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Turbo Tax Defense Fails Again in Tax Court



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.

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Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.

One thought on “Turbo Tax Defense Fails Again in Tax Court

  1. Avatar Tom Rex says:

    I would hope that eventually the Tax Court moves beyond – “[t]ax preparation software is only as good as the information one inputs into it.”

    With the advent of the step by step screens in Turbo Tax, I see Turbo Tax asking questions similar to a tax professional.

    I don’t know how much Artificial Intelligence there is in Turbo Tax, but it seems to be making some tax prep decisions, which their users rely on, and who I feel should be entitled to some penalty relief. Obviously they are responsible for the taxes due, regardless of who prepares their return.

    There are many client and potential clients that I talk with, and a common story is Turbo Tax kept on asking and I kept on entering.

    In the defense of Turbo Tax, many of their users don’t read the small print on the screens or review their tax returns. But this is true for returns prepared by some tax professionals.

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