Today the Tax Court looked at a case that showed what happens when you use a tax preparer who (a) doesn’t understand the software, (b) has little knowledge about your primary sources of income, and (c) has little tax knowledge. As you might expect the petitioners didn’t fare well.
Our petitioners had their return audited for 2002, and a deficiency resulted from disallowing “(1) $12,000 deducted as an other miscellaneous deduction for “home winterization” on Schedule A, Itemized Deductions, and (2) the following expenses claimed on Schedule E, Supplemental Income and Loss, for rental Property B (identified as an “apartment building” located at 8314 South Green Street):
- Advertising $350
- Auto and travel 4,500
- Cleaning and maintenance 3,000
- Repairs 12,000
- Supplies 900
- Utilities 3,000″
When the parties met for the pre-trial conference the petitioners’ accountant, when informed that it was required by the Tax Court that everything not in dispute be stipulated, made a remark that set the tone for the case: “Rules are made to be broken.” I’m sure the Court appreciated that.
Things didn’t get much better. “During the above meeting, [petitioner’s accountant] redefined the properties listed on petitioners’ Schedule E….” Why wasn’t this done before the audit? But I digress. These changes, which included one rental property included on the original return which shouldn’t have, and another property that wasn’t included suddenly appeared, resulted in additional deficiencies and an accuracy-related penalty:
“(1) Unreported rental income; (2) disallowance of five dependency exemption deductions; (3) unreported income from a State income tax refund; (4) disallowance, in total, of itemized Schedule A deductions for (a) medical and dental expenses, (b) real estate taxes, (c) personal property taxes, (d) home mortgage interest, (e) gifts to charity, and (f) unreimbursed employee business expenses; (5) disallowance in total of all Schedule E deductions; and (6) disallowance of rental and real estate loss because of passive activity loss limitations.”
As for the actual case, just a few lines from the decision note the most important point of all.
“Petitioners provided no receipts to substantiate any of the expenses claimed for either Property A or B. For example, [Petitioner] admits that they did not spend $350 to advertise either Property A or B for rent and that, in the case of Property A, no advertising of any kind was necessary since their daughter took possession of that property immediately after they moved to Property B. [Petitioner] acknowledged that $700 claimed for auto and travel expenses was arbitrarily arrived at. [Petitioner] testified that the $2,000 claimed for cleaning expenses for Property A was paid to clean out the basement of that property in anticipation of their move.
“Our examination of the record convinces us that petitioners failed to maintain any records whatsoever with respect to the items claimed on the Schedule E attached to their 2002 return. Moreover, [petitioner] and their tax preparer…admit that some of the figures claimed for deductions taken on their 2002 return, including all of their Schedule E deductions, were false and/or arbitrarily contrived.”
I could go on and on, but I think you get the flavor.
There are some morals to this story. First, not all tax preparers are equal. Obviously the petitioner’s tax preparer comes from the Bozo side of tax preparation. He was unlicensed, untrained, and, had little knowledge of the tax software he was using. That’s a problem with software—it will put the numbers exactly where you tell it to. As the cliche goes, garbage in, garbage out.
Second, get a tax preparer who understands your major areas of tax concern. For example, I had a potential client approach me about doing his return. I sent him to another professional I know because his return had a large amount of oil, gas, and mineral rights income, and that’s an area I don’t know well. He’s much better off going to someone who understands that well as it’s a specialized area. Sure, I could learn it, but he’d have to pay me to relearn the wheel, so to speak (and I have enough areas that I specialize in already).
Third, choose your preparer wisely. You are ultimately responsible for what’s on your tax return, not your accountant. As the Tax Court noted,
“We further conclude that petitioners have failed to show that their reliance on Mr. Ingram’s tax return preparation was reasonable. Mr. Ingram admitted that he was not an accountant, that he was unfamiliar with the computer software that he used to prepare petitioners’ return, that he had made many errors with respect to petitioners’ 2002 return, and that his rush to complete the return also resulted in errors. Petitioners’ reliance on Mr. Ingram as their tax return preparer was clearly unreasonable.”
And finally, keep your receipts! Today’s petitioners invented numbers out of thin air and got the results they deserved. If you have rental property, you’re supposed to treat it as a business. You can purchase a filing cabinet for under $100.
Case: Burkley v. Commissioner, T.C. Summary 2008-20
