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

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.

About the Author

Paul Caron

Paul Caron was named Duane and Kelly Roberts Dean of Pepperdine University School of Law on June 1, 2017. Dean Caron joined the Pepperdine faculty in 2013 after serving as the Dorothy and Leonard Straus Distinguished Visiting Professor of Law in the spring semesters of 2010 through 2013. He served as Associate Dean for Research and Faculty Development at Pepperdine in 2015-2017. Before coming to Pepperdine, he was Associate Dean of Faculty and Charles Hartsock Professor of Law at the University of Cincinnati College of Law.

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