Results of Google Search Not Reasonable Cause for Failure to Report Income

A former CPA’s attempt to establish a “self-directed” IRA failed to comply with the requirements of the law, subjecting the distribution he received from his Vanguard IRA to tax―a matter not in question in this case. But in the case of Woodard v. Commissioner, TC Summary Opinion 2009-150, the former CPA argued that he should not be liable for an accuracy-related penalty on that distribution.

Mr. Woodard, a former CPA who had worked as a computer programmer for 20 years, apparently let his tax research skills and auditor’s professional skepticism lapse in addition to his CPA certificate. Mr. Woodard decided to take $100,000 out of his Vanguard IRA and instead put it into a “self-directed IRA” investing in mortgages. He did so by depositing the funds directly into a personal account with other non-IRA funds, and then eventually transferring them to Amanda M. Mahn, supposedly secured by a first lien on property she held.

It turned out that Ms. Mahn already had a mortgage on the property that had not been recorded and that she altered a warranty deed to obtain the funds from Mr. Woodword. When the original lender discovered these facts, it filed suit and, eventually, the mortgage that Mr. Woodard had funded was held to be void. Ms. Mahn was convicted of bank fraud and, not surprisingly, Mr. Woodard saw no more of the $100,000.

He claimed he determined how to set up a self-directed IRA by consulting information he found on various websites. However, he could not recall the specific sites he had visited, nor the qualifications of those who had authored such sites. But he claimed he should not be held liable because he intended to keep the funds in a retirement account, the area of law was complex and he ended up with no benefit from the funds in any event as he lost to them to Ms. Mahn.

The Tax Court disagreed. It noted that it could not determine the reasonableness of Mr. Woodard’s reliance on the materials uncovered in his Google search when Mr. Woodard could not produce such materials. The fact that Mr. Woodard had been a CPA was considered in making the determination, as the court noted:

We recognize that petitioner had not worked as an accountant for years before filing the 2004 return, but his accounting degree, M.B.A., and C.P.A. training, no matter how stale, undoubtedly taught him what sources could be relied upon as definitive; such as, for example, the Internal Revenue Code and the income tax regulations, both of which are readily available on the Internet.

The Court held that he had demonstrated no reasonable cause for failing to report the income and therefore was liable for the accuracy related penalty.