, and even waives the penalty for applicants who qualify as foreign residents.
Different Types of Streamlined Procedures
The Streamlined Procedures can be broken further down into two (2) programs:
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
Streamlined Domestic Procedures (U.S. Residents)
Streamlined Filing Compliance Procedures for US persons residing in the United States (or do not meet the technical “Foreign Resident Test”) is referred to as the Streamlined Domestic Offshore Procedures for U.S. Residents.
Typically, there are three (3) main eligibility requirements that a U.S. Taxpayer must meet in order to qualify and become eligible for the Streamlined Domestic Offshore Procedures.
The requirements include:
- Non-Willful Certification Statement
- Non- Foreign Resident
- Timely Filed Tax Returns
Streamlined Domestic Resources:
Streamlined Foreign Procedures (Non-U.S. Residents)
Streamlined Filing Compliance Procedures for US persons residing outside the United States is referred to as the Streamlined Foreign Offshore Procedures.
Streamlined Foreign Offshore Procedures (SFOP) are a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance before it is too late! It allows individuals to come into IRS Tax and Reporting Compliance, without having to pay any penalties.
The requirements include:
- Qualify as Non-Willful;
- Meet the 330-Day Foreign Residence Test/Non U.S. Person; and
- You do not have to have filed all prior year tax returns.
Streamlined Domestic Resources:
Lower Standards of Willfulness
If you are willful, you do not qualify for either program, and willful does not mean intent.
There can be “lower” forms of willfulness, which do not require willful or intent — these additional willful standard are referred to as:
Golding & Golding: About Our International Tax Law Firm
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