The U.S. Tax Court has again ruled against a taxpayer who used the “the tax preparation software said it was okay” defense. In the case of Phu and Yvonne Au, the couple had claimed a deduction for more than $40,000 of gambling losses. They claimed no gambling winnings. The Internal Revenue Code only allows gambling losses to be deducted to the extent of gambling winnings. Since they had no gambling winnings, the $40,000 of losses were not deductible.
In addition to the extra tax assessed by the IRS, the Au’s were also hit with a 20% accuracy related penalty. The couple tried to argue that they should not be subjected to the penalty because they say they followed the instructions in the computer software they used to prepare the tax return. The Tax Court disagreed with that argument.
The Court said “(the Au’s) indicate that they were unaware of the provisions of the Code and that they did not consult any … (IRS) publications or professional tax advisors before claiming deductions equaling almost half of their reported income in 2006.”
The Court also said “We doubt that the (software) instructions, if correctly followed, permitted a result contrary to the express language of the Code. Petitioners may have acted in good faith but made a mistake. In the absence of evidence of a mistake in the instructions or a more thorough effort by petitioners to determine their correct tax liability, we cannot conclude that they have shown reasonable cause for the understatement of tax on their 2006 return.”