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Wednesday, November 17, 2010


Mr. and Mrs. Au erroneously deducted gambling losses to offset other income, in violation of Code §165(d). Code §165(d) only allows gambling losses to be deducted to the extent of gambling winnings.

The IRS sought to impose the 20% accuracy-related penalty under Code §6662 for the understatement of tax. The taxpayers objected, claiming that they deducted the losses only because their tax preparation software allowed them to do it – thus, they had reasonable cause which is an exception to the 20% penalty.

The Tax Court rejected the reasonable cause claim. This is not the first time it has done so. See, for example, Parker v. Comm., T.C. Memo 2010-78 (June 21, 2010).  That case involved the TurboTax tax preparation software, and this defense is often referred to as the “TurboTax Defense.”

In the Au’s case, the Court found that the taxpayers did not provide evidence of a mistake in the software instructions, nor of a thorough effort by the taxpayers to determine their correct tax liability. This seemingly leaves the door open to the successful use of the TurboTax Defense if a taxpayer can actually prove up a mistake in tax preparation software or its instructions.

To be fair (to TurboTax), the opinion did not indicate whether the software used was TurboTax or some other company’s software. I am sure that TurboTax does not appreciate the colloquial use of the term “TurboTax Defense” since it implies that their tax preparation software makes mistakes. Perhaps they may take some comfort in the credo that there is no such thing as bad publicity, or does that only apply to celebrities?

Au v. Commissioner, T.C. Memo. 2010-247


Bob said...

I can easily confirm that TurboTax offers clear guidance on the reporting of gambling winnings and losses. Furthermore, the TurboTax calculations are correct.

The TurboTax interview states,

"Gambling losses can be deducted as an itemized deduction up to the total of reported gambling and prize winnings.

Since you reported total gambling and prize winnings of $3,000 (in my example), you can deduct up to $3,000 in gambling losses if you itemize deductions."

While it's not surprising for taxpayers to use the TurboTax defense, few will prevail. At TurboTax, we're so confident that the calculations are accurate that we'll pay penalty and interest if they're not.

Bob Meighan, CPA
VP, TurboTax

Peter Reilly said...

I'd be really surprised if Turbotax didn't have it right, if you paid attention. One time my brother asked me to look at his big refund Turbotax return. It turned out that he had put in miles in the box where they were asking for dollars.