Can You Avoid Late FBAR Penalties Based on “Reasonable Cause?”
Under the federal Bank Secrecy Act (BSA), U.S. taxpayers who own qualifying offshore accounts and other foreign financial assets are required to file a Report of Foreign Bank and Financial Accounts (FBAR) on an annual basis. Failure to comply with the BSA can lead to steep penalties—even if the failure is inadvertent. With this in mind, U.S. taxpayers who discover that they are behind on their FBAR filings must take proactive steps to come into compliance. As Washington D.C. international tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, this may mean submitting a statement of “reasonable cause.”
Options for Remedying Delinquent FBAR Filings
U.S. taxpayers who have failed to file FBARs in compliance with the BSA have three primary options. These options are available under different circumstances, and taxpayers must work with their attorneys to determine which option makes the most sense for them. These options are:
Voluntary disclosure is an option for taxpayers who have willfully failed to file FBARs. Taxpayers who make a voluntary disclosure must still pay all applicable penalties, but completing the process successfully can help them avoid criminal prosecution. Submitting a streamlined filing is an option for “non-willful” violations; and, although criminal prosecution generally is not a risk in these cases, taxpayers who commit non-willful violations are liable for civil penalties.
Submitting a statement of “reasonable cause” allows taxpayers to avoid penalties for delinquent FBARs. The IRS recently stated that it “will not penalize those who properly reported a foreign account on a late-filed FBAR if the IRS determines there was reasonable cause for late filing.” To avoid penalties based on reasonable cause, taxpayers must satisfy the requirements outlined in 26 CFR Section 301.6724-1.
Requirements for Avoiding Penalties Based on “Reasonable Cause”
Section 301.6724-1 is a lengthy and complex regulation. It establishes two main grounds for taxpayers to claim reasonable cause (“significant mitigating factors” and “events beyond the filer’s control”), and it includes numerous detailed definitions and exceptions.
For example, even if a taxpayer can prove a significant mitigating factor (either “the filer was never required to file [prior to the failure],” or “the filer has an established history of complying with the [FBAR filing requirement]”), the taxpayer still cannot claim reasonable cause if the taxpayer cannot also prove that he, she or it acted in a “responsible manner.” Under Section 301.6724-1, acting in a responsible manner means both (i) “exercise[ing] reasonable care . . . in determining [the taxpayer’s] filing obligations,” and (ii) “undert[aking] significant steps to avoid or mitigate the failure [to file].”
Speak with a Washington D.C. International Tax Attorney in Confidence
Given the severe penalties for FBAR filing violations and the challenges involved in establishing reasonable cause, taxpayers who believe they may have grounds to claim reasonable cause should speak with an attorney promptly. To schedule a confidential consultation with Washington D.C. international tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033, email email@example.com or request an appointment online now.