TurboTax is no defense, sir


In 2006, Ohioan James Hopson prepared returns using Turbo Tax software. That year Mr. Hobson had debt he wanted to pay off, so he withdrew $60,882 from his retirement accounts. Even though this was income was as such, Mr. Hopson did not  report it. He told Turbo Tax his income was $88,488 when in reality it was much, much larger — $149,370. Mr. Hopson's Turbo Tax 1040 stated he owed $6,115, when in reality he actually owed a more "robust" amount of $28,069.  Mr. Hopson conceded his error, and agreed to the $28,069 total assessment.


The IRS however, imposed an additional "accuracy-related" penalty. 26 USC Section 6662 (a) and (b)2 allows the IRS to assess an additional 20% penalty on an substantial (more than 10% or greater than $5000) under reporting of income. In this case, the penalty appears to be $4,390.


However, the tax code also allows an exception to the penalty if the error was made in good faith. Mr. Hobson believed this to be the case, and brought a petition in US Tax Court — that essentially, Turbo Tax made him do it.  The tax court denied the argument, with good reason.


Mr. Hobson knew he made more money than he reported. He just failed to input the correct amount into the program. This error is analogous to a taxpayer who knows he had $60,882 income from a 1099-R and then fails to write down $60,882 lines 15a or 16a of his 1040. 


The Turbo Tax argument is complete a red herring.  If you know it is income, and you don't input that information as income, that is not "good faith." Turbo Tax did not make the error.  Mr. Hosbson did. And he appears to have done so intentionally.


Now, what happens when you are not a simple Ohioan, but rather figurative head of the IRS? Could it be that different standards apply? (at least administratively — this case never went to tax court)


As a summary from wikipedia states:


At the Senate confirmation hearings, it was revealed that Timothy Geithner had not paid $35,000 in self-employment taxes for several years, even though he had acknowledged his obligation to do so, and had filed a request for, and received, a payment for half the taxes owed.


The failure to pay self-employment taxes, in part due to the way his employer reported his wages which was not in accordance with tax law, was noted during a 2006 audit by the Internal Revenue Service (IRS), in which Geithner was assessed additional taxes of $14,847 for the 2003 and 2004 tax years. Geithner also failed to pay the self-employment taxes for the 2001 and 2002 tax years (for which the statute of limitations had expired) until after Obama expressed his intent to nominate Geithner to be Secretary of Treasury.


He also deducted the cost of his children's sleep-away camp as a dependent care expense, when only expenses for day care are eligible for the deduction.Geithner subsequently paid the IRS the additional taxes owed, and was charged $15,000 interest, but was not fined for late payment.


In a statement to the Senate panel considering his nomination, Geithner called the tax issues "careless," "avoidable" and "unintentional" errors, and he said he wanted to "apologize to the committee for putting you in the position of having to spend so much time on these issues."


Geithner testified that he used TurboTax to prepare his own return and that the tax errors are his own responsibility.This statement is in conflict with statements by the Obama campaign that Geithner was advised by his accountant that he did not owe the taxes.


The Washington Post quoted a tax expert who said that TurboTax has not been programmed to handle self-employment taxes when the user identifies himself as being employed.Geithner said at the hearing that he was always under the impression that he was an employee, not a self-employed contractor, while he served as director of the Policy Development and Review Department of the IMF.Geithner comments are contradicted by the Senate report that showed he was not only informed of his status, but that he actively applied for the allowance.


Now, I don't have Mr. Giethner's account transcripts, so I can't tell for sure if he was actually assessed the accuracy-related penalty. But with the numbers involved (greater than $5000), he should have been. It would be an interesting read for sure.


Wikipedia additionally notes that "Geithner also failed to pay the self-employment taxes for the 2001 and 2002 tax years (for which the statute of limitations had expired)" Now true, while the normal 6-year statute of limitations to assess additional taxes Mr. Geithner on 2001 and 2002 have expired, there is NO statute of limitations to assess where  a fraudulent return has been filed with the intent to evade taxes. See 26 USC 6501(c).  True, this is a difficult burden to prove. However, with the report form the Senate that Mr. Geithner was aware of his status as self-employed, but failed to report his self-employment taxes, it would be reasonable for a jury to conclude there was an intent to avoid taxes — thus the taxes could be assessed at any time."


Of course, there is no way that as Treasury Secretary, Mr. Geithner will direct himself to be assessed for intent to evade taxes. But a successor administration may go back in and assess him —- 4, 8 or even 40 years in the future — there is no limitation. Now, it may be true that the unpaid 2001 and 2002 underpaid taxes actually have been paid (I have not read that anywhere). So, if Mr. Geithner hasn't taken care of all of his back taxes, because of his notoriety,  it may be a good idea for him to do so anyway.