Tax Court Penalizes Self-Prepared Tax Return | USTaxAid

Diane Kennedy's Blog

Tax Court Penalizes Self-Prepared Tax Return

Written by Diane Kennedy, CPA on February 2, 2012

Tax is tricky. And it often contradicts what you think you know. There rarely is one right answer, because everybody’s circumstances are different and it’s not as simple as reading an IRS tax guidebook. In fact, you need to look at Tax Court cases, memorandums, revenue rulings, revenue proceedings and Treasury Regulations.


My firm pays a lot of money every year for the tax tools we use. It’s not some off-the-shelf Turbo Tax solution.

So I’m always a little skeptical when I see people who insist on preparing their own tax returns if there is any level of complication at all. After all, it doesn’t make logical sense for them to spend the time and money on the research and tax preparation tools we have.

Well, it looks like Tax Court shares my skepticism. In fact, the Tax Court threw a penalty in the mix for the taxpayers who got in over their heads with their tax filing.

In this case, the husband and wife bought a cheap TurboTax program at the local Costco and set to work preparing their own return.

The husband worked as an engineer. The couple owned and managed residential real estate. They offset the real estate losses with their earned income. Because their income was over $150,000, that wouldn’t normally be allowed. In this case, though, they took the deduction because they claimed to be real estate professionals.

The IRS tagged two years – 2005 and 2006 – to audit. The IRS disallowed his passive real estate losses and the whole case moved to Tax Court. All along, the taxpayers maintained they were real estate professionals and thus got the full amount of the loss against their other income.

Unfortunately, the couple continued to represent themselves through the audit, appeal and even at the court case. They made some legal blunders in the case, but the court ruled in their favor and against the IRS. It seemed like the court was really trying to help this couple out with some leniency.

The problem was the taxpayer didn’t realize how his testimony pre-trial could be used against him when he flip-flopped after realizing what the answers should have been. He didn’t have documents to prove the amount of hours he now claimed to meet the real estate professional standard.

And then when it looked like he would not only losing the real estate professional deduction with the resulting tax, penalties and interest, he got even worst news. The IRS is going after him for the even higher negligence penalties (up to 20% on top of everything else).

They blame TurboTax software for failing to notify him as to the requirements of the real estate professional status. The Court didn’t buy it.

In fact, the Court stated, “Petitioners contend that they used TurboTax software to prepare their returns for both years and that the software program is to blame for any miscalculations in their income. However, petitioners have not provided any evidence showing the information that they entered into the software program, a preliminary showing that would be required to decide whether the software program is in any way at fault for petitioners’ underpayment. See Paradiso v. Commissioner, T.C. Memo. 2005-187. Such software is only as good as the information the taxpayer puts into it. See Bunney v. Commissioner, supra at 267. We have held that the misuse of tax preparation software, even if unintentional or accidental, is no defense to penalties under section 6662. See Lam v. Commissioner, T.C. Memo. 2010-82.” T.C. Mem. 2011-69, at p. 15.”

Garbage in means garbage out. It was up to the tax preparer, or in this case the taxpayer/tax preparer, to make sure the information that was put in was correct, the laws were followed and the documentation supported the tax positions taken.

The Court goes on to say, “A reasonable person in Mr. ****’s position, understanding that the tax law governing the deductions he claimed was complex, would have consulted a tax professional instead of merely assuming that he qualified on the basis of his own conclusions.”


Bottomline: They lost the real estate professional deduction. They got hit with the regular penalties and interest plus the more onerous negligence penalties. And they weren’t successful in throwing Turbo Tax under the bus. It was the taxpayer’s responsibility to seek a tax pro and they paid a high price for failing to do so.


Leave a Comment


  • Three weekly emails with free tax updates
  • Exclusive deals on products and services
  • FREE Webinar: Covid-19 and Your 2020 Tax Return