Zero Penalty for Client Following IRS OVDP Opt-Out Audit

THE CHALLENGE

Our client, a business planning manager for a global technology firm, moved from his native India to the United States to take advantage of a new job opportunity within his company. Not knowing whether his move to the U.S. would be temporary or permanent, he left multiple investments behind in India, including real estate and multiple bank accounts

After getting settled in the United States, our client consulted with friends and colleagues regarding his options for satisfying his U.S. tax return preparation and filing requirement. Believing his tax and financial situation to be relatively simple and straightforward, he decided to use TurboTax. Our client self-prepared his U.S. Individual Income Tax Returns, using TurboTax for a number of years, and did not properly disclose his investment holdings in India.

Through online research, our client learned about his obligation to disclose his Indian holdings and about the then relatively new IRS Offshore Voluntary Disclosure Program and he contacted us for advice, counsel and representation.

OUR APPROACH

We obtained and carefully reviewed all of our client’s previously filed U.S. tax returns, and we created a list of all of his foreign holdings. We thoroughly debriefed our client and obtained background facts related to his education, work history, move to the U.S. and tax return preparation and filing. We went into great detail with our client about his use of TurboTax and his tax return preparation process

After completing our initial investigation, our professional opinion was that our client had exercised reasonable business care and prudence, and under the IRS reasonable cause doctrine, our client’s case was one that should be resolved without any monetary penalty. After meeting with our client and explaining to him the options available for resolving the case, and the pros and cons associated with each option, he decided to proceed with an opt-out and seek a resolution that would not include a monetary penalty.

In our initial presentation to the opt-out revenue agent, we explained that our client had no background in tax or accounting, and only learned about his obligation to disclose foreign holdings days before he hired us when he tripped over information about the IRS Offshore Voluntary Disclosure Program while surfing the internet. We explained that our client did not recall the TurboTax software inquiring about foreign assets and that he had no idea, as he was preparing his tax returns, that assets held in India would be relevant to a U.S. Form 1040.

The revenue agent took a hard line and pushed back. He took the position that the TurboTax software does ask about foreign accounts if the appropriate prompts are answered affirmatively. The agent advised us that he believed our client was unreasonable and careless, answered the TurboTax questions incorrectly and in a way that did not prompt the questions about foreign investments, and was not entitled to pay no penalty under the reasonable cause doctrine.

We had multiple follow-up conversations with the revenue agent and a meeting with the agent’s manager. After diligently preparing him, we allowed our client to answer questions from the revenue agent during a series of telephone interviews. Our campaign established credibility and ultimately, the revenue agent and his manager believed us and were persuaded.

THE RESULT

Our client received a warning letter and resolved his case without paying any civil penalty