Following extensive publicity surrounding IRS enforcement of foreign bank account reporting rules, many U.S. citizens living abroad have only recently became aware of their U.S. tax reporting requirements. Taxpayers who did not participate in the IRS′s offshore voluntary disclosure program are concerned about the penalties the IRS will asses against them when they attempt to comply with their reporting requirements.

In response, the IRS released Fact Sheet 2011–13, detailing important penalty information for U.S. citizens who live abroad. The release summarizes existing tax law and provides additional insight into how the IRS will approach noncompliant U.S. citizens who assert they had reasonable cause for failure to comply.

U.S. citizens abroad are concerned about three potential penalties:

• Failure to file a tax return. The penalty for failure to file is 5% of the amount of tax required to be shown on the return for each month, or fraction of a month, during which the failure continues. The maximum failure to file penalty is 25%. The penalty may be abated if the taxpayer can show that the failure was due to reasonable cause and not due to willful neglect. If the taxpayer does not owe any tax, the taxpayer will not owe a penalty.
• Failure to pay tax. Similarly, the penalty for failure to pay tax begins running on the due date of the return (without regard to any extension of time for filing the return) and is 0.5% of the amount of tax shown on the return for each month, or fraction of a month, that the amount remains unpaid. The maximum failure to pay penalty is 25%. (Note: If both penalties apply in a particular month, the failure to file penalty is reduced to 4.5% so that the maximum penalty is 5% for the month.) The penalty may be abated if the taxpayer can show that the failure was due to reasonable cause and not due to willful neglect. As with the penalty for failure to file, if the taxpayer does not owe any tax, the taxpayer will not owe a penalty for failure to pay tax.
• Failure to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50% of the total balance of the foreign account at the time of the violation. Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. There is no penalty if the IRS determines the failure was due to reasonable cause.

It is clear that application of the reasonable cause exception will be critical for many US citizens who owe U.S. tax and who need to file an FBAR.

Reasonable cause for failure to file or pay taxes. Taxpayers can assert reasonable cause either in response to an IRS letter or on Form 843, Claim for Refund and Request for Abatement. The IRS states it will grant reasonable cause relief for taxpayers who can demonstrate they exercised ordinary business care and prudence in meeting their tax obligations but nevertheless failed to meet them. Specific factors the IRS will consider include:

1. The reasons given for not meeting the requirements (for example, relying on a tax expert, serious illness, death, natural disaster or other casualty that destroys tax records),
2. The taxpayer′s compliance history,
3. The length of time between failure to meet obligations and subsequent compliance, snf
4. Circumstances beyond the taxpayer′s control (for example, a spouse withholding necessary information).

Relevant to U.S. citizens abroad who did not know they were required to file U.S. tax returns, the IRS states that taxpayers can also establish reasonable cause if they were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. This means that a taxpayer may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or the taxpayer was unaware of the requirement and could not reasonably be expected to know of the requirement.

These include:

1. The taxpayer′s education,
2. Whether the taxpayer has previously been subject to the tax,
3. Whether the taxpayer has been penalized before,
4. Whether there were recent changes in the tax forms or law that the taxpayer could not reasonably be expected to know, and
5. The level of complexity of a tax or compliance issue.

Reasonable cause for failure to file an FBAR. Taxpayers can assert reasonable cause by attaching an explanation to a late filed FBAR. IRS examiners will examine the facts and circumstances and determine if the taxpayer should be issued a warning letter, a reduced penalty, or a full penalty.

Factors that might weigh in favor of finding reasonable cause include:

1. Reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account,
2. That the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and
3. That there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account.

Factors that might weigh against a finding of reasonable cause include:

1. Whether the taxpayer′s background and education indicate that he should have known of the FBAR reporting requirements,
2. Whether there was a tax deficiency related to the unreported foreign account, and
3. Whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.

There may be factors in addition to those listed that weigh in favor of or against a finding of reasonable cause. No single factor is determinative.



This latest IRS guidance is helpful for taxpayers who just learned of their reporting obligations and will be filing late income tax returns and FBARs.