Hey, would you mind trying to remember our January 2010 "Tip of the Month? You mean you didn't save it among your most precious emails? Well, would you do us a quick favor and please read the following excerpt:
Each year, when the tax season rolls around, we get a number of new clients who want us to prepare their tax returns. Usually, they had been preparing their returns themselves. Alas, the returns just became too complicated, even using TurboTax, and they needed professional help. Unfortunately, we find that these taxpayers often made mistakes in the earlier years that led to the overpayment of taxes and the potential for being singled out for audit.
Perhaps the United States Tax Court reads such from our website in that on April 19th they issued T.C. Memo 2010-82 where they held the taxpayers liable for negligence penalties despite their claimed reliance on "TuboTax".
Here's some "non-technical" tax stuff for you to read about the matter. Ms. Lam operated a real estate business and for her 2004 and 2005 federal income tax returns she used Turbotax. Upon audit, she tried to argue to the IRS, and ultimately the Tax Court, that she was not liable for the accuracy related penalty imposed because she acted with reasonable cause by making consistent mistakes using TurboTax to prepare her income tax returns. So you know, there is an exception to this penalty - section 6662(a) for you Internal Revenue Code buffs - when a taxpayer can demonstrate reasonable cause for the underpayment and that the taxpayer acted in good faith with respect to the underpayment. At the initial trial the IRS argued that "...the Lams did not seek the help of a tax professional, consult with the IRS, visit the IRS website, or otherwise read any instructions for filing a schedule C and thus the Lams did not behave reasonably in filing their returns."
At trial Ms. Lam argued that she filled out their tax returns using TurboTax and that she consistently confused capital gains and losses with ordinary income and expenses. Although the Court concluded the errors in the Lam's tax preparation were made in good faith, they ruled that the Lams had not established that they behaved in a manner consistent with that of a prudent person. Before the trial the Lams stipulated that they did not consult a tax professional, failed to visit the IRS' Web site and did not read the instructions for schedule C (have you recently?).
The Tax Court did not accept the Lams misuse of TurboTax, even if unintentional or accidental, as a defense to the penalties. Interestingly, at trial Ms. Lam analogized her situation to that of the Secretary of the Treasury, Timothy Geithner. Citing a Wikipedia article, Ms. Lam essentially argued that, like Secretary Geithner, she used TurboTax, resulting in mistakes on her taxes. For those of you who don't recall, during his Senate confirmation hearings in 2009, the man who would be selected to oversee all of the money of the United States of America, had made mistakes in filing his own tax returns using TurboTax. We should add that, although Mr. Geithner initially blamed TurboTax, he ultimately acknowledged that, as a taxpayer, he is to bear full responsibility for everything represented on his tax returns.
The Tax Court noted that, in short, it was not a flaw in the TurboTax software which caused her tax deficiencies. "Tax preparation software is only as good as the information one inputs into it...Taxpayers should also realize that the duty to file an accurate tax return generally cannot be avoided, for example, by shifting responsibility to a tax return preparer. However, reliance upon the advice of a tax professional may establish reasonable cause and good faith for the purpose of avoiding a section 6662(a) penalty." Courts have frequently held that reasonable cause is established when a taxpayer shows that he or she reasonably relied on the advice of an accountant or attorney.
As Abo would say, "to put the extra nail in the coffin", the decision ended with "...The Court has considered all of petitioners' contentions, arguments, requests and statements. To the extent not discussed herein, we conclude that they are meritless, moot and irrelevant." Ouch!
Okay, okay. We know a lot of CPAs and tax attorneys receive and read our email alerts and will tell us that Tax Court Memorandums typically carry the disclaimer that such opinions "...may not be treated as precedent for any other case." Well, how about reading the small print just above the signature line of your 1040 "Under penalty of perjury, I declare that I have examined this return and accompanying schedules and statements, and, to the best of my knowledge and belief, they are true, correct, and complete."
Gotcha! |
