Date: February 21, 2012
The IRS may allow leniency when levying penalties in an understatement of income when a taxpayer used a tax software package, and the taxpayer does not completely understand the question prompted by the software provided the following:
1. The taxpayer consulted with a tax professional.
2. The taxpayer visited the IRS website.
3. The taxpayer called the IRS 1-800 phone line.
4. AND only if the reliance on one of the above sources was reasonable under the circumstances.
However in the case of Yat Muk Lam v. Commissioner, T.C. Memo. 2010-82, the taxpayer claimed the tax software calculated incorrectly resulting in a large understatement of income. The IRS ruled the tax software was not flawed. The taxpayer using the software was confused about the treatment of several items of income and expenses and entered them incorrectly resulting in a large understatement of income. The taxpayer was responsible for the penalties and interest. The IRS also audited the tax returns for the years the taxpayer used the software. Fortunately, it was only for 2 years.
So, when using the tax software to print and file your business and/or personal tax returns and if you do not understand what the software is asking you to type into the space, please consult the IRS, a tax professional/CPA or the IRS website. It can save you alot of grief.
