The Tax Court has given us a cautionary lesson on when a taxpayer should rely on their accountant, rather than on software when claiming deductions. It’s a lesson clients should consider before they are tempted to take the plunge into DIY tax preparation.
Barry Bulakites, the main player in Bulakites v. Commissioner, T.C. Memo 2017-79, is an insurance consultant whose clients are accountants. However, rather than seek the advice of his clients, he relied on the consumer edition of a popular tax software package when he prepared his own returns. He made mistakes in his deductions in three areas on his 2011 and 2012 returns – payments to his ex-wife, business interest expenses, and other business expenses. He blamed the software for “luring” him into claiming some of the deductions.
Bulakites and his ex-wife legally separated in 2009 and were divorced a year later. The separation agreement directed him to pay his ex-wife $2,000 per month for spousal support until the sale of the marital residence, at which point his payments would increase to $8,000. The real estate market was poor at that time, and Bulakites credibly claimed during trial that the house was “under water” with no hope of a sale. Although he and his ex-wife never entered into any subsequent maintenance agreements, Bulakites orally agreed with his ex-wife to increase his payments to $5,000 per month. In fact, he did pay his ex-wife about $50,000 in both 2011 and 2012.
Unfortunately for Bulakites, a deductible payment for alimony must be required by a divorce or separation instrument. His oral modification of his written separation agreement did not satisfy the requirement under Code Section 71(b)(2). The Tax Court found that while his motivation was sincere, he could not deduct the excess amounts over $2,000 a month as alimony.
Bulakites failed to provide sufficient evidence on business loan repayments and other expenses. The Tax Court agreed with the Internal Revenue Service and denied his claimed deductions for those expenses.
In imposing the accuracy-related penalty for the years at issue under Code Section 6662, the court found that Bulakites’ understatement was “substantial” since it surpassed both “the greater of $5,000 or 10 percent of the tax required to be shown on the return,” as required by Section 6662(d)(1)(A).
“The burden then swings to Bulakites to show that his mistakes were reasonable and in good faith,” the court said. Although Bulakites claimed that his tax software made him do it, the court reasoned that, “Tax preparation software is only as good as the information one inputs into it.”
So the court agreed with the IRS, and denied Bulakites’ claimed deductions and imposed the penalty. Is there any doubt that had he become a client of any of his client-accountants, he might have avoided his tax troubles?