Reasonable Cause Form 3520 Reporting: Post-DIIRSP Update

Reasonable Cause Form 3520 Reporting (New) 2020

Reasonable Cause International Penalty Relief

When a Taxpayer has failed to report their foreign accounts, assets, investments, and income to the IRS in previous years, they may become subject to IRS fines and penalties for their non-compliance. Oftentimes, the penalties for international information reporting non-compliance can be very harsh and far exceed the nature of the violation.

Common international reporting forms include:

• • • FBAR

    • Form 3520

    • Form 3520-A

    • Form 5471

    • Form 8621

    • Form 8865

    • Form 8938

In order to minimize or avoid international reporting penalties, the IRS has also developed various international penalty relief or ‘Amnesty’ programs, such as

• • • IRS Voluntary Disclosure Program

    • Streamlined Filing Compliance Procedures (SFCP, SDOP, & SFOP)

    • Delinquency Procedures (DFSP & DIIRSP)

As an alternative to these above-referenced amnesty programs, some Taxpayers may qualify for the Reasonable Cause Exception to penalties. 

*This is a 2023 update to an earlier article we authored on Reasonable Cause.

Reasonable Cause Exception to Penalty Relief

When a Taxpayer can show that they meet the reasonable cause standard, they will avoid penalties and/or have their penalties removed (as long as the Reasonable Cause Exception applies, since it may not apply to all types of penalties). It is important to note that there is not a specific ‘Reasonable Cause Form’ such as the IRS Non-Willful Certification Forms (Form 14654 and 14653) for making a reasonable cause submission.

Let’s look at the IRS’ updated information on qualifying for Reasonable Cause Penalty Relief.

*An update to our previous article on Reasonable Cause.

What is Reasonable Cause?

• • • “Reasonable cause is determined on a case by case basis considering all the facts and circumstances of your situation.

      • Reasons that qualify for relief due to reasonable cause depend on the type of penalty you owe and the laws in the Internal Revenue Code (IRC) for each penalty.

      • Reasonable cause doesn’t apply to certain penalties such as the estimated tax penalty.

      • For businesses, the reasons apply to the person with authority to submit the return, deposit, or tax.”

An important takeaway from the definition of Reasonable Cause is that it is based on each Taxpayer’s facts and circumstances – on a case-by-case basis. Thus, just because one Taxpayer qualifies for Reasonable Cause does not mean that a Taxpayer in a similar situation will also qualify for reasonable cause.

Information Return Penalty Relief

• • • “If you can show reasonable cause for failing to file accurate, timely information returns or payee statements, we may consider penalty relief if you prove:

      • “You acted in a responsible manner both before and after the failure by having:

      • Requested extensions of time to file when possible

      • Tried to prevent a foreseeable failure to file on time

      • Fixed any issues causing the failure

      • Corrected the fail ure as quickly as possible

    • Along with acting in a responsible manner, you must also prove there were significant mitigating factors with respect to the failure or the failure happened due to events beyond your control such as:

      • First time filer of the particular form or statement

      • Good compliance history

      • Actions by the IRS

      • Actions of an agent

      • Actions of another person

      • Access to relevant business records

      • Economic hardships that prevented electronic filing”

Since the failure to file international returns is a very common scenario that leads to IRS fines and penalties, the IRS provides several factors that can help bolster a Reasonable Cause submission. Factors such as a good compliance history and resolving the issue sooner than later all may contribute to a successful reasonable cause submission package.

Other Factors to Consider for Reasonable Cause

• • “The following factors don’t generally qualify as valid reasons for failure to file or pay a tax on time:

    • “Reliance on a tax professional. You’re generally responsible for complying with tax law even if someone else handles your taxes. You should know what your tax preparer files and get proof that your return or payment is sent on time.

    • Lack of knowledge. You’re responsible for knowing or getting advice on how to file returns and pay or deposit taxes on time. This includes filing requirements, deadlines and amounts you owe.

    • Mistakes and oversights. You’re responsible for making sure your tax returns, payments and deposits are correct and on time. In certain cases, reasonable cause may apply to a mistake if additional facts and circumstances show that you tried to comply with tax law.

    • Lack of funds. By itself, lack of funds is not reasonable cause for failing to pay or deposit taxes due. However, you may qualify for relief based on other facts and circumstances that show you used reasonable care and tried to comply with tax law.”

It is important to note that the IRS is not stating these factors are not valid, but that generally they do not qualify.

This goes back to the concept of the ‘case-by-case basis,’ and that each Taxpayer must present their own story to the IRS based on all the factors in order to try to meet the reasonable cause exception to penalties. For example, while professional reliance will not always qualify for reasonable cause if the Taxpayer (in international tax matters) can meet certain requirements as set forth by the LB&I concept unit, then Reasonable Cause may still apply.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms and do not believe they will qualify for the the reasonable cause exception, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.