For First Time, Tax Court Approves Use of Geithner/Turbo Tax Defense

The Tax Court on Wednesday for perhaps the first time accepted a taxpayer's use of the Geithner/TurboTax defense in allowing a patent attorney to blame mistakes in his use of tax preparation software to excuse him for penalties for failing to report income on his return. Olsen v. Commissioner, T.C. Summ. Op. 2011-131 (Nov. 233, 2011):

Petitioner works as a patent attorney for the Department of Energy at a national laboratory, holds a Government security clearance, and is subject to detailed and periodic background investigations.

In 2007, petitioner's wife received interest income from a trust created by her mother's estate. The funds were attributable to litigation resolved in favor of the estate. As a beneficiary of the trust, petitioner's wife received a Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc., reporting the interest income. Prior to this instance, the couple had never received a Schedule K-1 and were unfamiliar with the form.

Petitioner usually takes the lead in preparing the couple's joint Federal income tax returns. He prepared the couple's joint income tax return for 2007 using tax return preparation software. Because he had never dealt with a Schedule K-1 in the past, petitioner upgraded his tax preparation software to a more sophisticated version as a precaution to ensure proper treatment of the unfamiliar form.

Using the upgraded software's interview process, petitioner correctly entered the name and tax identification number of the trust, properly reporting the source of income. While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly displayed on Schedule E, Supplemental Income and Loss, of his Federal tax return. Petitioner reviewed the Federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error. ...

This Court has observed that "Tax preparation software is only as good as the information one inputs into it." Bunney v. Commissioner, 114 T.C. 259, 267 (2000). An isolated transcription error, however, is not inconsistent with a finding of reasonable cause and good faith. Reg. § 1.6664-4(b)(1).

We found petitioner to be forthright and credible, and we credit his testimony at trial. We conclude that he made an isolated error in transcribing the information from his wife's Schedule K-1 while using the tax return preparation software. [Fn.4] It is clear that his mistake was isolated as he correctly reported the source of the income, and he did not repeat any similar error in preparing his tax return.

Fn.4: We note that petitioner holds a Government security clearance and is subject to periodic background investigations, which, as he is well aware, provide substantial motivation for him to properly report income on his tax return.

The most important factor in deciding whether a taxpayer acted with reasonable cause and in good faith is the extent of the taxpayer's effort to assess the proper tax liability. ... Under the unique facts and circumstances of this case, we hold that petitioner acted with reasonable cause and in good faith within the meaning of § 6664(c)(1). Accordingly, petitioner is not liable for the accuracy-related penalty under § 6662(a) as determined by respondent in the notice of deficiency.

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Prior TaxProf Blog coverage:

• Geithner Blames Turbo Tax For His Tax Troubles (Jan. 22, 2009)
• TurboTax, Geithner Edition (June 30, 2009)
• Tax Court Rejects Taxpayer's Attempt to Use Geithner's TurboTax Defense (Aug. 26, 2009)
• Tax Court Rejects "Geithner Defense," Says Reliance on TurboTax Does Not Excuse Taxpayer From Penalty for Errors on Tax Return (Apr. 20, 2010)
• Tax Court Rejects Geithner/TurboTax Defense (June 23, 2010)
• Tax Court Again Rejects Geithner/TurboTax Defense (Nov. 12, 2010)