The TurboTax Defense Won't Work

There was a time when most people prepared their taxes themselves and used a pencil to fill in paper tax forms. Those days are long gone. Today, the vast majority of people who prepare their taxes themselves use tax preparation software such as TurboTax or TaxCut.

Software such as TurboTax makes doing your taxes yourself much easier. For one thing, it automatically does all the necessary calculations (and does them right). The software also can help you complete the forms by asking a series of questions in which you describe your tax situation. It also has an audit feature, in which the program reviews the return for errors.

While tax software will ensure that your math is right, it will not and cannot ensure that your return is right. That's what Brenda Bartlett, a retired phone company worker in Colorado, discovered the hard way. Bartlett used TurboTax to prepare her 2008 Form 1040. Because she apparently answered the questions TurboTaxasked her about her income incorrectly, she ended up underreporting her taxable income by over $100,000. The IRS audited her and said she owed $43,668 in additional income taxes. Moreover, because the understatement of income tax was greater than $5,000 as well as greater than 10% of the tax required to be shown on the return, the IRS tacked on an accuracy-related penalty of $8,734.

Bartlett appealed to the tax court. She admitted that she misreported her taxable income, but said it was due to "honest mistakes" resulting from her lack of familiarity with TurboTax. She said she used theTurboTax audit feature, and thought it would catch any mistake she made.

Unfortunately for Bartlett, the tax court was not sympathetic. It noted that the reason she underreported her income was because she entered the wrong information into TurboTax. Thus, she was the one who made the error, not TurboTax. The program's computations were perfectly correct. The court noted that "TurboTax is only as good as the information entered into its software program... Simply put: garbage in, garbage out."

Because Bartlett put garbage into TurboTax, the court ruled that she had to pay all the back taxes and penalties the IRS assessed. (Brenda Frances Bartlett v. Comm'r, T.C. Memo. 2012-254 (Sept. 4, 2012).) So, doing her taxes ended up costing Bartlett $8,734 in IRS penalties.

Brenda Barlett's sad story provides a good object lesson for everyone who uses tax preparation programs such as TurboTax. They are only as good as the information you put into them. If you put in the wrong information, TurboTax may give the illusion that your return is correct. But this is an illusion that the IRS may destroy. Moreover, be aware that the IRS tends to give self-prepared returns more attention than those prepared by professional tax preparers because it knows they often contain errors. So, like Caesar's wife, self-preparers must do all they can to remain above suspicion.

September 2012

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