The Geithner Defense

You knew it was only a matter of time – once it was revealed that Treasury Secretary Timothy Geithner blamed his personal tax problems on a misuse of the tax software TurboTax – that someone would try to blame their own tax problems on the software in Tax Court. Well, your wishes came true, and the first tax case was decided on the 19th concerning the “Geithner Defense”!

Tool Misuse

You can read the whole decision here, but the judgment came down to whether or not it was the tax software’s fault. In the case, our hero Aileen Yat Muk Lam had confused capital gains and ordinary income as a result of real estate rent coming in. Ms. Lam noted that she had religiously used TurboTax to fill out the tax forms, and hadn’t checked the IRS web site or consulted a professional in the filing of her taxes. In here testimony, she brought up the Wikipedia article on Timothy Geithner, and noted that he, too, had failed to get the correct numbers when using TurboTax.

The most important point from the decision is here:

“…it was not a flaw in the TurboTax software which caused petitioners’ tax deficiencies. “Tax preparation software is only as good as the information one inputs into it.” Bunney v. Commissioner, supra at 267. Because petitioners have not “shown that any of the conceded issues were anything but the result of [their] own negligence or disregard of regulations”, they are liable for the section 6662(a) penalties.”

Yes, Ms. Lam got the book thrown at her because she didn’t use the tool correctly. However, the language suggests that if it is a TurboTax bug that causes you to misreport your taxes… then you might have a case.

The Wrong Focus?

Maybe all of this is focusing on the wrong thing anyway. Why was it so hard for Ms. Lam to correctly report her taxes? The court notes that her father lived in one of her rental properties rent-free and other properties were used for personal reasons. I’m not sure of all the arcana of real estate tax law, but this disallowed some of her capital losses on the property. Negligence isn’t an argument for breaking the law, even a tax law but… is all of this evident? As I cited in a previous article, the tax code is growing increasingly complex. Let me leave you with this epic graph, the number of pages of the instructions that comes with the 1040 (our most basic tax form):