Innocent Mistakes While Using Tax Preparation Software Not A Defense To Penalties For Underreporting Taxes
In a recent Tax Court decision, the Court made clear that use of tax preparation software is not a defense to the imposition of penalties for filing an inaccurate tax return. The Internal Revenue Code permits the Internal Revenue Service to impose a 20% penalty for either substantially underreporting income income tax or negligently underreporting income tax. Income tax is “substantially” understated if it is understated by 10% or $5,000. “Negligence” is the failure to make a reasonable attempt to comply with the tax reporting laws
In Lam v. Commissioner, the taxpayer incorrectly entered rental losses and trading losses into a return using popular tax preparation software. When the Internal Revenue Service sought to impose accuracy penalties, the taxpayers filed a petition in tax court to challenge the penalties. The Lam Court stated that it could not accept the misuse of the tax preparation software, “even if unintentional or accidental, as a defense to the penalties.” The Court went on to acknowledge that a taxpayers’ reliance on an attorney or an accountant could provide a defense to a claim of negligent under reporting of tax liability. However, the Lam Court concluded, using software instead of professional advice does not provide the same defense.