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.
- Ask The Taxgirl: Google+ Hangout Edition
- Over Hill, Over Google.
- Eleven Tax Myths Debunked
- Ask the taxgirl: Do I need my 401(k) statement?
- My Best Tax Advice Ever, Part III: Make Friends With a Tax Pro