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SOMETIMES IT'S NOT THE SOFTWARE

March 31, 2005

Tax Analysts reports that the IRS has given a taxpayer extra time to make a tax return election that he says he missed because he used TurboTax software.

The anonymous taxpayer had $270,000 of investment interest expense. He also apparently had capital gains exceeding that amount. Investment interest is deductible only to the extent of your investment income; capital gains aren't counted as investment income unless you make a special election to have your capital gains taxed at ordinary income rates.

Many taxpayers skip this election because unused investment interest deductions carry forward; if you have enough interest income, you will be able to use the extra deductions without losing the benefit of capital gain tax rates.

The company that makes TurboTax says that the taxpayer would have been notified of the election if he used the software properly, and there's no reason to doubt it.

Still, one has to wonder about a guy with income and deductions in that range not at least checking first with a tax professional. He had to get a private letter ruling, for which the IRS filing fee exceeds $5,000. He also apparently paid somebody to prepare the ruling request for him, which is probably another $2,000 or more.

Another taxpayer learns the hard way: nothing costs more than cheap tax advice.

UPDATE: The Tax Prof has a link to the complete Tax Analysts report (the link at the top of this post is to a summary)

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