It is a good idea to look over your tax return before
hitting the “Send” button.
Why? Because things happen. Some prep software approximates a black box. It asks questions, you provide numbers and together they go
someplace hidden from the eyes of man. Granted, most times the result is just
fine. But there are those times ….
Let’s talk about Candice and Randall Busch.
They were preparing their 2017 tax return using a
popular tax software, which shall remain nameless. They reached the point where the
software wanted mortgage interest. Easy enough. They entered “21,201.25.”
So?
The software did not accept pennies.
This means that 21,201.25 went in as 2,120,125.
That, folks, is a lot of mortgage interest.
BTW one cannot deduct that much mortgage interest on a
principal residence. Why? The mortgage interest deduction had been capped for
many years as interest paid on the first $1 million of indebtedness. Let’s say
someone paid $62,000 on $2 million of principal residence debt. The tax
preparer should have caught this and limited the deduction as follows:
62,000 *
1,000,000/2,000,000 = 32,000
The $1,000,000 cap was further reduced to $750,000 in
2017.
The tax Code has no intention of allowing an unlimited
deduction for this type of interest.
Is it ever possible to get past the $1,000,000 (or
$750,000) limitation? Well, yes, and it happens all the time. Borrow money on
commercial real estate (say a strip mall) and there is no limitation. Borrow
money on residential real estate - as long as it is not a principal residence -
and there is no limitation. An example would be an apartment complex. The limitation we are discussing is personal
and involves debt on your house.
Back to the Busch’s.
They sound like average folk.
That mistake made their tax refund go through the roof.
They liked that answer.
They sent in the return.
The IRS flagged the return, which was not hard to do
when the interest deduction was larger than the allowed debt for purposes of calculating
the deduction itself.
The IRS wanted the excess refund back.
The Busch’s would do that.
Then the IRS also wanted a heavy penalty (the
accuracy-related penalty, for the home gamers).
The Busch’s said they wouldn’t do that. An exception
to the accuracy-related penalty is reasonable cause, and they had reasonable
cause all day long and three times on the weekend.
And what was that reasonable cause, asked the IRS.
It was an “honest mistake,” they replied.
Off to Tax Court they went.
The Busch’s represented themselves, the lingo for
which is “pro se.”
The Court acknowledged that mistakes happen. One can
get distracted and enter a wrong number, one can transpose, one can get
surprised by what a software might do.
But that is not the mistake here.
The mistake here was failing to review the return
before sending.
The biggest number on the return – literally – was
that interest deduction. It hung over the form like a Big Texan 72-ounce steak
on a normal-sized dinner plate.
Here is the Court:
A careful review of the return after it was prepared would most certainly have caught the error; actually, even as little as a quick glance at the return probably would have done so.”
The Busch’s got stuck with the penalty.
