Ask The California Employment Tax And Payroll Tax Attorney – The Office Of Tax Appeals (OTA) Rules That Faulty Tax Software Is Not Professional Tax Advice – The Penalties Stick

By Robert S. Schriebman
2021

Introduction

The Office of Tax Appeals (OTA) ruled that faulty tax software is not the same as professional tax advice – the OTA sticks it to the taxpayer one more time! On April 14, 2021 the OTA issued its decision in the Mauritzson case. In the Matter of Appeal of: R. Mauritzson And C. Mauritzson OTA Case No. 20015672.

This article will discuss the Mauritzson case and the OTA’s decision not to abate FTB late filing and late payment penalties for failure to timely file a California income tax return. The OTA ruled that faulty tax preparation software did not constitute erroneous professional tax advice. This is the first case of its kind to be brought before the OTA.

The Mauritzson Case

 The Mauritzsons owned and operated an Idaho LLC known as “RM”. The Mauritzsons were also residents of Idaho. There are no issues concerning California residency. In 2017, RM sold real property located in California but did not file a California return. The Mauritzsons filed an Idaho return but did not file a California nonresident income tax return. The FTB notified them that a return was required. After waiting over one year they finally filed a California nonresident return. The FTB imposed a late-filing penalty of over $1600 plus interest. The penalty was paid and a claim for refund filed. The FTB refused to abate the penalty so the Mauritzsons filed an appeal with the OTA.

The Mauritzsons argued that they relied on tax preparation software and the software did not instruct them to file a 2017 California income tax return. In fact, the software informed them that no California return was required. They argued that reliance on the software was reasonable cause for abating the late penalties, the same as relying on the advice of an account or attorney who advised them it was unnecessary to file a return-even when such advice turned out to have been mistaken. Their authority was the U.S. Supreme Court’s Boyle decision. United Sates V. Boyle (19856) 469 U.S. 241, 250.

 The Mauritzsons explained that after imputing the correct information, the tax preparation software informed them that they did not need to file a California nonresident tax return. Instead, the software instructed them to only file an Idaho state return.

The OTA’s Decision

 The OTA had to refer to the U.S. Tax Court because there were no California cases on point. The Tax Court had an opportunity to decide this issue in the Bunney case.  Bunney V. Commissioner (2000) 114 T.C. 259. The Tax Court observed that tax preparation software is only as good as the information one inputs into it. A taxpayer must provide evidence that demonstrates that the software had a programming flaw or an instructional error. Tax preparation software does not, by itself, constitute tax advice that can be relied upon to establish reasonable cause for the abatement of penalties.

Taking a page from the Tax Court, the OTA ruled that the Mauritzsons were not able to prove that the no-filing instruction was truly erroneous and did not result in their own error when inputting their information into the tax preparation software.

Conclusion

The Mauritzsons may have lost their case because of GIGO-garbage in-garbage out. What really troubled me in reading this case was the OTA’s statement that they did not provide any evidence or information that the tax preparation software had any programming flaws. How where they supposed to do that? The erroneous instruction speaks for itself. This seems to be a harsh and unreasonable demand by the OTA, but, then again, the OTA seems to reach far in denying a taxpayer the benefit of the doubt.

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 Robert Schriebman has a successful practice in the Rolling Hills

Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.  Mr. Schriebman is in private practice.  He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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