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Taxpayers' 2004 and 2005 joint Form 1040 were prepared using TurboTax. The wife reported expenses for her real estate business as well as unrelated losses on a single Schedule C. Adjustments to this schedule resulted in most of taxpayers' deficiencies and the resulting Section 6662 accuracy-related penalties, and primarily stemmed from the IRS disallowing taxpayers' reported rental losses and recharacterizing the trading losses as capital losses. At trial, the wife argued that they consistently filled out their tax returns using TurboTax and she consistently confused capital gains and losses with ordinary income and expenses. In rejecting taxpayers' misuse of TurboTax, even if unintentional or accidental, as a defense to the penalties, the Tax Court noted that "tax preparation software is only as good as the information one inputs into it." Aileen Yat Muk Lam , TC Memo 2010-82 (Tax Ct.).
Aaron's Take: This is a common argument in penalty abatement, however it rarely rises to the level of Tax Court. These taxpayers should have quit while they were ahead. Though, in certain circumstances, you can place the blame for a substantial understatement on your tax preparer, your tax software is not considered a "tax professional" capable of rendering appropriate decisions no your behalf. Sounds like it would have been a lot cheaper for this couple to hire and Enrolled Agent or CPA.
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Aaron Blau, E.A. is the Vice President of the Central Arizona Chapter of Enrolled Agents and a member of the Government Relations Committee of the National Association of Enrolled Agents. The opinions and ideas expressed here are in no way representative of the official position of the National Association of Enrolled Agents, Arizona Society of Enrolled Agents or the Central Arizona Chapter of Enrolled Agents.
For official comments, please e-mail NAEA Director of Communications at mlockwood@naea.org or Arizona Society president stefaniecampbell@aztaxpros.org.
IRS CIRCULAR 230 DISCLOSURE:
"To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment). In addition, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS. This communication is intended solely for the person to whom it is addressed; no one else should rely on the tax advice provided herein. The person to whom this advice is addressed is under no obligation to keep the advice or matters related to the advice confidential."
For official comments, please e-mail NAEA Director of Communications at mlockwood@naea.org or Arizona Society president stefaniecampbell@aztaxpros.org.
IRS CIRCULAR 230 DISCLOSURE:
"To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment). In addition, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS. This communication is intended solely for the person to whom it is addressed; no one else should rely on the tax advice provided herein. The person to whom this advice is addressed is under no obligation to keep the advice or matters related to the advice confidential."
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