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You Can’t Check “Prepared by Google” on Your Return

September 29, 2009 · 13 comments

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:

  1. 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.
  2. 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.
  3. 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.
  4. Be smart. You can figure out this last one for yourself.

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{ 8 comments… read them below or add one }

1 Ralph Lee September 29, 2009 at 4:23 pm

I hope they didn’t get divorced over a $5k accuracy penalty. That would be quite the sad story.

2 Kelly September 29, 2009 at 4:28 pm

I’m guessing there’s more to it. Mr. Woodard was involved in a lot of financial wheeling and dealing – and according to testimony, Mrs. Woodard wasn’t in the know. I suspect this was just the tip of the iceberg.

3 Rebecca September 30, 2009 at 5:54 am

Is it Woodard or Woodward? My partner’s last name is Woodward, people get the two mixed up a lot.

4 Kelly September 30, 2009 at 5:57 am

Woodard – thanks for pointing that out.

5 David Wilkenfeld September 30, 2009 at 10:00 am

Well, we’ve come a long way with modern technology. In the old days, people used to blame their tax errors on alien signals from space.

6 Rob September 30, 2009 at 2:55 pm

Reminds me of the US citizen living abroad who blamed his failure to file US tax returns for twenty-five years on the IRS’ UK website that purportedly stated there was no need to file. Of course, we could never find that particular page. Gotta give him an “A” for creativity though.

7 Liz Sweigart September 30, 2009 at 2:56 pm

Wait… does this mean that finding tax advisors on Craigslist might be a bad idea too???

8 Polprav October 15, 2009 at 9:45 pm

Hello from Russia!
Can I quote a post in your blog with the link to you?

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