In James vs. United States of America, the trial court stated the requirements for a reasonable cause defense.
“In general, reasonable cause exists when a taxpayer exercises ordinary care and prudence in determining his tax obligations despite his failure to comply.See I.R.M. 220.127.116.11.2 (11-25-2011). Whether reasonable cause exists depends upon all of the facts and circumstances of the case, including the taxpayer’s reason for failing to properly” Moreover, the Internal Revenue Manual (“IRM”) provides that ignorance of the law may provide reasonable cause if: “A. A reasonable and good faith effort was made to comply with the law, or B. The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement.”I.R.M. 18.104.22.168.2.2.6 (11-25-2011).”
In James the taxpayer claimed that he relied on the advise of his accountant in not filing a Form 3520 among other information returns. The James case is still in pre-trial status, so whether James can ultimately establish that he did rely on his accountant has not yet been determined. What is important is that the taxpayer failed to file an information return(s) and the result was the assertion by the IRS of substantial civil penalties. The taxpayer then had to show that his efforts to comply were reasonable and that his conduct was not willful or neglectful.
There are serious penalties for failing to file information returns, like Form 3520 Report of Foreign Gift or Bequest. The penalty is $10,000 or 35% of the gross reportable amount. There are limited excuses based upon “reasonable cause” that allow taxpayer’s to avoid penalties.Reliance on third parties like accountants and lawyers, needs to be in writing, and address the facts which must be fully disclosed to constitute a valid reasonable cause defense. The validity of a reasonable cause defense can be the deciding factor on whether a taxpayer should make a voluntary disclosure or alternatively, file late information returns, including a Report of Foreign Financial Account (FBAR) and claim a reasonable cause defense.