TAX COURT OPINION

Case: Ana Patricia Cajina n.k.a. Ana Patricia Vasudeo
Docket Number: 10556-10
Judge: Holmes
Opinion Type: bench
Filed: 11/02/2011
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 ANA PATRICIA CAJINA, N.K.A. ANA PATRICIA VASUDEO, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent . ) ) ) ) ) ) ) ) ) , . Docket No. 10556-10 .. Order of Service of Transcript Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of transcript of the trial of Holmes at San Francisco, California on October 7, 2011, containing his oral the conclus.ion of trial. the pages of findings of fact and opinion rendered after the above case before Judge Mark V. the (Signed) Mark V. Holmes Judge Dated: .Washington, D.C. November 2, 2011 $ERVED NOV - 9 2011 1 2 3- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BENCH OPINION BY JUDGE MARK V. HOLMES VASUDEO V. COMMISSIONER DOCKET NO. : 10556-10 OCTOBER 7, 2011 . THE COURT: In the case of Ana Patricia Vasudeo v. Commissioner, Docket No. 1Ó556-10, the Court has decided to render åral findings of fact and opinion, and the following is the Court ' s oral findïngs of fact and opinion. This bench opinion is made pursuant to the authority granted by Section 7459 (b) of the Internal Revenue Code of 1986 as amended and Rule 152 of the Tax Court ' s own Rules of Practice and Procedure . This case involves a single issue. The issue is whether Petitioner Ana Patricia Vasudeo acted with reasonable cause and good faith in determining her tax liability for the 2006 and 2007 tax years under Section 6664 (c) (1) . Ms . Vasudeo was a California resident when shel filed her petition. The parties were able to agree on the stipulation and exhibits, which together with the testimony constitute the record in this case. During the years in issue, 2006 and 2007, Ms. Vasudeo was a recent col ege graduate and unfamiliar with tax law. As portrayed by her and her counsel, she timely submitted quarterly estimated tax Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 . 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 payments and she used the 2006 and 2007 versions of TurboTax to prepare her returns. She did accurately follow the program's instructions. We find that unbeknownst to Ana at the time she prepared her returns the 2006 and 2007 versions of TurboTax did not account for the special circumstances related to her employment at the World Bank. As a result, she learned that she still owed self- employment taxes for both these years when her return was selected for audit and upon receipt of a notice of taxes due promptly paid the balance. These facts are largely uncontested. The IRS of course bears the burden of production under Internal Revenue Code § 7491(c) with respect to any accuracy-related penalty under 6662(a). To meet that burden, the Commissioner has to come forward with sufficient evidence indicating that it's appropriate to impose the relevant penalty. Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Code. And disregard includes any careless, reckless, or intentional conduct, all as defined by Section 6662(c). A disregard of rules is careless if the taxpayer makes little or no effort to determine whether a rule or regulation exists under circumstances which Heritage Reporting Corporation (202) 628-4888 .. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 demonstrate a substantial deyiation from the standard of conduct that a reasonable person would observe. That's Treasury Regulation § 1.6662-3 (b) (2). A disregardlis intentional if the taxpayer knows of the rule or regulation that is disregarded. See Sec. 1.6662-3.(b) (2.) A substantial understatement of income exists when the understatement of tax exceeds the greater of 10 percent of the amount of tax required to be shown on the return or $5,000. Sec. 6662 (d) (1) (A). In the case of Ms. Vasudeo, when she received a payment from World Bank for her share of her employment taxes she did sign a form acknowledging that the funds were for taxeb and should be remitted to respondent as an advance ayment on her account. According to the government, she must have known that these were for employment ta es as well as income taxes, so the government comes forward with the evidence that for 2006 and 2007 she failed to make a reasonable attempt to comply with the provisions of the Code and intentionally d sregarded the rules and regulations. For 2007, the Commi sion also asserts a substantial understatement: of income tax. This is mathematical. Ms. Vasudeo dïd understate her income Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 by $7,155. The amount of tax required to be shown on the return was $12, 126, 10 percent of which is $1, 212 . 60 . So there was an (mderstatement of income that exceeded the greater of $5, 000 or 10 percent of the amount of tax required tò be shown on her return. The real question here is of course whether she had reasonable cause and acted in good faith for the resulting mistake . N She presented what has become, if not common, at least not rare, the TurboTax defense, which is you put evbrything in the TurboTax program correctly. Is that a sufficient defense for negligence? Is it in fact a way of behaving reasonably and in good faith? Based on the trial testimony, I do find that Ms . Vasudeo answered each qu stion that TurboTax posed to her in the form the softwáre was in 2006 and 2007 accurately. It also prompted her to enter any of her . estimated tax payments, an . she properly entered them. Now what the . sof tware did not do, and