Admit it, you Google for tax advice. You might have even Googled to find me (Google seems to like me now that they no longer think I’m a porn site). But you can take Google too far… Just ask Kenneth and Trudi Woodard.
The Woodards filed a joint federal income tax return for the 2004 tax year. On that return, they failed to include $150,000 in distributions from IRAs in the name of Kenneth Woodard. The IRS subsequently assessed the Woodards a $27,606 deficiency and a $5,521 accuracy-related penalty (ouch). Mr. and Mrs. Woodard appealed the penalty, representing themselves in the process.
The facts weren’t in dispute. Basically, in 2004, Mr. Woodard withdrew $150,000 from various Vanguard retirements accounts to satisfy some outstanding loans. Mrs. Woodard didn’t know about any of this.
Mr. Woodard knew a little something about money. He had an MBA from Harvard and he previously earned a CPA license. And with a little bit of knowledge in hand, he claims that did what many of us would do: he searched the internet. Using information that he found via Google, he believed he thought he had a self-directed IRA and that he intended to reinvest the $100,000 in private mortgages. He eventually conceded that the funds were taxable but argued that the accuracy-related penalty shouldn’t apply to him because he thought “that his research on the Internet using the Google search engine provided him with reasonable cause for the position he took when filing his 2004 Federal income tax return.”
Mr. Woodard brought up this “forgive me for Googling” argument because relief from accuracy-related penalties can be granted in certain circumstances. For example, relying on a tax pro for tax advice may be sufficient so long as you use “ordinary business care and prudence.” What constitutes ordinary business care and prudence may vary but more or less, I’d advise you to consider the “laugh tax” – can you make the argument with a straight face?
Under the circumstances, it didn’t appear that Mr. Woodard used ordinary care and prudence. Adding to his problems, Mr. Woodard did not provide the links that he used (I can assure you, they weren’t from taxgirl.com!). With this in mind, the court found:
Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. Accordingly, we cannot conclude that Mr. Woodard exercised ordinary business care and prudence in selecting and relying upon the information he found on line.
Interestingly, the Woodards divorced in 2009. As I was researching the case, I was going to make a joke about Mr. Woodard being in the dog house for his error – but now I think it’s a little tacky (although apparently true). Trudi Woodard subsequently filed for, and received, Innocent Spouse Relief.
There are a few lessons to be learned here:
- Be nosy. While it’s true that the now ex-Mrs. Woodard was eventually granted complete relief, that is often a difficult argument to make. Know what your spouse is up to if you’re signing a joint return.
- Be diligent. Don’t completely rely on the internet for important tax decisions. A case can turn on facts and circumstances – that’s why I advise you to consult with a tax pro if you have questions. The internet can be a great resource as a starting place but the follow-up is all on you.
- Be meticulous. When you get advice, write it down or ask your tax pro to put it in writing. Keep it with your tax records.
- Be smart. You can figure out this last one for yourself.
It’s Fix the Tax Code Friday! Yesterday, I blogged about NC’s efforts to woo Apple and Google to the Tarheel state by passing corporate tax breaks directed at each of them. This is nothing new. In my own state of Pennsylvania, a new film tax credit is being touted in an effort to bring more filmmakers to the area. Similar programs have also been created in parts of Canada, like Vancouver, to attract moviemakers up the coast and away from California.
And sometimes the credits are not so much about attracting a company as keeping it from going (see almost every professional sports team stadium in the US).
The idea behind these tax credits is that bringing industry will create jobs. Those jobs will result in the need for more local services. And voila, it’s a ripple effect. But that doesn’t always happen. And when it does happen, it’s not always at the level that the lawmakers had hoped.
But sometimes it does work.
So today’s “Fix the Tax Code Friday” question is:
Are tax breaks targeted towards keeping or attracting certain companies worth it? And if so, does it matter that the individual taxpayers may have to pick up the slack through increased tax rates or decreased services in the short term if the plan is for increased revenue to the state (or locality) in the long term?
In a tough economy – when a state can’t yet pay its bills – you’d think the fiscal plan for the future would be conservative. Not so, North Carolina. Despite massive budget woes, the state legislature has agreed to special tax breaks designed to bring Apple to the Tarheel State.
