Can I Use the Reasonable Cause Defense in my FBAR Case?
Many of the penalties faced by expats who haven’t filed their U.S. tax returns may be reduced to zero, provided the taxpayer can prove reasonable cause for not filing. The IRS is rather strict as to whether you can use the reasonable cause defense, particularly if they found you versus you contacting them. In dealing with the serious tax issues as an expat (or even for those living on American soil), it is always advisable to speak with a U.S. tax attorney before contacting the IRS.
What Is the Reasonable Cause Defense for Penalties?
According to the IRS, as a U.S. Taxpayer, you may be required to report your interest in certain foreign financial accounts on Form FinCen 114, Report of Foreign Bank and Financial Accounts (FBAR). Failure to do so can result in penalties, including steep fines and in cases of tax fraud, possible jail time.
There are some situations that will allow taxpayers to file late and avoid incurring late penalties. A good example under the IRS Fact Sheet 2011-13:
Example 3: Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR. The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause. The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.
Additionally, there are some U.S. Taxpayers that are not aware that they are required to file income tax returns every year. They may use the reasonable cause defense if they can prove any of the following situations:
- Taxpayer has limited education.
- Whether the taxpayer received prior penalties.
- Recent changes in the tax forms (or law) that could not reasonably be expected to be known by the taxpayer.
- The complexity of the tax or compliance issue.
Other scenarios may also be used under the reasonable cause defense. Speak with a U.S. tax attorney to discuss the details of your situation.
Can You Use the Reasonable Cause Defense?
The best way to determine if you can use the reasonable cause defense is to speak with a U.S. tax attorney. Even if you cannot use the reasonable cause defense, the tax attorney can help you properly file FBAR forms and U.S. Federal Income Tax returns utilizing procedures aimed at minimizing tax, interest and penalties.