“Reasonable Cause” When Dealing with the IRS

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On November 5, 2020, the IRS removed the Delinquent Information Submission Procedure Program from its Offshore Compliance Options Menu.  Before the removal of this program, a US Taxpayer could file a “delinquent” international information tax return with what is known as a Reasonable Cause Statement from which the IRS could waive non-compliance penalties if a US Taxpayer was able to establish Reasonable Cause to the satisfaction of the IRS. 
 

The November 5, 2020 IRS update demonstrates that the IRS can change it position towards Taxpayers in the international arena at its discretion.  Not only did the IRS remove the Delinquent Information Submission Procedure Program, but it also alarmed US Taxpayers and Tax Practitioners by stating that:

  • “During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement.”
  • “It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information.”

Taxpayers who have identified the need to file delinquent international information returns who are not under a civil examination or a criminal investigation by the IRS and have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns through normal filing procedures

Although “Taxpayers may attach a reasonable cause statement to each delinquent information return filed for which reasonable cause is being asserted”, there is no assurance offered that a Taxpayer’s reasonable cause statement will be considered.   

What is Reasonable Cause for the IRS?

In the US, Taxpayers “self-assess and voluntarily” pay taxes.  The IRS position is that Voluntary Compliance occurs when a Taxpayer makes a “good faith” effort to meet the Taxpayer’s tax obligations as defined in the Internal Revenue Code. IRS encourages Taxpayer Voluntary Compliance to assure compliant Taxpayers that non-compliant Tax Offenders are identified and penalized.   

Fairness of the Tax System is important.  At times, relief from penalties such as the failure to file, failure to pay and/or failure to deposit might be attributed to Reasonable Cause.      

IRS bases “Reasonable Cause” on the individual facts and circumstances of a Taxpayer’s situation. IRS considers reasons which establish that a Taxpayer used ordinary business care and prudence to meet a Federal tax obligation.  For example, while a Taxpayer’s inability to make timely tax payments in and of itself is NOT Reasonable Cause for failure to file or pay on time, the reasons for the lack of funds might meet Reasonable Cause criteria for the failure-to-pay penalty.   

Divulging a failure to timely file international information returns now comes with further uncertainty regarding penalty imposition 

The information sourced by the IRS from the use of data analytics, technology, information sharing agreements, Memorandums of Understanding, whistleblowers and FATCA is causing the IRS to narrow the options that it wants to provide to non-compliant US Taxpayers for coming into compliance.   

US Taxpayer’s Offshore Compliance Options currently include:

  • IRS Criminal Investigation Voluntary Disclosure Practice
  • Streamlined Filing Compliance Procedures
  • Delinquent FBAR Submission Procedures

Get Started on your International Tax Compliance Status

If you are out of tax compliance, do not wait to come forward.  There are options available for non-compliant Taxpayers if the IRS does not contact you first.  Consult a specialized Tax Advisor for your best option now.  

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