TurboTax defense dismissed ... again

Twice this year, a tax court has thrown out attempts by filers to blame tax return mistakes -- which, of course, produced nice tax results for the filers -- on computer software.

In the latest ruling, filed last week, the court made it clear that the taxpayer is the one ultimately responsible for submitting a return and making sure such filing is timely and correct.

Here are the facts, per the court ruling. Henry Broderick, owner of a small business in New Jersey, filed a corporate return for his company in 2002 showing earnings of just under $3,000 and business losses of $29,000. But when reporting income from the company on his personal tax return, Broderick's numbers were all over the place on various 1040 schedules.

When all was tallied, his return showed $56,000 less in income than it should have, resulting in no tax due and, in fact, a $6,045 refund, attributable primarily to taxes withheld from his jointly-filing wife's salaried job.

Broderick stipulated in tax court to some mistakes, but basically blamed the errors (or, in the words of the ruling, "defects in his income tax return") on software he used in preparing his Form 1040.

Nice try. Sort of the tax version of "the dog ate my homework." Tax Court Senior Judge Arthur L. Nims was about as forgiving as those former school teachers.

Nims noted, "Such a program is only an aid for preparation of a return and depends on careful entry
of accurate information, which [Broderick] manifestly failed to do. [Broderick] admits that he has the education to prepare and review his income tax return, and that he had an opportunity to review his return prior to filing it."

That is, garbage in = garbage out. And the tax court says the "garbage man," aka the taxpayer handling the tax info, is liable.

Again from the ruling: "Use of software in preparing [a] return does not constitute reasonable cause for the errors in [the] return or for the deficiency in this case."

The bottom line: Broderick was responsible for the errors, responsible for understating his income and now owes the back tax and penalties.

Although the ruling carries right up front the standard CYA disclaimer that "this opinion may not be treated as precedent for any other case," this is not a new or surprising legal finding. Read the fine print above your tax return's signature line:

"Under penalty of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete."

Two tries, two tax smack downs: The Broderick ruling comes nine months after Douglas and Nancy Maxfield tried a similar argument to justify errors on their return.

Back in February, Special Trial Judge Carleton D. Powell found the Maxfields' claims of computer software fault unconvincing. Rather, Powell ruled that the couple knew the deductions they were entering into the program were personal expenses that were not tax deductible.

That garbage in/out thing again.

Brand clarification: The Maxfield ruling specifically named TurboTax as the filing software used by the couple. No product was named in the Broderick case.

Deduction dangers: The Broderick case also had some deduction issues. In that area, Judge Nims found that "claims of deductible expenses, which [Broderick] has not substantiated with any credible documentation, support the imposition of the penalty … on the basis of negligence …."

It's a good precautionary lesson for us all. Whenever you claim any deduction, be sure you can back it up if the IRS has questions.

'Til taxes do us part: Finally, both cases involved joint tax filings, although only Broderick was officially listed as the claimant in his case.

Remember, when both spouses sign off and actually sign a joint tax return, both generally are considered to be equally responsible for the filing and any subsequent consequences. There is innocent or injured spouse relief, but it's after the fact and can sometimes prove problematic.

The hubby has put his faith in my tax prowess and filing accuracy for our entire married life. He's not alone. In many situations, one spouse takes financial, including tax, charge and the other trustingly goes along.

Trust in any relationship is critical. But when it comes to money, trust then verify is not an unreasonable approach.

If you have questions about how your partner is managing any shared resources, ask. If you have concerns about items on a joint return, don't sign it until you're comfortable with the form's data.

And if you just don't ever feel financially at ease with your spouse, open a separate bank account, file a separate 1040 and call a marriage counselor.

Comments

[1040ez form user]

My opinion - great software. I really enjoy (if You can say that about the taxes)filling theirs 1040ez form - some info about it is on my home page i attached. I cen recommend it to everyone with no regret.

[Bob Meighan]

It's refreshing that you acknowledge the fact that filers need to take responsibility for the accuracy of the information they enter into tax software. As you say, garbage in, garbage out.

It's disappointing that the taxpayer blamed TurboTax when in reality the software simply correctly calculated the return based on information he entered. As you mention, blaming someone else for ones mistake is nothing new.

Bob Meighan
VP, TurboTax