A couple had prepared their own tax returns for several years using a popular tax preparation software product. The wife reported expenses for her real estate business and unrelated losses on a Schedule C. Most of these deductions were inaccurately reported. Adjustments to this schedule resulted in most of the taxpayer's taxable income to be significantly reduced. As a result, the IRS assessed accuracy-related penalties.
The couple decided to appeal the penalties in Tax Court. At trial, the wife said that they consistently filled out their tax returns using this software and she consistently confused capital gains and losses with ordinary income and expenses. She believed the tax software would accurately prepare their return.
In rejecting the taxpayer's software misuse (even if unintentional or accidental) as a defense to the penalties, the Tax Court noted that "tax preparation software is only as good as the information one inputs into it." Relying on a tax professional's advice can establish reasonable cause and good faith to avoid a penalty, but the taxpayers did not rely on a professional - they self-prepared the returns.
The fact is that as a tax professional I actually do like tax & accounting softwares, some professionals might take issue with me saying that, but for the right situation they can do a great job. With that said as things get more complex, especially when we start talking about business income & expenses, these products start to lose some of their edge & qualifications. At this point I love them even more because they become a great referral sources for our firm! Cleaning up and dealing with the IRS correspondence that is created by mistakes made, even if unintentionally, can take a lot of time as well as can be costly in both tax professional cost as well as IRS penalties & interest.