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Wednesday, June 23, 2010

Tax Court Rejects Geithner/TurboTax Defense

The Tax Court on Monday again rejected the Geithner/TurboTax defense. Parker v. Commissioner, T.C. Summ. Op. 2010-78 (June 21, 2010):

It is petitioner's position that the accuracy-related penalties at issue "should be waived." In support of that position, petitioner asserts:

    During the period under question I worked as a contractual employee with the International Monetary Fund (IMF). Because I was a contractual employee, IMF provided a W2 to me but did not withhold any federal income or social security (FICA) taxes. * * *

    For tax years 2005 and 2006, I calculated my own taxes using the computer program TurboTax. I even paid extra for the opportunity to specifically ask TurboTax professionals if FICA taxes were included in the tax computations they did for me. These representatives assured me that all the taxes were included (Exhibit A).

    * * * Although I believed that I had paid all taxes due, because I had never filed in this capacity (self-employed), I was a little uncertain about whether TurboTax's calculations included the self employment taxes, so I entered the IRS settlement initiative in January, 2007.

    As it turned out, TurboTax representatives were wrong; the social security taxes were not included in the tax computations they did for me. Then, I engaged a tax specialist to examine and re-calculate my 2005 and 2006 income tax returns and determine any additional taxes due.

    * * * I then withdrew from the [IRS] settlement initiative and filed my amended returns along with payment of taxes and interest due. This resulted in total payments of $32,389 plus $1,808 interest for 2005 and $52,950 plus $828 interest for 2006.

    Because I had initiated contact with the IRS and voluntarily come forward with the problem, I respectfully requested that the IRS waive any additional penalties in conjunction with the underpayments. The IRS, despite my complete cooperation with all their information demands, refused my request and insisted on payment of penalties of $2,435.40 for 2005 and $3,655.40 [sic] for 2006.

    According to I.R.C. § 6664(c) the accuracy related penalty "will not apply where the taxpayer can show reasonable cause for the understatement and action in good faith". I voluntarily made the effort to comply with the tax laws; and paid all my federal taxes and interest due. I acted in good faith throughout this process and believe that I had reasonable cause for my understatement and actions.

We turn first to petitioner's claim that he "had reasonable cause" within the meaning of § 6664(c)(1) for his respective underpayments for his taxable years 2005 and 2006 because he relied on TurboTax. At the respective times petitioner filed his 2005 return and his 2006 return he knew that he was responsible for self-employment tax. Nonetheless, neither his 2005 return nor his 2006 return reported any self-employment tax. On the record before us, we reject petitioner's claimed reliance on TurboTax.

We turn next to petitioner's claim that he "had reasonable cause" within the meaning of § 6664(c)(1) for his respective underpayments for his taxable years 2005 and 2006 because he relied on certain unidentified "TurboTax experts". We do not find credible petitioner's claim that any such "experts" told him that self-employment tax was included in the computation of petitioner's tax in his 2006 return when that return itself did not report any self-employment tax. On the record before us, we reject petitioner's claimed reliance on certain unidentified "TurboTax experts". ...

On the record before us, we find that petitioner has failed to carry his burden of establishing that there was reasonable cause for, and that he acted in good faith with respect to, any portion of the underpayment for each of his taxable years 2005 and 2006. ...

Fn.15: We shall address briefly petitioner's contention that the IRS granted "favorable treatment" in a case involving U.S. Secretary of the Treasury Timothy Geithner, which petitioner described as "incredibly similar" to the instant case. According to petitioner, "there should not be different, or favorable rules for the well-connected". The record in this case does not establish any facts relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner. In any event, those facts would be irrelevant to our resolution of the issue presented here. Regardless of the facts and circumstances relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner, petitioner is required to establish on the basis of the facts and circumstances that are established by the record in his own case that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment for each of his taxable years 2005 and 2006 that is attributable to his failure to report self-employment tax.

Update #1:  The Tax Court, Tim Geithner, and Jack Webb

Update #2:

http://taxprof.typepad.com/taxprof_blog/2010/06/tax-court-.html

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Tracked on Jun 23, 2010 8:00:00 AM

Comments

One interesting program I recently learned about that might have applied here is First Time Abate (FTA), which allows the waiver of certain penalties if you haven't had any tax problems for the three prior years. That was very helpful to a recent client of mine, and might have been helpful here.

Posted by: ouch | Jun 23, 2010 8:13:26 AM

As far as I can tell from news reports, BOTH Geithner and Daschle paid zero in penalties. They paid interest on unreported and illegal deductions (day camp, really?).

Now the judge in the case has it "for the record" that these well-connected citizens received special treatment.

Posted by: WJ | Jun 23, 2010 11:31:38 AM

" In any event, those facts would be irrelevant to our resolution of the issue..."

Translation: Your connections do matter. You are not Timothy Geithner and so you'll be judged on the facts.

Posted by: willis | Jun 23, 2010 12:04:54 PM

Silly little man, doesn't he know that there are no excuses for little people like him. Who does he think he is? The Secretary of the Treasury?

Posted by: Walter Sobchak | Jun 23, 2010 1:11:40 PM

I don't know what rank Mr. Parker held in his organization, but it should not surprise him that as member of the middle class he gets different treatment from the Obama administration from that provided to the elite.
Perhaps a contribution the the president's campaign would have helped.
However all is not lost. If he did not consult with turbo-tax experts he lied to the court. If he did, he may have a claim against turbo-tax for the penalty. And I would not be surprised if turbo-tax promptly paid his claim. Fighting it would cost more money than what is involved in the penalty, and paying it publicly could generate lots of favorable publicity for turbo-tax, worth much much more than the cost of the settlement.

