Reasonable cause is a legal argument that can help you avoid tax evasion penalties if your failure to disclose offshore holdings was non-willful. However, many people don’t understand the IRS reasonable cause standards and make costly mistakes in their international tax cases. Learn more about reasonable cause and when it applies to tax claims below.
What Is a Non-Willful Violation?
To assert reasonable cause, you must show that your non-disclosure of offshore income or bank accounts was non-willful. If you truly had no idea that you had to report your accounts and didn’t actively use them, you’ll have a strong argument that your violation was non-willful. However, most people’s claims are more complicated.
The IRS weighs a variety of factors when they assess the willfulness of your violations. They’ll look to see if you had financial advisors, whether:
- these advisors had experience with international tax laws
- you paid your other taxes
- you have a pattern on nondisclosure
They’ll also look at your level of knowledge and experience with international tax issues.
If your violation was non-willful, you’ll have a variety of ways you can address your unreported international tax liability. They include the Streamlined Disclosure Procedures and reasonable cause. If your violations are deemed wilful, you will have to pay significant penalties and cannot use these beneficial systems.
What Are the Benefits of Asserting Reasonable Cause?
Unlike the IRS Streamlined Disclosure Procedures, reasonable cause isn’t a formal IRS program. Instead, IRS reasonable cause is a legal argument that you can use to limit your tax liability. Essentially, to prove reasonable cause, you must show that:
- Your non-disclosure of offshore bank accounts, assets, and income was non-willful
- You lacked any intent to evade U.S. tax laws
- Other factors suggest that you did your best to comply with tax laws
Proving reasonable cause is a complex process. The IRS will examine your claim, looking to see if you:
- Consistently paid foreign taxes on your offshore accounts
- Stayed up-to-date on your other United States income taxes
- Your underlying knowledge of international tax law
- The extent of your violations
- Whether you had professional help managing your offshore accounts
- Whether your bank or financial advisor warned you about disclosure requirements
- How long your violations persisted
Generally speaking, if a penalty seems absurd under your circumstances, you might be able to use reasonable cause as a defense.
If you and your international tax lawyer convince the IRS that you had reasonable cause for your non-disclosures or other tax law violations, you won’t have to pay penalties or interest on them.
Reasonable Cause Defenses Typically Require Legal Representation
If you’re asserting IRS reasonable cause, it’s in your best interests to consult with an international tax attorney before you discuss your claim with the authorities. First, your lawyer will listen to your story and investigate your tax violations. This involves weighing all of the factors involved in your case and determining whether you have a valid reasonable cause defense. Your lawyer should also assess your eligibility for other programs, such as the Streamlined Disclosure Procedures.
Next, you and your lawyer will discuss all of your legal options. You’ll learn about the strengths and weaknesses of your claim and the advantages and disadvantages of each legal strategy. Once you understand your rights and your options, you can make an educated decision about how to proceed with your defense.
Typically, this involves deciding whether your reasonable cause argument is so strong that it’s likely to convince the IRS to waive your penalties. While nothing is ever guaranteed, it’s always best to make this assessment with help from an international tax lawyer. These are highly complex and nuanced legal arguments– and one mistake can result in an assessment of tax liability.
If your reasonable cause argument isn’t compelling, filing under the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures might be a better option. The Streamlined Disclosure Procedures involve penalties and interest. However, they’re significantly lower than the full array of penalties and fines you might face in an IRS enforcement action.
How Do I File for IRS Reasonable Cause?
If you and your international tax lawyer determine that reasonable cause is your best defense, they will craft a detailed IRS reasonable cause application or letter. This document sets out your reasonable cause allegations and asks the IRS to waive your penalties and interest.
The IRS will review your claims and either approve or deny your reasonable cause application. If approves your request, you won’t have to pay tax penalties for your failure to submit tax disclosure forms such as:
- Foreign Trust Beneficiary and Ownership Forms (Form 3520 and 3520-A)
- Report of Foreign Bank and Financial Accounts (FBAR)
- Statement of Specified Foreign Assets (FATCA Form 8938)
- U.S. Ownership of Foreign Companies (Form 5471)
- U.S. Ownership of Passive Foreign Investment Companies (Form 8621)
If the IRS denies your request, you’ll face significant penalties and interest– at rates that are much higher than those available in the Streamlined Disclosure Procedures. (If your application is denied, your international tax lawyer should also help you understand your appeal rights and whether an appeal is in your best interest.)
You can also assert reasonable cause for other tax violations. If you have questions about the applicability of IRS reasonable cause in your claim, contact an experienced international tax lawyer at Randall & Associates for a confidential, no-risk evaluation.
Request an IRS Reasonable Cause Consultation With Randall & Associates
Proving reasonable cause is an art. If you’d like to learn more about your potential defenses and options in an international tax liability claim, contact Randall & Associates today. Our team of international tax lawyers and professionals will carefully evaluate your situation, educate you about your rights and options, and craft a strategy that protects your financial assets and aims to minimize your liability. We work with clients around the world and look forward to speaking with you.