In Uncategorized on 09/04/2012 at 16:40

I’ve commented before about the preparation software trap. See my blogposts “Real Estate Professional Revisited”, 3/24/11, and “Basis for Dummies”, 11/24/11, in the latter post specifically my discussion of Kurt C. Olsen, T. C. Sum. Op. 2011-131.

Now the shrink-wrap gurus may not claim to be foolproof guides, philosophers and friends, taking the innocent and inexperienced through the impenetrable thicket, unintelligible alike to laypeople and lawyers, that is the Internal Revenue Code, and its pendant Regulations, Revenue Rulings, Revenue Procedures and Notices. And I’m sure the software developers’ counsel have festooned box and contents with disclaimers and exculpatory exhortations worthy of the medieval indulgence mongers.

But I’d argue that the prevalence of the software, the public’s apparently inexhaustible appetite for same, and IRS’ increasing, and well-publicized, reliance thereon for e-filing and free-filing, causes taxpayers to think that the digital wizard behind the cellophane will solve all their problems. And, incidentally, computers give Congress the impetus to complicate the IRC even further, as no taxpayer needs to understand what they’ve done, because Doug Shulman’s guys and the geeks at TurboTax and others of that ilk will solve it all.

Of course, reliance on the CD-ROM enshrined in the fetching cardboard box, which promises fast fast fast relief from the annual income tax headache, and frees one from entanglement with paid preparers now registered and charging appropriately, avails the taxpayer naught when enmeshed like Laocoön in the aforesaid thicket.

Today’s post-Labor Day blues is brought to you by Judge Cohen, as she unpacks the sad tale of Brenda Frances Bartlett, T. C. Memo., 2012-254, filed 9/4/12.

Brenda Frances retired from Qwest Communications at the youthful age of 50. As she strode for the last time from her cubicle, she was handed the $221K accumulated in her pension account.

Brenda Frances reported only half that amount on her 1040, and failed to report $2K in other income and a couple of hundred bucks in wages.

When IRS nailed Brenda Frances for $44K in unpaid tax, plus penalties (10% Section 72(t) early withdrawal plus Section 6662(d) accuracy for over $5K or 10% understatement of tax due), she blamed TurboTax, with which she claimed she was unfamiliar.

Brenda Frances admitted she understated her tax.

No go, says hard-hearted Judge Cohen. Brenda Frances typed in the wrong information. “It is apparent that a portion of the information petitioner entered into the TurboTax program was incorrect; hence the mistakes made (which resulted in the underpayment) were made by petitioner, not TurboTax. TurboTax is only as good as the information entered into its software program. See Bunney v.Commissioner, 114 T.C. 259, 267 (2000). Simply put: garbage in, garbage out.

“Petitioner’s errors were not merely isolated computational or transcription errors. See sec. 1.6664-4(b)(1), Income Tax Regs. Petitioner systematically underreported her income and this resulted in an underpayment of tax on her Federal tax return. Petitioner did not have reasonable cause for any portion of the resulting underpayment. Respondent’s determinations as to both the tax deficiency and penalty are sustained.” T. C. Memo. 2012-254, at pp. 4-5.

So if, like Kurt, you put one item on the wrong line, you might get away without penalties, but Brenda Frances went a little too far.

Maybe the shrink-wrapped gurus might carry a warning: RELYING ON THIS SOFTWARE COULD BE HAZARDOUS TO YOUR TAX HEALTH.

  1. She lied to the software. Why is that the software’s fault?


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