If you use tax preparation software, use it correctly

I know of many people who use tax preparation software, such as TurboTax, to prepare their own tax returns (without the help of a tax professional). Mistakes do get made while using the popular software program and when they do, it isn’t necessarily going to fly as an excuse with the U.S. Tax Court. The Tax Court recently rejected the taxpayer’s use of the “Geithner defense” and held that blaming TurboTax for errors on her return did not excuse her from penalties. Tim Geithner blamed some of his tax issues on problems with tax-preparation software.)

The Tax court opinion reads:

Petitioners’ 2004 and 2005 joint Forms 1040 … were prepared by Ms. Lam using TurboTax…………….. [The IRS] claims that petitioners were negligent in the preparation of their 2004 and 2005 federal income tax returns. . . . At trial respondent argued that petitioners did not seek the help of a tax professional, consult the IRS, visit the IRS’ Web site, or otherwise read any instructions for filing a Schedule C and thus petitioners did not behave reasonably in filing their 2004 and 2005 tax returns.

At trial Ms. Lam repeatedly argued that petitioners consistently filled out their tax returns using TurboTax and that she consistently confused capital gains and losses with ordinary income and expenses. Although the Court concludes the errors in petitioners’ tax preparation were made in good faith, petitioners have not established that they behaved in a manner consistent with that of a prudent person. Before the trial petitioners stipulated that they did not consult a tax professional or visit the IRS’ Web site for instructions on filing the Schedule C.

We do not accept petitioners’ misuse of TurboTax, even if unintentional or accidental, as a defense to the penalties on the basis of the facts presented. . . .

In short, it was not a flaw in the TurboTax software which caused petitioners’ tax deficiencies. “Tax preparation software is only as good as the information one inputs into it.” [Bunney v. Commissioner, 114 T.C. 259, 267 (2000).] Because petitioners have not “shown that any of the conceded issues were anything but the result of [their] own negligence or disregard of regulations”, they are liable for the § 6662(a) penalties.

In other words, it’s not enough to blame TurboTax. You’ve got to make sure you’re using TurboTax correctly.

About the Author

Reed Tinsley CPA

This article is written by Reed Tinsley, a Houston, TX-based CPA with over 30 years of experience advising physicians and medical practices across Texas and the United States. Reed holds certifications as a Certified Valuation Analyst (CVA), Certified Healthcare Business Consultant (CHBC), and Certified Financial Planner (CFP), specializing exclusively in the healthcare sector. He is a published author, nationally recognized speaker, and trusted advisor to physicians on accounting & tax, practice management, and financial planning. Schedule a Free Consultation.