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Wednesday, March 1, 2006

The TurboTax defense

There aren't many people left who do their own taxes with a pen or a pencil any more -- are there? A lot of do-it-yourselfers use TurboTax, or similar tax preparation software, to get the job done on their computers.

With the software, you don't have to think too much. You can just let the computer interview you; you answer the questions it poses, and voila! Out comes an authoritative-looking tax return.

But what if that return has mistakes on it? And what if the IRS asserts a negligence penalty? Can a taxpayer say "I relied on TurboTax," and beat the penalty rap?

Maybe, maybe not. Certainly one Maryland couple's TurboTax defense fell on deaf ears in a recent trip to the U.S. Tax Court. The court disallowed a bunch of deductions that the couple had taken for alleged business expenses, without any proof that the money in question was in fact spent on any business. The judge also sustained the penalties that the IRS had asserted against the couple. He noted:

We have no difficulty in finding that petitioners are guilty of negligence for both years before the Court. They claimed deductions that are clearly improper and made no attempt to keep satisfactory records as required by section 6001. Petitioners claim that they used "Turbo Tax", a computer program for preparing tax returns, and any fault lies with that program. While section 6664(c) provides an exception for a portion of the underpayment due to reasonable cause, petitioners have not shown reasonable cause here. The "Turbo Tax" program depends on the entry of correct information. Petitioners certainly knew that they were deducting personal expenses when they entered items such as routine meals, clothing, insurance, etc. Respondent's determinations are sustained.
As we used to say about "data processing equipment" more than 30 years ago, "GIGO" -- garbage in, garbage out. There may be cases in which good faith reliance on faulty software may get the taxpayer off the hook for penalties. But if you're making stuff up to avoid taxes, well, the fact that you are doing so on your PC with the help of a $25 computer program isn't going to save you. (Via TaxProf Blog.)

Comments (11)

These folks were clearly trying to evade taxes, not avoid them. Avoiding taxes is legal and what everyone should strive to do. The same thing would happen to these folks if they lied to their CPA in order to evade taxes.

D'oh!

Wouldn't that be FIFO? Falsehood in, falsho...no, wait, that's an accounting technique.

These folks were clearly trying to evade taxes, not avoid them.

"Making stuff up to avoid taxes" is what tax evasion is, I suppose. But note: these folks were not accused of the crime of tax evasion.

Jack, where can I find a copy of Turbo Tax for $25 -- is that the tax-lawyer-professor discount price?

I don't know about Turbo tax, but Taxcut only cost me $24.95. I bought the Oregon state version for that and the federal version was free.

Jack, where can I find a copy of Turbo Tax for $25 -- is that the tax-lawyer-professor discount price?

Cost-Co sells it for $32.99, and each February there is a one-week window when members can get an instant $10 rebate.

For all pseudo-scholars out in BogLand, GIGO in Latin is,
"Purgamentum init, exit purgamentium."

...saecula saeculorum...

For all pseudo-scholars out in BogLand, GIGO in Latin is,
"Purgamentum init, exit purgamentium."

...saecula saeculorum...

Amen.

here's the free download for TaxCut for anyone that is interested:

taxcut download

But if you're making stuff up to avoid taxes, well, the fact that you are doing so on your PC with the help of a $25 computer program isn't going to save you.

That's what tax lawyers are for. Making up believable stuff to avoid taxes.




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