Is Relying on Tax Preparation Software a Defense Against IRS Penalties? We May Soon Find Out

U.S. taxpayer Jiaxing Huang followed advice from TurboTax and was later issued IRS penalties that once reached $190,000 for failing to file IRS Form 3520. This form is required when U.S. taxpayers receive large gifts or bequests from individuals who live in other countries. Recently, the U.S. District Court for the Northern District of California dismissed the IRS’ motion to dismiss, allowing Huang the opportunity to plead her case in court.

The claim allowed to proceed relates to whether Huang’s reliance on TurboTax constituted “reasonable cause” for failing to timely file Form 3520. The case, Huang v. United States, highlights the difficulties taxpayers face when trying to abate penalties related to international informational returns and the importance of taxpayer’s documenting their compliance efforts.

Background: The Complex Trap of Form 3520

Under IRC Section 6039F, the failure to timely file Form 3520 can trigger significant penalties up to 25% of the unreported gift amount. These penalties are automatically assessed and can quickly spiral out of proportion to the underlying gift.

Huang received financial gifts from her non-U.S. parents in 2015 and 2016 to assist with a relocation and home purchase in the U.S. Following advice from TurboTax, the software she reasonably believed provided accurate guidance, she did not file Form 3520. When she learned of the oversight in 2018, she promptly filed the 2015 and 2016 forms. The IRS asserted automatic penalties for failing to timely file. She sought penalty abatement on reasonable cause grounds.

The IRS denied her penalty abatement request. What followed was a penalty assessment that more than doubled over time, peaked at nearly $190,000 and was later abated without a clear explanation. After paying the remaining penalties under protest, the taxpayer sued for a refund.

The Legal Question: Can Reliance on Tax Preparation Software Support a Reasonable Cause Penalty Abatement?

The IRS said no — arguing Huang had not relied on a competent professional or entered sufficient data into the software. The IRS moved to dismiss her claim on both jurisdictional and substantive grounds.

The court disagreed, at least in part, citing United States v. Boyle, 469 U.S. 241 (1985) and Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000), the court emphasized that reliance on professional advice can constitute reasonable cause if the taxpayer:

1. Relied on a competent professional
2. Provided that professional with complete and accurate information
3. Acted in good faith based on that advice

Importantly, the court noted that Huang was not a tax professional, the law in question is obscure and that she followed TurboTax’s explicit advice that she had no obligation to report the foreign gifts. The court found her assertions plausible and sufficient to survive the IRS’ motion to dismiss. Her case can now proceed to discovery and possibly trial.

Why This Matters: The Reasonable Cause Defense Is Not Dead

For years, the IRS has taken a rigid view of what qualifies as reasonable cause, especially when the taxpayer’s defense is based on ignorance of the law or reliance on tax software rather than a flesh-and-blood advisor. This case challenges that posture.

While TurboTax isn’t a licensed CPA or attorney, the court appeared open to the argument that software widely marketed as a “trusted” and “complete” tax solution might warrant some deference — at least when the taxpayer’s reliance was in good faith and the guidance was plainly misleading.

This ruling is consistent with prior Tax Court decisions such as Olsen v. Commissioner, T.C. Summ. Op. 2011-131 that suggest good-faith reliance on tax software can support reasonable cause, depending on the facts. It also highlights a growing judicial recognition of the difficulties average taxpayers face in navigating foreign information reporting requirements.

Final Thoughts

Huang v. United States does not change the law, but it reaffirms a principle that taxpayers should not forget: the reasonable cause defense is fact-intensive and should not be dismissed out of hand, especially in the foreign reporting context. As IRS penalty enforcement continues to increase, especially for automatic penalty assessments for Forms 3520, 3520-A, 5471 and 8938, this case may provide a roadmap for defending clients who act in good faith but still get caught in the trap.

It also raises a broader question: if the government encourages the use of tax software and penalizes taxpayers for following its advice, where should the line of liability be drawn? As courts continue to wrestle with this question, Huang stands as an important milestone.

Given the significant penalties associated with international tax reporting forms, we suggest all taxpayers seek the advice of a competent tax advisor rather than relying on generic software. Weaver’s international tax services team assists clients with such international tax reporting and compliance matters, so please contact us with questions about reasonable cause and international informational reporting forms. We are here to help.

Authored by Matthew Heberlein

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