Apple, the company that makes Mac computers (including the very MacBook I’m typing this blog entry on), the ubiquitous iPods and the iPhones that I would buy if they hadn’t struck a silly deal with AT&T, has confirmed that it will build a data warehouse “somewhere” in North Carolina. The deal requires Apple to build the warehouse outside of the twenty most wealthy counties in the state. This means no to counties like Wake and Mecklenberg; most of the Research Triangle Park and the Piedmont will be excluded.
The deal wasn’t unexpected, as North Carolina worked hard to position itself to get the business – even passing a massive tax break specifically targeted to Apple.
So what does this get the state? Free computers for its cash-strapped schools? New iPods to support the struggling arts programs? Nope, it gets – wait for it – the guarantee of 50 jobs over 9 years.
Whew. Just let that sink it. Fifty whole jobs.
Of course, Governor Perdue of North Carolina (no chicken jokes, please) believes that an additional 250 jobs could be attributed to the data center. Those jobs would be related to providing services for the whopping 50 new employees.
In defense of their position, Commerce Secretary Crisco was ready with his obligatory crystal-ball reading. “Technology-driven projects like this may bring fewer overall jobs than traditional industry, but they have a tremendous economic impact through locally purchased goods and services.”
In other words, they’re hoping that it brings in more cash.
How much is it costing the state? Initially, about $46 million in foregone tax revenue over the next ten years. If Apple sticks it out in NC for at least 30 years, the company could save more than $300 million on corporate taxes. That’s more than the tax package the state offered Google just a couple of years ago to open its data center in western NC: Google will only save $260 million over 30 years.
But hey, look what Google has brought to NC… *sounds of crickets chirping*
(At least Apple will make NC look cool.)
As you can imagine, not everyone is excited about the new tax breaks. A law suit has already been filed against the state with respect to Google – expect more of the same in response to the Apple package. While those companies get tax breaks, NC taxpayers are being asked to cough up a little more out of their own pockets in order to meet the $4.6 billion budget gap looming on the horizon.
I generally think encouraging investment is a good thing. And as a former North Carolina girl, I understand that the state could use additional revenue. Unemployment rates are increasing as companies move their manufacturing jobs out of the state (my dad was a victim of DuPont’s flight south to Mexico) and agriculture increasingly becomes outsourced (yes, it’s true that we actually import a significant amount of food in the US). Giving companies incentives to move to North Carolina may be good for the state. May.
But, in this case, the timing and scale seem a little off. This is the same state that threatened to delay tax refunds as well as raise taxes and fees to meet the budget in 2008 – in a year that saw the poverty rate in the state increase. People in the state are hurting. And yes, I get that people need industry and investment to survive. But the statistics since 2000 have not demonstrated a correlation between increased spending for investment and increased prosperity for the people of the state.
The investment in Google in the western part of the state hasn’t provided a significant bump in the economy. Although the company indicated that it might hire as many as 200 employees, a year after the deal was finalized, Business Week reported that Google had hired 1 full time employee. Just one.
How ’bout them apples?
Update: More from the Tax Update Blog with a must see illustration!
Earlier in the week, I received an email about spam and I just wanted to take a moment or two to re-emphasize my thoughts on spam and your privacy.
Like most bloggers, I use a service to send out feeds via RSS and email. The most popular service is Feedburner, which is what I use at taxgirl.com. Feedburner was acquired last year by Google in what is clearly Google’s attempt to take over the world. You can read Feedburner/Google’s privacy policy here. More or less, Google requires opt-in consent for third party email, so you won’t get on a mailing list by simply providing your email for a feed like mine. In other words, subscribing to my email feed does not equal solicitations!
I’ve noticed an uptick in spam on all of my accounts this spring – from gmail and mac (both of which normally have great filters) to erblaw and taxgirl. Estimates are that more than 80% of all email received is spam. Nice, huh?
I just wanted to put your mind at ease that your email address is safe with me – I don’t do a thing with it – and with Feedburner. Unfortunately, spammers exist and they will spoof, steal headers, phish, etc. as much as they can until they are stopped. I hate it, too. Trust me. You can read more about how much I hate spam here.
