In Robert L. Bernard et ux. (T.C. Memo. 2012-221) instead of correctly reporting the IRA distributions on their tax return, the taxpayers mischaracterized $99,334.82 of the distributions as proceeds of sale, claimed a combined basis of $49,054, and reported $50,280.82 as long-term capital gains and agreed they failed to report certain additional distributions.
When the 2007 return was prepared, the taxpayer had misfiled or misplaced the information returns reporting their income. The taxpayers had received notice that the IRS was challenging their treatment of IRA distributions on tax returns for earlier years. The taxpayers obtained an extension of time to file the 2007 return because he was suffering from depression, confusion, and memory loss. He was hospitalized in May 2008 during the period of extension for filing the 2007 return.
The taxpayers prepared the return themselves using commercial software. They advanced several arguments as to why they shouldn't be taxed on the full amount of the distributions, but Court rejected the arguments. The IRS also claimed the taxpayers were liable for the accuracy-related penalty. The taxpayers relied on his health problems as an excuse for the numerous errors on the return.
The Court noted that the taxpayers confused authorities describing a serious medical condition as an excuse for late filing of a return with those describing reasonable cause sufficient to avoid a penalty under Section 6662(a). The Court viewed the taxpayers' failure to seek competent help in preparing the return as negligence and allowed the penalty.(emphasis mine)
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