Tax Error? Can't Blame the Software

Software programs may make doing your taxes easier, but they don’t offer legal protection. If you make a mistake while using one of the increasingly popular tax software packages to prepare your return, the Tax Court won’t let you off the hook for a penalty.

One taxpayer found that out the hard way when she tried to blame errors on the TurboTax software program that she had used to prepare her returns over the years. Unfortunately for her, the IRS audited her returns for two of the years and found a number of mistakes in how she handled rental properties she owned. Among them: She reported losses from sales of securities on Schedule C, which is used for business income and losses, instead of Schedule D, which is for capital gains and losses. And she claimed a loss on a property where her father lived rent free.

The IRS sent her a bill for unpaid taxes -- and assessed penalties on top of that. She argued before the Tax Court that use of a tax software program insulated her from any penalty. She pointed out that Treasury Secretary Timothy Geithner also used TurboTax and made some very well-publicized errors on his tax returns that almost derailed his nomination. (After first appearing to blame the program for his misreporting of his income, he later took full responsibility for the mistakes.)

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The Tax Court gave her argument short shrift, finding that the additional taxes she owed were caused by her own input errors, not by a flaw in the TurboTax program. It upheld the IRS’ imposition of penalties against her. Had Geithner made the same argument in the Tax Court, he would have lost, too.