Turbo Tax Defense Fails Again in Tax Court
As we’ve blogged about previously, self-preparing your tax return can be a risky endeavor, especially for U.S. expats with heightened reporting obligations.
Expat taxpayers are particularly susceptible to errors because of the complex international tax issues and additional reporting requirements that can significantly affect the tax return of a U.S. citizen living abroad. For example, U.S taxpayers that have an interest in specified foreign financial assets and meet the reporting threshold must report their foreign financial assets under FATCA. Furthermore, all U.S. persons that have an aggregate interest of $10,000 or more in foreign financial accounts must file FinCEN Form 114 (FBAR). A number of other forms may be required depending on the circumstances. Penalties for non-compliance can be severe.
In a recent Tax Court case, a taxpayer attempted to avoid IRS penalties by blaming Turbo Tax software for the errors on his tax return. The Court wasn’t at all convinced.
The Bulakites Case
In what can best be described as a series of unfortunate events, this taxpayer’s ominous journey began with a lawsuit for bad insurance advice that left him on the hook for $500,000 in 2007. The taxpayer, Mr. Bulakites, paid the settlement by taking out a loan secured by his home. He planned to sell his home and use the proceeds to pay back the loan when it came due in in 2008, a year later. The 2008 recession then hit, making it very difficult for Bulakites to sell his house, so he was able to pay only a fraction of what was owed. His troubles got worse in 2009, when he divorced his wife, who was awarded spousal support of $2,000 a month, which they orally agreed to increase to $5,000 upon the sale of the taxpayer’s residence.
The taxpayer, using Turbo Tax, deducted the spousal support payments, including the amounts paid above the monthly $2,000 divorce settlement agreement. The Court denied the deductions above $2,000 per month because they were not subject to a written agreement. The Court also denied the taxpayer’s interest deductions on his loan because he could not show the Court proper documentation demonstrating loan payments that matched the deductions claimed on the taxpayer’s return.
To make the bad situation worse, the IRS imposed penalties on the taxpayer for substantial underpayments of tax. The taxpayer argued that he should not be penalized because his mistakes were reasonable and in good faith. After all, he argued, TurboTax was to blame. The Court answered by citing well-established precedent, that “[t]ax preparation software is only as good as the information one inputs into it.” The Court upheld the penalties on the taxpayer.
How We Can Help
This latest Turbo Tax defense case further demonstrates the importance of filing an accurate tax return and the unwillingness of the IRS and courts to accept excuses.
If you are a U.S. expat who wants make sure your taxes are done right, or who is behind and looking to catch up with the IRS, Expat Tax Professionals is here to help.
By Ephraim Moss, Esq. & Joshua Ashman, CPA