TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, March 31, 2005

IRS Grants Relief to Taxpayer Who Used TurboTax to Prepare His Tax Return

Tax_analysts_78In a not-yet published private letter ruling obtained by Tax Analysts, the IRS granted relief to a taxpayer who claims he overlooked a tax election worth over $70,000 because he used TurboTax software to prepare his return:

In the March 22 ruling provided to Tax Analysts by the taxpayer's enrolled agent, the IRS considered and granted a request to make a late election to treat capital gains as investment income under § 163(d)(1) and 163(d)(4)(B).  By making the election, the taxpayer will be able to deduct otherwise disallowed investment interest expense. The IRS determined that when the taxpayer filed his return he did not understand that the option to make the election existed or would affect his liability.

According to Claudia Hill, president of Tax Mam Inc., the enrolled agent representing the taxpayer in filing the private letter ruling request, the taxpayer prepared his 2002 joint return using TurboTax....

A spokesperson for Intuit, the maker of TurboTax, defended the popular software. "I suspect any claim that TurboTax did not alert a customer to the availability of the election is not accurate" said Bob Meighan, vice president of customer advocacy for Intuit. "TurboTax definitely alerts customers to the election option and fully explains the implications. This is a clear case of a customer improperly using the software or at least using it in a manner which will not provide the guidance and tips one would expect from software."....

TurboTax provides two methods for entering data. The first option, recommended by Intuit, is the interview method, which prompts a user to enter data in response to specific questions that vary depending on the user's prior responses. The other option is a forms- based method to enter the data, which allows a user to enter information directly on the tax forms. According to Meighan, using the forms-based method to prepare a return bypasses the guidance and tips that TurboTax provides in the interview process. He characterized the process as similar to pulling out the tax forms and putting in the numbers manually, and then allowing TurboTax to simply do the calculations. When following the forms-based method, a TurboTax user does not receive guidance or analysis, said Meighan. "You are basically on your own . . . you do not have any of the guidance that TurboTax is all about," he said. "If you're going to drive at night without the lights on . . . then you take the risk you may not arrive at the correct destination," Meighan added....

TurboTax currently offers a "100% guaranteed accurate calculations" policy, which according to Meighan would extend to calculation errors resulting in an overpayment. The policy provides for reimbursement of any IRS or state penalties imposed because of TurboTax calculation errors, according to Intuit's Web site. Since a return prepared without making the investment income election would still be correct, it is unclear whether the policy benefits a taxpayer who overpays tax due to missed elections. In any case, "there are no penalties or interest when the government owes you $70,000," said Hill.

See the documents available on the Tax Analysts web site:

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Tracked on Mar 31, 2005 6:20:33 AM