Posted by: daniel | Jun 23, 2010 1:15:15 PM

The Turbo Tax excuse isn't for The Little People.

Posted by: Concerned Citizen | Jun 23, 2010 3:24:55 PM

It's about time for tar and feathers to make a comeback.

Posted by: Diego | Jun 23, 2010 3:38:17 PM

Please understand that the Tax Court is not a part of the Federal Judiciary. The Tax Court judges are IRS employees, just like the IRS lawyers. It's a rigged game. When you petition the Tax Court, you are in a kangaroo court. I saw many taxpayers screwed by the IRS in my years as a court reporter for the US Tax Court. The IRS 'judges' work in concert with the IRS lawyers. I'm surprised this has gone on this long. It's all phony.

Posted by: Jim Oz | Jun 23, 2010 10:06:07 PM

As Chris Rock put it: "If O.J. drove a bus, he wouldn't even be O.J. He'd be Orenthal the Bus Driving Murderer." Bring the Pain (HBO, 1996).

And Jim, you are wrong. The Tax Court is an Article I court established by Congress in 1969 and dates back to the Revenue Act of 1924, at which not time since 1924 have Tax Court Judges or BTA Members been IRS employees. Enough with the protester crap. Next thing this will devolve into a discussion of FRNs and being a citizen of the free republic of Fredonia.

Freedonia ("Land of the Spree, and the Home of the Knave") suffered from severe financial problems, and government leaders requested a loan to keep things afloat. The lender agrees on the condition that Rufus T. Firefly, played by Groucho Marx, take control and run the country. In the musical number that accompanies Firefly's first day in office, Groucho lets the audience know how things will run, singing lyrics such as "If any form of pleasure is exhibited, report to me and it will be prohibited! I'll put my foot down, so shall it be... this is the land of the free! The last man nearly ruined this place, he didn't know what to do with it/If you think this country's bad off now, just wait 'til I get through with it."

"Here is the Treasury Department's report, sir. I hope you'll find it clear. Clear? Huh. Why a four-year-old child could understand this report. Run out and find me a four-year-old child, I can't make head or tail of it."

"Your Excellency, I thought you'd left! Oh no, I no leave. But I saw you with my own eyes! Well, who you gonna believe, me or your own eyes?"

"Now, how about lending this country twenty million dollars, you old skinflint? Twenty million dollars is a lot of money. I'd have to take that up with my Minister of Finance. Well, in the meantime, could you let me have twelve dollars until payday? Twelve dollars? Don't be scared, you'll get it back. I'll give you my personal note for ninety days. If it isn't paid by then, you can... keep the note."

"Take a letter. Who to? To my dentist. Uh... Dear dentist, enclosed find check for $500, yours very truly. Send that off immediately. I'll, um, I'll have to enclose a check first. You do and I'll fire you."

"The Department of Labor wishes to note that the workers of Freedonia are demanding shorter hours. Very well, we'll give them shorter hours. We'll start by cutting their lunch hour to 20 minutes."

"And now, members of the cabinet...[pounds gavel] we'll take up old business. I wish to discuss the tariff. Sit down, that's new business. No old business? Very well... [pounds gavel] we'll take up new business. Now, about that tariff... Too late, that's old business already. Sit down."

"I'll see my lawyer about this as soon as he graduates from law school."

"Something must be done! War would mean a prohibitive increase in our taxes. Hey, I got an uncle lives in Taxes. No, I'm talking about taxes - money, dollars!
Dollars! There's-a where my uncle lives! Dollars, Taxes!"

"You're a brave man. Go and break through the lines. And remember, while you're out there risking your life and limb through shot and shell, we'll be in be in here thinking what a sucker you are."

"Gentlemen, Chicolini here may talk like an idiot, and look like an idiot, but don't let that fool you: he really is an idiot. I implore you, send him back to his father and brothers, who are waiting for him with open arms in the penitentiary. I suggest that we give him ten years in Leavenworth, or eleven years in Twelveworth." "I'll tell you what I'll do: I'll take five and ten in Woolworth."

"Not that I care, but where is your husband? Why, he's dead. I bet he's just using that as an excuse. I was with him to the very end. No wonder he passed away. I held him in my arms and kissed him. Oh, I see, then it was murder. Will you marry me? Did he leave you any money? Answer the second question first."

"Notables from every country are gathered here in your honor. This is a gala day for you. Well, a gal a day is enough for me. I don't think I could handle any more."

"Hey! Do you want to be a public nuisance? Sure! How much does the job pay?"

And, perhaps, the best for last:

"How about taking up the tax? How 'bout taking up the carpet? I still insist we must take up the tax. He's right, you've gotta take up the tacks before you can take up the carpet."

Posted by: tax guy | Jun 24, 2010 12:20:10 AM

After having read the story, I'm not sure what to think about it. I detest Timothy G., and I find it unacceptable that someone at best, that incompetent, or at worst, that crooked, should be elevated to Treasury Secretary.

But ...

Again, I am probably ignorant of how stuff works, so please correct me.

It would seem that this is not a matter of legal precedent, but a matter of legal interpretation. Were Timothy G. not such a famous individual, it's unlikely that the defendant in this case would even have known about him. With thousands of cases, justice is likely to be served unequally upon occasion. Now, I'm not saying it's write, or that there isn't a corrupt good ole boys club - I don't know.

What I am saying is that when one of my kids says, "well you didn't punish him as much", that doesn't necessarily hold sway with me. In court rooms it's no different, unequal sentences are meted out all the time. (Maybe they should not be, but juries and judges have this leeway.)

It's hard for me to tell what's what here, although given the history of corruption in government, I'm less and less likely to give tbe benefit of the doubt.

Posted by: Martin | Jun 24, 2010 9:04:25 AM