Argument Blaming DIY Software is DOA in Tax Court

In recent years, taxpayers have been enticed by the simplicity and cost of do it yourself (DIY) tax preparation software. Unfortunately for taxpayers relying on software to file an accurate return the Internal Revenue Service (IRS) does not consider reliance on DIY software as a legitimate defense in improper reporting or the abatement of the associated penalties as illustrated in a recent Tax Court case. Last month a taxpayer unsuccessfully blamed his tax software for “luring” him into claiming a large amount of deductions, which were disallowed by the IRS.

In Bulakites v. Commissioner Tax Court Case, Barry Bulakites, an insurance consultant, who services many accountants, chose to prepare his own tax return using TurboTax rather than seek the expertise of one of his clients. He claimed the software lead him to take erroneous deductions in three areas – alimony, business interest expense, and other business expenses.

Bulakites and his wife separated in 2009 and their separation agreement stated that he pay his ex-wife $2,000 a month in spousal support until the sale of their residence, at which time his payments would increase to $8,000. Due to the recession, Bulakites had no near-future hopes of selling the home, but in an effort to “do the right thing,” he orally agreed to increase his alimony payments to $5,000 a month. Had Bulakites sought the advice of a tax professional he could have been informed that in order to be deductible, alimony is required by a divorce or separation instrument, meaning that his oral modification to the terms of his separation did not satisfy the requirements of the statute.

The remaining two errors could have been avoided if Bulakites had consulted a professional as well. He took business interest expense deductions, but failed to provide the court with any loan statements, loan repayment schedules, or any business records regarding the loan to substantiate his position. He also took a deduction for other business expenses, but was unable to provide the court with any substantiating documentation for these deductions, and therefore, they were disallowed.

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Besides taxes being imposed based on these disallowed expenses, the taxpayer was further punished for his mistakes by accuracy-related penalties due to a substantial understatement of his income tax liability. (This penalty is assessed when the tax reported on the originally filed return was deficient by $5,000 or 10% of the tax that should have been reported.)

In its decision, the Court cited another case, Bunney v. Commissioner (2000) was cited, where it stated that “tax preparation software is only as good as the information one inputs into it.” Tax software is relying on the inputter to be the expert — and if the taxpayer isn’t, may this act as a word of warning to call your accountant.

If you have any questions about the proper input or the qualified tax preparers at Marcum can assist you, please call a local Marcum tax advisor.