July 16, 2012 The Tax Lawyer

Tax Court Wrestles with “Geithner Defense” to Accuracy-Related Penalties

Vol. 65, No. 2 - Winter 2012

Conor F. Larkin

Abstract

    In 2010 the Tax Court rejected the so-called Geithner defense to accuracy-related penalties in several cases where taxpayers sought to avoid penalties by blaming their TurboTax software for understating their tax liability. Named for Treasury Secretary Timothy Geithner’s now famous failure to pay self-employment taxes while he worked at the International Monetary Fund (IMF), the Geithner defense against penalties is without basis in either the Code or case law. In Lam v. Commissioner , the first of the 2010 Tax Court cases analyzing the Geithner defense, the taxpayer admitted to not reading the instructions for using the Schedule C, and the court held that this failure contributed to her mischaracterizing income and losses from her real estate business when she used TurboTax. Then, in Parker v. Commissioner , the second of the 2010 Tax Court cases, a taxpayer who was an IMF employee (as Secretary Geithner had been) sought to avoid accuracy-related penalties after he discovered his tax returns had not included his self-employment taxes. The Tax Court found that his use of TurboTax to prepare those returns was no defense. Yet, after consistently rejecting Geithner defenses in 2010, the Tax Court in 2011 accepted that a taxpayer’s misuse of TurboTax was a defense to penalties in Olsen v. Commissioner .

    This Note will argue that, although the court likely reached the correct conclusion in these cases, its hostility to the fairness concerns advanced by the Lam and Parker taxpayers represents an alarming indifference to the Service’s disparate treatment of similarly situated taxpayers. The Tax Court’s acceptance of a Geithner defense in Olsen may compound these concerns about disparate treatment. Part I of this Note summarizes the applicable tax law and the example of Secretary Geithner. Part II discusses primarily the Tax Court’s ruling in Parker, its dismissal of the Geithner defense in Parker and in Lam , and its apparent reversal in Olsen . Part III shows why the Tax Court was correct to reject the defense in Parker and Lam for legal and policy reasons, and defends the decision in Olsen . Part IV critiques the court’s indifference to the taxpayers’ fairness concerns, discusses the inequity of allowing a Treasury Secretary to avoid accuracy-related penalties while holding ordinary taxpayers accountable for the same—or lesser—infractions, and questions the court’s insistence in Parker that a taxpayer’s post-filing actions to remedy a deficiency are irrelevant to the determination of good faith. Part V concludes with a suggested means of redressing the present inequity to ensure that taxpayers have valid incentives for understanding and complying with the Code.

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