Tax Court Rules in Favor of TurboTax Defense

The U.S. Tax Court has ruled in favor of a taxpayer who made a data entry error when using Intuit’s TurboTax tax prep software.

The case involved Kurt Olsen, a patent attorney who works for an Energy Department laboratory. The IRS determined a deficiency in his and his wife’s joint income tax return for 2007 of $9,297 and an accuracy-related penalty of $1,859. His wife received interest income from a trust created by her mother’s estate, and Olsen used TurboTax to prepare the tax return. Because he had never dealt with a Schedule K-1 in the past, he upgraded the software to a more sophisticated version “as a precaution to ensure proper treatment of the unfamiliar form,” according to the ruling last Wednesday, which was reported on the TaxProf blog.

“Using the upgraded software's interview process, [Olsen] correctly entered the name and tax identification number of the trust, properly reporting the source of income," said the court. "While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly displayed on Schedule E, Supplemental Income and Loss, of his federal tax return. [He] 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 Olsen to be “forthright and credible” during his testimony at trial. It concluded that he made an isolated error in transcribing the information from his wife's Schedule K-1 while using the tax 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,” wrote Judge Robert N. Armen Jr. He added that Olsen acted in good faith and would not be liable for the accuracy-related penalty.

The TaxProf blog, written by University of Cincinnati law professor Paul Caron, said it was the first time a court has approved a “TurboTax defense.” A similar defense was rejected in several cases in 2009 and 2010 before the Tax Court.

The case was reminiscent of testimony given by Treasury Secretary Tim Geithner during his Senate confirmation hearings in January 2009. Geithner admitted that he failed to pay Social Security and Medicare self-employment taxes while he worked for the International Monetary Fund between 2001 and 2004. He testified that he used TurboTax to do his taxes in 2001 and 2002, although he denied that the tax software was to blame and said it was his responsibility.