Over the last several years, many taxpayers have been going the do-it-yourself route when it comes to
tax preparation. While that may be a great option for many people, if you have an IRA or other retirement assets, you may want to consider sticking to your
trusty CPA who can provide accounting services beyond the do-it-yourself computer programs. In Tax Court case, Bernard v. C.I.R. (T.C. 2012) 104
T.C.M. (CCH) 136, a married couple failed to correctly
report their IRA distributions on their tax return. They used a
popular tax preparation software program but, unfortunately,
such programs cannot always determine whether or not the user is properly inputting data.
The petitioners in
this case
mischaracterized $99,334.82 of their IRA
distributions, incorrectly reporting them as proceeds of a sale and
longterm capital gains. They also failed to report six
additional IRA distributions totaling $26,637. The IRS
determined a deficiency of $44,643 and a section 6662 penalty of
$8,179. The case went to trial.
The petitioners received a deficiency notice from
the IRS but erroneously claimed that because capital gains
within their IRAs increased the value of those accounts,
they were entitled to report the IRA distributions
received as capital gains. Had the petitioners relied on the
professional advice of a certified public accountant and a
retirement distribution expert, they would not likely have
encountered
such problems. The Tax Court stated that:
“Petitioners did not rely on relevant authorities or competent tax
advisers or otherwise make reasonable efforts to assess their proper tax liability.”
The retired couple in this case learned a lesson the hard way that ended up costing them nearly $10,000
in penalties and an unknown amount in litigation costs.
Don’t forget they are also liable for the income tax owed
on the deficient amount of IRA distributions that should
have been
reported as ordinary income in the first place.
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