What Constitutes “Reasonable Cause” for a Delinquent FBAR?

The IRS is unforgiving when it comes to delinquent FBARs. However, there is one significant exception: The IRS does not penalize taxpayers who can show that their failure to file was due to “reasonable cause.” In this article, Virginia FBAR attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains how the IRS evaluates claims of “reasonable cause.”

“Reasonable Cause” for Failure to File an FBAR By October 15

“The IRS will not penalize those who properly report[] a foreign account on a late-filed FBAR if the IRS determines there was reasonable cause for late filing.” This statement comes from the IRS itself. But, despite the importance of this exemption from liability for delinquent FBAR filings, what constitutes “reasonable cause” is not clearly defined.

Instead, the IRS examines taxpayers’ claims of probable cause on a case-by-case basis. In doing so, it considers the criteria outlined in 26 CFR Section 301.6724-1. Under this federal regulation, there are two main circumstances in which the IRS may make a finding of reasonable cause:

• “There are significant mitigating factors with respect to the failure; or,”
• “The failure arose from events beyond the filer’s control.”

Significant Mitigating Factors With Respect to the Failure

Section 301.6724.1 goes on to provide two non-exclusive examples of “significant mitigating factors.” First, it provides that a taxpayer may be able to avoid penalties for a delinquent FBAR by showing that, “prior to the failure[,] the filer was never required to file [an FBAR].” Second, it provides that, “[t]he fact that the filer has an established history of complying with the [FBAR filing requirement],” may be sufficient to avoid liability.

However, these are not absolute protections. For example, even if 2021 was the first year in which you had to file an FBAR, if you knew about the requirement and still failed to file, the IRS is not going to make a finding of reasonable cause. “[If a] filer establishes that there are significant mitigating factors for a failure but is unable to establish that the filer acted in a responsible manner, the mitigating factors will not be sufficient to obtain a waiver of the penalty.”

Events Beyond the Filer’s Control

Section 301.6724.1 identifies two events that may be beyond a filer’s control that are pertinent to the FBAR filing requirement: (i) unavailability of relevant business records due to a supervening event, and (ii) certain actions of the IRS or IRS agents. Similar to the “significant mitigating factors” discussed above, these events do not automatically provide protection from delinquent FBAR penalties, but instead, provide potential options for making a claim of “reasonable cause.”

Speak with Virginia FBAR Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

There are other requirements for making a claim of “reasonable cause” as well. If you missed the October 15 FBAR filing deadline, we encourage you to schedule an appointment to discuss your options at Thorn Law Group. To speak with Managing Partner Kevin E. Thorn in confidence, call 703-752-3752, email ket@thornlawgroup.com or inquire online today.