Paul L. Caron

Friday, November 12, 2010

Tax Court Again Rejects Geithner/TurboTax Defense

The Tax Court yesterday again rejected a husband and wife's use of the "Geithner defense" and held that blaming tax preparation software for errors on their return did not excuse them from penalties.  Au v. Commissioner, T.C. Memo. 2010-247 (Nov. 10, 2010):

Petitioners contend that they followed the instructions on the [Tax Cut] tax preparation software that they used in preparing their 2006 tax return, asserting that the software was "approved by the IRS". They indicate that they were unaware of the provisions of the Code and that they did not consult any Internal Revenue Service (IRS) publications or professional tax advisers before claiming deductions equaling almost half of their reported income in 2006. ...

The software instructions are not in the record, so we cannot determine how the error occurred. We doubt that the instructions, if correctly followed, permitted a result contrary to the express language of the Code. Petitioners may have acted in good faith but made a mistake. In the absence of evidence of a mistake in the instructions or a more thorough effort by petitioners to determine their correct tax liability, we cannot conclude that they have shown reasonable cause for the underpayment of tax on their 2006 return.

Prior TaxProf Blog coverage:

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By treating the connected and powerful exceptionally leniently (I'm talking to YOU Timmy) while hammering and insulting the non-elite, the IRS has forfeited all moral authority and has only fear remaining in its arsenal.

Posted by: Jehu | Nov 13, 2010 11:36:27 AM

I wonder if the Courts will accept the Treasury/IRS argument that TURBOTAX includes the refund of an itemized state income tax overpayment in the determination of taxable Social Security benefits and therefore it is correct to use this technique to swindle taxpayers. Note: There are more than twenty-five other phase-outs where itemized deduction recoveries are (or have been) used to reduce deductions, exemptions, exclusions, eligibilities, or credits.

Compare the language in section 111(a) of the Internal Revenue Code with the fact that including such a refund in the determination of taxable Social Security benefits can result in the taxable income attributable to the refund being up to 1.85 times the amount of the refund entered on Line 10 of Form 1040 which is the amount of the refund that provided a tax benefit in the prior year.

Also, will Treasury/IRS use the TURBOTAX defense to justify the entry of ALL tax refunds entered on Lines 10 or 21 of Form 1040 (2009) on Line 8 of Form 6251 (2009) where the amount is subtracted in determining Alternative Minimum Taxable income? This little blunder is currently costing the Treasury about ONE BILLION DOLLARS per year and has been going on since 1988. BTW, the legitimate purpose of section 56(b)(1)(D) of the IRC is to allow the taxation of the refunds of taxes that when deducted in a prior year produced a limited long-term capital gains rate based tax benefit that resulted from the two-tier capital gains rate.

Would the state of Virginia attempt to use the TURBOTAX defense to support their Married filing separate or Married, spouse has no income from any source, filing status REQUIREMENTS for nonresidents when both spouses are nonresident but only one spouse has Virginia income? There are no such requirements in Virginia Code Sections 58-1-324 or 58-1-341.

Also see:
Article IV, Section 2, Clause 1, of the United States Constitution
Corfield v. Coryell. 546 (C.C.E.D. Pa. 1823).
Travis v. Yale & Towne Mfg Co, 252 U.S. 60 (1920)
Lunding v. New York Tax Appeals Tribunal, 522 US 287 (1998)

Posted by: WD Kebschull | Nov 13, 2010 8:25:16 AM