Do You Have “Reasonable Cause” for Failing to File an FBAR?Hot Topics, Offshore Account Update
Posted on October 29, 2021 | Share
Failing to file a Report of Foreign Bank and Financial Accounts (FBAR) can lead to steep penalties under federal law. While the Internal Revenue Service’s (IRS) streamlined filing compliance procedures provide a way for taxpayers to mitigate their liability for “non-willful” FBAR filing violations, submitting a streamlined filing does not allow taxpayers to avoid penalties entirely. However, as Boston international tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, it is possible for taxpayers to avoid penalties for delinquent FBAR filings in some cases.
Avoiding Penalties for FBAR Violations Based on “Reasonable Cause”
To avoid penalties entirely, U.S. taxpayers who have committed FBAR filing violations (i.e., by failing to file FBARs when required) must be able to demonstrate “reasonable cause.” As the IRS recently explained:
“Those who don't file an FBAR when required may be subject to significant civil and criminal penalties that can result in a fine and/or prison. [However, t]he IRS 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.”
Importantly, attempting to correct a past filing mistake on a future FBAR can also be considered a “quiet disclosure,” and making a quiet disclosure can trigger an audit or investigation. So, taxpayers seeking to avoid penalties must clearly state their claims of reasonable cause, and they must ensure that their claims align with the requirements outlined in 26 CFR Section 301.6724-1.
What Constitutes “Reasonable Cause” for a Delinquent FBAR?
Under 26 CFR Section 301.6724-1, there are two main circumstances that will justify a claim of reasonable cause for failure to file an FBAR:
“Significant Mitigating Factors”
The IRS may find reasonable cause in cases involving “significant mitigating factors.” Section 301.6724-1 provides two non-exclusive examples: (i) “prior to the failure[,] the filer was never required to file [an FBAR];” and, (ii) “the filer has an established history of complying with the [FBAR filing requirement].”
However, the regulation goes on to state that “[if a] filer . . . is unable to establish that the filer acted in a responsible manner, the mitigating factors will not be sufficient” to avoid statutory penalties. Section 301-6724.1 defines acting in a “responsible manner” as, “exercise[ing] reasonable care . . . in determining its filing obligations . . . and . . . undert[aking] significant steps to avoid or mitigate the failure [to file] . . . .”
“Events Beyond the Filer’s Control”
The IRS may also find reasonable cause if a failure to file is due to “events beyond the filer’s control.” Such events include (i) unavailability of relevant business records due to a supervening event and (ii) certain actions of the IRS or IRS agents. Here, too, Section 301-6724.1 provides a detailed explanation of when these requirements may (or may not) be satisfied.
Request a Consultation with Boston International Tax Attorney Kevin E. Thorn
If you need to address past FBAR filing deficiencies, we can help, and we encourage you to contact us promptly for an initial consultation. Call 617-692-2989, email firstname.lastname@example.org or send us your contact information online to speak with Boston international tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, in confidence.