Can Relying on TurboTax Satisfy a 6039F (3520) Penalty Waiver?

Can Relying on TurboTax Satisfy a 6039F (3520) Penalty Waiver?

Can Relying on TurboTax Satisfy a 6039F (3520) Penalty Waiver?

In a recent California District Court Case for the Northern District of California, a taxpayer is raising the argument that she should be entitled to prove reasonable cause by establishing that she relied on TurboTax’s failure to properly prompt her regarding Form 3520. While TurboTax is a good tax program for basic filing, when it comes to international reporting the only main international information reporting form they provide is Form 8938. Here, taxpayer takes the position that the program did not properly prompt her regarding filing Form 3520. She further alleges that in conjunction with Boyle and Neonatology (two important cases involving establishing reasonable cause based on professional reliance), her reliance on TurboTax should be sufficient to show that she relied on a ‘tax professional.’ Not surprisingly, the US government disputes this argument and sought to dismiss the argument.

How Did the District Court Rule

The United states District Court for the Northern District of California ruled in part for the plaintiff and part for the defendant, but it is important to note that this is the initial stage of the case, and the ruling was just involving whether the taxpayer can proceed with her complaint (and not whether she established her reasonable cause argument). As provided by the Court:

• • • “Plaintiff’s First Claim is that she provided reasonable cause for her late-filed forms: the topic at issue is obscure, she’s not a tax expert, and she relied on TurboTax advice, akin to relying on professional tax advice. She cites United States v. Boyle, where the Supreme Court found that relying on tax professionals can be reasonable.  469 U.S. 241, 246 (1985). 

    • A related opinion by the Tax Court has elaborated on the professional advice standard, creating a three-prong test: “(1)[t]he adviser was a competent professional who hadsufficient expertise to justify reliance,(2) the taxpayerprovided necessary and accurate information to the adviser,and (3) the taxpayer actually reliedin good faith on theadviser’s judgment.”Neonatology Assocs. v. Comm’r of Internal Revenue, 115 T.C. 43,99 (2000); see also 26 C.F.R. § 1.6664-4(c)(2)(noting that the taxpayer’s education, sophistication, and business experience is relevant in determining whether reliance on tax advice was reasonable and made in good faith).As Plaintiff’sreasonable cause letter states, she used TurboTax, a program which alerted her to certain obligations but affirmatively advised her there was no need to report the giftsin question.  She claims she inputthe proper dataand relied on TurboTax’s responsive advice, and moreover, that TurboTax amounts to the sort of “competent professional” thatjustifiesher reliance.

    • The complaint plausibly alleges that she had reasonable cause for delay—especially in light of the fact that,“generally, the most important factor in determining whether the taxpayer has reasonable cause and acted in good faith is the extent of the taxpayer’s effort to report the proper tax liability.” , at *3.(quoting Treas. Reg. § 1.6664–4(b)(1)).

    • Moreover, to the extent Defendant argues that her Form 843 was too sparse to have put the IRS on notice of this argument, Plaintiff fairly notes that the IRS itself told her to “file a claim on Form 843 … with a statement requesting your claim be immediately disallowed,” instructions which she followed to a T.  That her more fulsome explanation came in an earlier letter (which she later supplemented on appeal) does not eliminate its existence; to the contrary, the agency was well-aware of her arguments before this suit was filed.  Considering that the Tax Court itself has ruled that reliance on tax software in good faith can support a reasonable cause defense, see Olsen v. Comm’r, No. 11658-10S, 2011 WL 5885082, at *2 (T.C. 2011), it is premature to dash her claim at the pleadings.

    • The case shall proceed to the merits as to the IRS’s denial of Plaintiff’s reasonable cause claim.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, 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.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.