Why DIY Tax Software is Not a Good Optionby
A recent Tax Court case lays bare the problems of do-it-yourself tax software, especially when a taxpayer blames Turbo Tax for deductions he shouldn’t have taken and overstating his losses.
In Barry Leonard Bulakites v. Commissioner of Internal Revenue, insurance consultant Bulakites represented himself in a case in which the IRS believes he took too many deductions while Bulakites claims he has the evidence to prove some while blaming the software for “luring him” into claiming others, according to the court document.
Here’s the back story:
Years earlier, Bulakites was named as a defendant in a lawsuit when Wasley Products employees participating in the company’s 401(k) plan sued the company where Bulakites worked. In 2007, a settlement required Bulakites to pay $500,000.
He paid the settlement with a $500,000 loan secured by his home, which he planned to sell before the note came due in October 2008. But thanks to the onset of the Great Recession in 2008, Bulakites could only pay a portion of the loan.
In 2009, Bulakites and his wife separated and then divorced a year later. He was to pay her $2,000 a month in alimony until the home sold, and then $8,000 a month. With the home underwater and a sale looking dismal, Bulakites increased his alimony payments to $5,000. He ended up paying her $50,000 in both 2011 and 2012.
Bulakites used Turbo Tax to prepare his tax returns for those years and “he now admits he made a lot of mistakes in the process,” according to the court document.
He didn’t respond to the IRS requests for informal discovery and actually didn’t produce evidence until the eve of the trial, claiming there had been a flood at the house. As it turned out, the flood had been three years earlier but Bulakites testified that he was still getting vital documentation from a restoration company that very week.
The court faced decisions on four issues:
- Was Bulakites entitled to deduct the payments to his ex-wife in 2011 and 2012?
- Was he entitled to deduct business-interest expenses in 2011 and 2012?
- Could he deduct other business expenses for 2011?
- Is he liable for the accuracy-related penalty under Tax Court Section 6662(a) for 2011 and 2012?
(That section of the Internal Revenue Code imposes an accuracy-related penalty equal to 20 percent of the underpayment to which the section applies. An understatement is equal to the excess of the amount of tax required to be shown in the tax return over the amount of tax shown in the return.)
The court found:
- Bulakites claimed alimony of $70,580 in 2011 and $66,710 in 2012. In both years, the allowed amount was $24,000. His oral modification of his divorce agreement was deemed unacceptable. The court said he was not allowed to deduct the excess amounts as alimony. The court ruled for the IRS.
- Taxpayers can deduct interest paid if it’s an ordinary business expense. Payments must show what portion was interest and what was for the principal owed. Bulakites claimed $31,000 in 2011 and $48,000 in 2012. The allowed amount in both years was zero. While Bulakites made payments on the loan, the amounts don’t match tax-return claims. He also didn’t provide loan documentation. “The problem is that we can’t figure out what happened to the note--was it refinanced? Was it extended? Without any paperwork (in a situation where there should have been lots of paperwork) we are left only with his testimony about the total amounts of the payments and the allocation of those payments between principal and interest,” the court document states. The court ruled for the IRS.
- Bulakites claimed a deduction of $185,673 for other expenses in 2011. He testified that this was a carryforward of a net operating loss from a previous year that he mistakenly put on the wrong line of his tax return. A taxpayer can substantiate this type of claim by filing with his return a statement indicating the amount of net operating loss deduction claimed, including a detailed schedule showing how it was computed. Bulakites didn’t file this. He didn’t contest the issue on brief, which the court typically considers a concession.
- An understatement of tax is considered substantial if it’s more than $5,000 or 10 percent of the tax required on the return. Bulakites’ understatements for both years was far more. He also couldn’t show that his mistakes were reasonable and done in good faith. He admitted he had deducted items he shouldn’t have and overstated losses, and tried to blame Turbo Tax for the errors. The court ruled for the IRS.
Citing an earlier case, the court stated that “tax preparation software is only as good as the information one puts into it.”
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.