FBAR “Reasonable Cause” Exception Under the New Procedure for U.S. Citizens Under IR-2012-65, June 26, 2012 and IRS Fact Sheet FS-2011-13, December 2011

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Alvin Brown & Associates, tax law firm, identifies "reasonable cause" exceptions for FBAR penalties in lieu of entering IRS Offshore Voluntary Disclosure Program (OVDP)

Federal law requires taxpayers to report annually to the Internal Revenue Service (“IRS”) any financial interests they have in any bank, securities, or other financial accounts in a foreign country. 31 U.S.C. § 5314(a). The report is made by filing a completed form TD F 90-22.1 (“FBAR”) with the Department of the Treasury. 1 See id. § 5314; 31 C.F.R. § 1010.350. The FBAR must be filed on or before June 30 of each calendar year with respect to foreign financial accounts maintained during the previous calendar year, 31 C.F.R. § 1010.306(c), and the Secretary of the Treasury may impose a civil money penalty on any person who fails to timely file the report, 31 U.S.C. § 5321(a)(5)(A). Moreover, in cases where a person “willfully” fails to file the FBAR, the Secretary may impose an increased maximum penalty, up to $100,000 or fifty percent of the balance in the account at the time of the violation. Id. § 5321(a)(5)(C). The authority to enforce such assessments has been delegated to the IRS. 31 C.F.R. § 1010.810(g).

Some taxpayers who are dual citizens of the U.S. and a foreign country or who are merely U.S. citizens living and working abroad, may have failed to timely file their FBAR reports.

The good news is that there is a reasonable case exception under the FBAR Statute that that may eliminate the potential FBAR penalty. The authority for the "reasonable cause" exception is found in the IRS Manual IRM (07-01-2008). This IRM approves of the "reasonable cause" guidance provided under 26 C.F.R. § 1.6664, Reasonable Cause and Good Faith Exception to the § 6662 penalties. IR-2012-65, June 26, 2012 offers a "new procedure" to go into effect September 1, 2012, that embraces the "reasonable cause" exception to the FBAR penalty, as articulated in IRS Fact Sheet FS-2011-13, December 2011.

Whether a failure to file or failure to pay is due to "reasonable cause" is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including:

  •     The reasons given for not meeting your tax obligations;
  •     Your compliance history;
  •     The length of time between your failure to meet your tax obligations and your         subsequent compliance; and
  •     Circumstances beyond your control.

F-Bar reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. Among the facts and circumstances that will be considered are:

  •     Your education;
  •     Whether you have previously been subject to the tax;
  •     Whether you have been penalized before;
  •     Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and
  •     The level of complexity of a tax or compliance issue.
  •     Reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account.
  •     Evidence that the foreign account was established for a legitimate purpose.
  •     Evidence that there was no effort to intentionally conceal the reporting of income or assets.
  •     Evidence that there was no tax deficiency related to the unreported account.
  •     There may be other factors in addition to those listed that may weigh in favor of a determination that the failure to file was due to reasonable cause.
  •     Ignorance of the law, if reasonable along with a good faith effort to comply with the law if you could not reasonable be expected to know of the F-Bar requirement.
  •     No single factor will determine "reasonable cause." It is a "facts and circumstances test."
  •     The term "reasonable cause" has been substantially litigated and there are strong judicial guidelines that provide precedent on that term. For this reason, it is recommended that justification for "reasonable cause" under the facts and the law be accompanied by a legal memorandum to accompany the FBAR report by an experienced tax attorney. Tax attorneys at the law firm of Alvin Brown & Associates, http://www.irstaxattorney.com prepare “reasonable cause” memoranda. For questions and a free consultation, contact a tax attorney at ab@irstaxattorney.com or call (212) 588-1113.

Alvin Brown & Associates, LLC (ABA) is a tax law firm specializing in IRS controversies. ABA has tax clients throughout the U.S. and abroad dealing with all IRS tax issues, including, for example: civil and criminal examinations, offers in compromise, installment agreements, penalty abatement, IRS collection issues, payroll tax issues, F-Bar issues and many other tax issues.

Media Contact
Alvin S. Brown, Esq.
575 Madison Ave., 8th Floor
New York, NY 10022-8511
(212) 588-1113

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Alvin Brown
Alvin Brown & Associates, LLC.
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