Using Tax Prep Software Doesn’t Avoid Penalties

Each year, more and more individuals use tax preparation software to complete and file their tax returns. However, a recent case demonstrates that failing to properly report taxes is not necessarily excused by reliance on software.

In the case, an individual who had previously worked for 17 years for the FDIC became an independent contractor for the U.S. Agency for International Development (AID) and the Office of Assistance of the U.S. Department of the Treasury. He used TurboTax to complete his return. He reported his income but failed to pay self-employment tax.

The Tax Court imposed accuracy-related penalties for this failure. He had argued that he should be excused from paying these penalties on the grounds that using tax preparation software was reasonable cause for the underpayment resulting from the failure to include self-employment tax on his return. The Court rejected this argument. He admitted that he did not consult any IRS publications or IRS guidance in preparing his return. He apparently knew about the obligation for self-employment tax, but didn’t pay it.

Lesson: Software is a great tool for simplifying the preparation of a tax return, but it is no substitute for information and guidance about taxes. Using information such as J.K. Lasser’s Your Income Tax is helpful in avoiding penalties. When in doubt, always consult a tax specialist.

Source: David Cameron Parker; TC Summary Opinion 2010-78