Tuesday, January 3, 2012


I take exception to the recent decision in Olsen v Commissioner, T.C. Summary Opinion 2011-131, which for the first time upheld the “Turbo Tax Defense”.  In the past this defense only worked for high-level government officials.

Here are the facts of the case -

In 2007, the wife of the petitioner (a patent attorney) received interest income from a trust created by her mother’s estate.  The wife received a Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., reporting interest income. Prior to this instance, the couple had never received a Schedule K-1, and the petitioner was unfamiliar with the form.

The petitioner prepared the couple’s joint income tax return for 2007 using tax preparation software. Because he had never dealt with a Schedule K-1 in the past, the petitioner upgraded his tax preparation software to a more sophisticated version as a precaution to ensure proper treatment of the unfamiliar form.

Using the upgraded software’s interview process, petitioner correctly entered the name and tax identification number of the trust, properly reporting the source of income. While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly reported on his Form 1040.  The Petitioner reviewed the Federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error.

The Court found -

We found petitioner to be forthright and credible, and we credit his testimony at trial.  We conclude that he made an isolated error in transcribing the information from his wife’s Schedule K-1 while using the tax return preparation software.  It is clear that his mistake was isolated as he correctly reported the source of the income, and he did not repeat any similar error in preparing his tax return.

We note that petitioner holds a Government security clearance and is subject to periodic background investigations, which, as he is well aware, provide substantial motivation for him to properly report income on his tax return. 

The most important factor in deciding whether a taxpayer acted with reasonable cause and in good faith is the extent of the taxpayer’s effort to assess the proper tax liability. Under the unique facts and circumstances of this case, we hold that petitioner acted with reasonable cause and in good faith within the meaning of § 6664(c)(1). Accordingly, petitioner is not liable for the accuracy-related penalty under § 6662(a) as determined by respondent in the notice of deficiency.”

Here is what I have to say -

(1) The back of the Form K-1 clearly indicates to the taxpayer on which IRS form or schedule the individual information on the front of the form is to be entered.  Here it states that interest income (from K-1 Line 1) is reported on Form 1040, line 8a.  That seems simple enough for even a patent attorney to understand.

(2) Just because one uses a tax preparation software package to generate a Form 1040 does not mean that one does not have to carefully and independently check and double check the return generated.  You cannot just accept the return that has been generated to be mathematically or legally correct.  The taxpayer indicated that he did indeed check the return, but it would seem to me that in the course of checking the return the taxpayer would have clearly seen that the income from the K-1, apparently substantial (we're ain't talking about $36.00), was not entered anywhere.

By accepting the “Turbo Tax Defense” the Tax Court set a very dangerous precedent.

Just think of all the agita the taxpayer in this case would have avoided, to say nothing of the costs of going to Tax Court, if he had used the services of a qualified and competent tax professional to prepare his 1040 in the first place instead of relying on a box!



Trish said...

Robert, I wrote about this decision at the end of November. Never did Mr. Olsen blame TT. He admits that he made a data entry mistake and did not catch it. He was allowed penalty relief because he could show that he worked hard to prepare a correct return but messed up.
The next day I received an e-mail from him and he corroborated that he won because he accepted blame for making a data entry mistake. And at no time did he blame the software for his problem. (He also corrected my mis-spelling of his name.)

Robert D Flach said...


I think I recall that post.

(1) If he admitted his error why did he go to Tax Court?

(2) I still don't think he worked hard enough to get penalty relief - as per my comments.

(3) Surely you agree with my final paragraph.



Tom said...

So what this is saying is that the “Turbo Tax Defense” is not only for high-level government officials but for those who holds a Government security clearance also.

Just another step towards a further separation of elite government and the common citizenry it rules over...

Trish said...

Sure if he had used a tax pro he wouldn't had to mess with with tax court, if the tax pro hadn't made the same mistake. He could have done a paper return and made the same mistake.
He went to Tax Cout because it was a 20% accuracy penalty. If that had happened to me I would have thought about fighting it too. That penalty has a feel of almost fraud. What I didn't know was that there was a "small claims" track at Tax Court.
Tom, I remember the article I had was very specific that Mr. Olsen won because it was a data entry level and TT still was not a good excuse.

Robert D Flach said...


If we are talking about a tax deficiency of $9297 then the amount of interest reported on the Form K-1 was a lot,

I stand by my concern that the return was not properly checked.

I think it would be obvious by reviewing the finished return that an amount so big was not included in the income.

If you received $30,000 in interest from a K-1 and the interest line on your 1040 is only $2,000 (I am making up the numbers) it is obvious to the most math challenged person that something is wrong.

My observation in the post still stands - Mr Olsen should have gone to a competent tax professional in the beginning and not relied on a box.