Attorney-at-Law

REAL ESTATE PROFESSIONAL REVISTED

In Uncategorized on 03/24/2011 at 18:12

Or, Taxpayers Who Do Their Own Returns Get Done

So learned Yusufu Yerodin Anyika and Cecelia Francis-Anyika, in T.C. Memo 2011-69, released 3/24/11. They bought TurboTax at the local Costco, and set to work.

Yusufu owned and managed residential realty, while his day job was as an engineer. Yusufu had been an owner-operator for more than 15 years, but his problems only started with his losses reported for tax years 2005 and 2006. IRS disallowed the losses as passives not covered by the $25,000 safe harbor for passive rental losses, as the Anyikas’ combined AGI was in excess of $100,000, and phased out under Section 469(i)(1), and he failed the real estate professional tests.

Yusufu failed to turn over his trial evidence pre-trial, causing IRS to seek sanctions (denied). On the trial, he changed his testimony from his 4564 Document Information Request responses as to the hours he worked to try to qualify as a real estate professional (at least half of all hours worked devoted to real estate activity, but not less than 750). This flip-flop availed Yusufu not, and caused the Court to discredit his testimony generally.

Even worse, Yusufu’s account of his hours devoted to real estate was unsubstantiated. Once again, our old friend Temp Reg 1.469-5T(f)(4) sets forth the requirements necessary to establish the taxpayer’s hours of participation. I can’t do better than quote the regulation as the Court quoted it, T.C. Mem 2011-69 at p. 6: ‘The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.”

Once again this proves the old saying: That which is temporary becomes permanent, and that which is permanent becomes temporary. This regulation, temporary in name, is permanent in the Court’s memory.

Yusufu tries to avoid the Section 6662 negligence penalties by blaming TurboTax, as he did his own returns for those years with the ubiquitous software. The Court admonishes him thus: “Petitioners contend that they used TurboTax software to prepare their returns for both years and that the software program is to blame for any miscalculations in their income. However, petitioners have not provided any evidence showing the information that they entered into the software program, a preliminary showing that would be required to decide whether the software program is in any way at fault for petitioners’ underpayment. See Paradiso v. Commissioner, T.C. Memo. 2005-187. Such software is only as good as the information the taxpayer puts into it. See Bunney v. Commissioner, supra at 267. We have held that the misuse of tax preparation software, even if unintentional or accidental, is no defense to penalties under section 6662. See Lam v. Commissioner, T.C. Memo. 2010-82.” T.C. Mem. 2011-69, at p. 15.

In short, garbage in equals garbage out.

And, most warming to the heart of any tax professional, the Court recognizes us as the taxpayers’ first line of defense: “A reasonable person in Mr. Anyika’s position, understanding that the tax law governing the deductions he claimed was complex, would have consulted a tax professional instead of merely assuming that he qualified on the basis of his own conclusions.” T.C. Mem. 2011-69, at p. 13.

So, like the jolly testator who makes his own will, or the person who represents themselves and has you-know-what for a client, let us all fill our glasses and raise them high to the person who trusts the online guru or the shrink-wrapped expert to solve all their tax problems.

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