this was well proven by her counsel, was identify that a Schedule E was required in situations like hers, which caused her on her account to fail to compute the self-employment tax for 2006 and 2007. Also, as counsel demonstrated, the hole in the TurboTax software was fixed for the 2009 year. A new item was added to a list of special Heritage Reporting Corporation (202) 628-488.8 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 circumstances that specifically asked employees of international organizations if they were liable for self-employment tax. Of course Ms. Vasudeo is not the first person to encounter problems with TurboTax software and attempt to use it to get out of penalties. In an early case, Thomson v. Commissioner, T.C. Memo. 2007- 174, our Court held that petitioner made a reasonable attempt to comply with the Internal Revenue laws and exercised ordinary and reasonable care by obtaining software to aid him in the. preparation of his 2002 Federal income tax return and did not find for the Commissioner on the accuracy-related penalty issue. However, in Thomson, the underlying Code .15 section itself was ambiguous, and so in subsequent 16 17 18 19 20 21 22 23 24 25 cases, simply relying on TurboTax has been held not to be enough. For instance, in the Lam v. Commissioner case, T.C. Memo. 2010-82, the Court noted and reminded practitioners that "the duty to file an accurate tax return generally cannot be avoided by shifting responsibility to a tax return preparer." In this way of viewing TurboTax largely as a tax preparer rather than a tax adviser is one that has become more or less settled in recent opinions, the most recent of which came out this summer, Anvika v. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Commissioner, T.C. Memo. 2.011-69, where we stated, "We have held that the misuse of tax preparation software, even if unintentional or accidental, is no defense to penalties under Section 6662 . . . Use of TurboTax does not establish reasonable cause and good faith. " So I conclude that in the.case of Ms. Vasudeo, like·others who use TurboTax, the right rules to look at are the rules involving the use of a tax preparer, not reliance on a tax adviser like a lawyer or accountant . So TurboTax is like going to the H&R Block. What rules apply in this situation to the application of a penalty for negligence or substantial understatement, the defense to the penalty, as pointed out by Ms . Vasudeo, is in Section 6664 of the Code, which has regulations accompanying it, specifically 26 C. F.R. § 1.6664-4 (b) (1) . "A taxpayer's reliance on erroneous information reported on a Form W-2, Form 1099 or other information return indicates reasonable cause and good faith provided the taxpayer did not know or have reason to know that the information was incorrect. Generally a taxpa er knows or has reason to know that the information on an information return is incorrect if such information is inconsistent with other information reported on otherwise furnished to the taxpayer or with the taxpayer's knowledge of the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 transaction. This knowledge includes, for example, the taxpayer's knowledge of the terms of his employment relationship or of. the rate of return of a payor's obligation." Here the answer I think to the case in front of me lies in the exhibits that are under seal, which though not technically information returns required to be sent by the international organizations to the IRS certainly are analogous to them in that they summarize the remuneration and conditions of employment of the employees in this case of the World Bank. This tax information that was sent to her included the line that "Schedule SE Self-Employment Tax must be attached to your Form 1040. U.S. staff must pay Social Security and Medicare tax at the self-employment rate on wages for services performed inside the U.S. Please refer to instructions 'for Schedule SE U.S. Citizens Employed By Foreign Governments or International Organizations" and then gives the IRS web address. 7 Here I think I have to reach a split decision because for the 2006 year the box on which the World Bank told Ms..Vasudeo what she should enter on her Schedule SE and attach to her tax return was blank. It had no money. I think a reasonable person, Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 particularly one of Ms. Vasudeo's education, training and experience, could easily have interpreted that to mean that she had zero and having zero didn't need to attach a Form SE to her tax return for.the 2006 year. The next year, the.year in which she was fully employed or the. year for which she was employed by the World Bank ·for the entire year, there was a large amount of money listed in this box in contrast to the zero for 2006 and it actually says "Must be reported on line 2, Schedule E". So, for that, I find that she is in the position of somebody who received an information return but didn't give it over to the tax return preparer. And so I will find for the government for the 2007 year, against the government for the 2006 year·. This is a split decision, so when the transcript comes out and the order sending the transcript to the parties is mailed I will issue an order giving.the government some time to come up with computations and agree on them with petitioner under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:L3 a.m., the bench opinion in the above-entitled matter was concluded.) Heritage Reporting Corporation (202) 628-4888