Legal News

Tax Court: If You?re Gonna Use TurboTax, Use It Correctly

By Ashby Jones

It’s April 20. Which means that, in addition to taking the day off to smoke weed, you filed your tax return last week. On both fronts, you’re feeling pretty good. On the former, your clients will totally understand that you can’t get to that filing because you’re busy munching almond M&Ms and watching Wizard of Oz synched to the Dark Side of the Moon (again). And on the latter, well, TurboTax says you get a refund. And nothing ever ever goes awry with TurboTax, right?

Well, not exactly. Mistakes do get made while using the popular software program. And when they do, it ain’t necessarily gonna fly as an excuse with the U.S. Tax Court.

The Tax Court on Monday rejected the taxpayer’s use of the “Geithner defense” and held that blaming TurboTax for errors on her return did not excuse her from penalties. Click here for Paul Caron’s post at the TaxProf blog. (During his confirmation hearings, Tim Geithner blamed some of his tax issues on problems with tax-preparation software.)

The Tax court opinion reads:

Petitioners’ 2004 and 2005 joint Forms 1040 … were prepared by Ms. Lam using TurboTax. . . .

[The IRS] claims that petitioners were negligent in the preparation of their 2004 and 2005 federal income tax returns. . . . At trial respondent argued that petitioners did not seek the help of a tax professional, consult the IRS, visit the IRS’ Web site, or otherwise read any instructions for filing a Schedule C and thus petitioners did not behave reasonably in filing their 2004 and 2005 tax returns.

At trial Ms. Lam repeatedly argued that petitioners consistently filled out their tax returns using TurboTax and that she consistently confused capital gains and losses with ordinary income and expenses. Although the Court concludes the errors in petitioners’ tax preparation were made in good faith, petitioners have not established that they behaved in a manner consistent with that of a prudent person. Before the trial petitioners stipulated that they did not consult a tax professional or visit the IRS’ Web site for instructions on filing the Schedule C.

We do not accept petitioners’ misuse of TurboTax, even if unintentional or accidental, as a defense to the penalties on the basis of the facts presented. . . .

Ms. Lam even pointed to Geithner in her attempt to untangle herself from the situation:

At trial Ms. Lam did not attempt to show a reasonable cause for petitioners’ underpayment of taxes. Instead, she analogized her situation to that of the Secretary of the Treasury, Timothy Geithner. Citing a Wikipedia article, Ms. Lam essentially argues that, like Secretary Geithner, she used TurboTax, resulting in mistakes on her taxes.

In short, it was not a flaw in the TurboTax software which caused petitioners’ tax deficiencies. “Tax preparation software is only as good as the information one inputs into it.” [Bunney v. Commissioner, 114 T.C. 259, 267 (2000).] Because petitioners have not “shown that any of the conceded issues were anything but the result of [their] own negligence or disregard of regulations”, they are liable for the § 6662(a) penalties.

In other words, it’s not enough to blame TurboTax. You’ve got to make sure you’re using TurboTax correctly.

Full post as published by Law Blog - WSJ.com on April 20, 2010 (boomark / email).