The U.S. Tax Court has ruled in favor of a taxpayer who made a data entry error when using Intuit’s TurboTax tax prep software.
The case involved Kurt Olsen, a patent attorney who works for an Energy Department laboratory. The IRS determined a deficiency in his and his wife’s joint income tax return for 2007 of $9,297 and an accuracy-related penalty of $1,859. His wife received interest income from a trust created by her mother’s estate, and Olsen used TurboTax to prepare the tax return. Because he had never dealt with a Schedule K-1 in the past, he upgraded the software to a more sophisticated version “as a precaution to ensure proper treatment of the unfamiliar form,” according to the ruling last Wednesday, which was reported on the TaxProf blog.
“Using the upgraded software's interview process, [Olsen] correctly entered the name and tax identification number of the trust, properly reporting the source of income," said the court. "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. [He] reviewed the federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error.”
The court found Olsen to be “forthright and credible” during his testimony at trial. It concluded that he made an isolated error in transcribing the information from his wife's Schedule K-1 while using the tax preparation software. “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,” wrote Judge Robert N. Armen Jr. He added that Olsen acted in good faith and would not be liable for the accuracy-related penalty.
The TaxProf blog, written by University of Cincinnati law professor Paul Caron, said it was the first time a court has approved a “TurboTax defense.” A similar defense was rejected in several cases in 2009 and 2010 before the Tax Court.
The case was reminiscent of testimony given by Treasury Secretary Tim Geithner during his Senate confirmation hearings in January 2009. Geithner admitted that he failed to pay Social Security and Medicare self-employment taxes while he worked for the International Monetary Fund between 2001 and 2004. He testified that he used TurboTax to do his taxes in 2001 and 2002, although he denied that the tax software was to blame and said it was his responsibility.
7 Comments
An accuracy penalty of $1,859 for a typo? What nonsense!?!? And the IRS or any other government entity for that matter has never made an error.
It's a typo, adjust the tax, let the guy pay the difference and move on. Every government employee that decided not to waive the penalty and to pursue the case in tax court should be fired for incompetence and for wasting taxpayer resources.
Posted by: PATRICK K | December 17, 2011 1:12 AM
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"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. [He] reviewed the federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error."
Interest income from a trust is reported on Schedule B not Schedule E as stated by the judge. Even the tax court can't get it right. Do you think the tax code is too complicated?
Posted by: Unknown | December 1, 2011 7:24 PM
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Experienced preparers know that simply using the verification procedure to validate one's data entry is insufficient due diligence. The taxpayer should have printed out a complete draft copy of the tax return and traced all items to supporting documentation. Had he done so, he would have detected his own error.
Posted by: scg799 | December 1, 2011 11:52 AM
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Gee, a government employee who won't spend a couple hundred bucks of his own money when it's prudent, but probably thinks nothing of wasting millions of dollars of our money.
Posted by: Unknown | December 1, 2011 10:14 AM
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It seems to me that he made an error and he should be held to the same standard as anyone else. I made an error on my taxes 2 years ago (no I'm not a tax professional!) and had to pay a penalty. It was my fault. I paid the penalty. He should have to do the same thing. It seems that personal responsibility gets less and less every year.
Posted by: gary d | December 1, 2011 9:53 AM
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Well, he won didn't he? It is a case of "David against Goliath".
Posted by: Linor34b | December 1, 2011 9:36 AM
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Did Mr. Olsen ever think of hiring a professional knowedgeable in the preparation of income tax returns? What would he think of a novice trying to defend a patent matter?
Posted by: bob from elgin | November 29, 2011 9:26 AM
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