Paul L. Caron

Tuesday, April 20, 2010

Tax Court Rejects "Geithner Defense," Says Reliance on TurboTax Does Not Excuse Taxpayer From Penalty for Errors on Tax Return

The Tax Court yesterday 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.  Lam v. Commissioner, T.C. Memo. 2010-82 (Apr. 19, 2010):

Petitioners' 2004 and 2005 joint Forms 1040 ... were prepared by Ms. Lam using TurboTax. In 2004 and 2005, she reported expenses related to her real estate business as well as unrelated losses on a single Schedule C for each taxable year. Adjustments to this schedule resulted in most of petitioners' deficiencies and primarily stemmed from the fact that respondent disallowed petitioners' reported rental losses and recharacterized the trading losses as capital losses. The rental losses were disallowed under § 280A because the property was used for personal use, as her father lived in the rental property rent free. The trading losses were allowable only as capital losses and were moved to Schedule D. ... 

[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. ...  At trial Ms. Lam did not attempt to show a reasonable cause for petitioners' underpayment of taxes. Instead, she analogized her situation to that of the Secretary of the Treasury, Timothy Geithner. Citing a Wikipedia article, Ms. Lam essentially argues that, like Secretary Geithner, she used TurboTax, resulting in mistakes on her taxes. 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.

Update:  Wall Street Journal Law Blog, Tax Court: If You’re Gonna Use TurboTax, Use It Correctly.

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Tracked on Apr 20, 2010 5:22:29 AM


A guy like Geithner used TURBO TAX? I use TURBO TAX. I'm on a pension. But Geithner? Bulls.... He just didn't care to pay. With all the accountants around him, he used TURBO TAX? Yesterday, I flew my Huyndai to the moon and back. Great trip. Believe It Or Not. Geither, TURBO TAX. Stalin kissing the Popes ring.

Posted by: Anthony Mangiaracina | Apr 21, 2010 7:29:19 PM

I don't think you have a jury option in tax court. In fact, as far as I am aware, it is significantly different from the "normal" legal system, much like family court. There is no presumption of innocence in tax court, and I believe no precedents are allowed.

Posted by: Vance | Apr 21, 2010 1:00:16 AM

I think that Geithner should retroactively be charged with the same thing Ms Lam is charged with and made to pay the penalties plus interest. Anything else reeks of favoritism and spoils. Actually I could have stopped that sentence with reeks.

Posted by: dick | Apr 20, 2010 9:40:47 PM

Should I be on a jury, I will most certainly apply the Geithner jurisprudence. In fact, I will use a Legal Realism standard---the law only existing in its application, in this case, I won't punish anyone for anything that the system felt compelled to give the elite a free pass on.

Posted by: David | Apr 20, 2010 5:03:18 PM

To avail herself of the "Geithner defense," Ms. Lam must get the president to make her a cabinet officer. As with many things in American life, the privileges and immunities of the elite are not available to the riffraff.

Posted by: Pau | Apr 20, 2010 1:21:52 PM

Taxes are for the Little People

Posted by: EvilDave | Apr 20, 2010 12:02:59 PM

Taxes? For the little people.

Excuses? Not so much.

Posted by: Paul A'Barge | Apr 20, 2010 11:32:00 AM

This ruling shouldn't come as a surprise at all. Of course elites, like Geitner, making the same mistakes are forgiven. They are part of 'the court' that has to make big important decisions to control the little people. What is really surprising is that none of the press or interested tax lawyers have filed petitions or FOIA requests to determine how Timmy pled his case so that they could use it themselves in the future. There must be some paper, eh?

Posted by: SenatorMark4 | Apr 20, 2010 11:06:40 AM

It is a cruel world that requires lay persons to perform legal research just to know how much their annual bill to the king will be.

Posted by: Ion | Apr 20, 2010 11:02:58 AM

No man is above the law and no man is below it: nor do we ask any man's permission when we ask him to obey it.
Theodore Roosevelt


I know most folks roll their eyes at this, but this is bloody freaking ridiculous. The IRS needs people to voluntarily cooperate and they are run by someone who went as far as he could to refuse to do so. Out of the entire Democrat elite they couldn't find someone who didn't have this problem to run the Treasury? This is the most patent example of arrogance in government I've seen. Even though I disagree strongly with so much of the policies in place, this double standard is just plain more annoying.

Why couldn't they find someone else? Either none of Obama's circle bother to pay taxes, or Geithner is a crony.

Posted by: Tipper Gore Romney | Apr 20, 2010 10:47:24 AM

Okay, Geithner was specifically told by his employer that the extra payment he received was to compensate him for taxes not withheld and that he would have to pay himself.

Do I have that right?

So, how did Geithner escape penalty if the IRS used the same standard used against these taxpayers?

Posted by: edh | Apr 20, 2010 10:42:10 AM

At what point does the tax code, or the law for that matter, become so complicated that ignorance becomes an excuse for not following it?

Should I find myself prosecuted by the IRS, at trial I will show up with the entire tax code, all several million words of it, plunk it down on my desk and ask how I'm supposed to know what's in it. If I have a jury, I'll win--especially if I start quoting relevant passages from the tax code.
What utter nonsense it is!

Posted by: Andrew | Apr 20, 2010 10:29:00 AM

Of course the "Geithner Defense" didn't work for her. She's not a member of the Obama administration.

Posted by: Diggs | Apr 20, 2010 10:05:24 AM