IRS Attacks Another Form 3520 Turbo Tax Reasonable Cause Defense

The IRS continues to take an aggressive approach concerning reasonable cause relief associated with late international information returns.  More recently, these attacks have centered on arguments that taxpayers do not have reasonable cause where they rely solely on tax preparation software (e.g., TurboTax) to advise them of the reporting obligation.  Last year, in Huang v. United States, No. 3:24-cv-062998-RS (N.D. Cal.), a taxpayer successfully convinced a federal court, at least at the motion to dismiss stage, that her late-filed Forms 3520 should be excused due to her reliance on TurboTax.  That case remains pending.  According to a more recent filing in Zhang v. IRS, No. 3:24-cv-08210 (N.D. Cal.), the government remains undeterred after Huang in challenging reasonable cause defenses based on TurboTax.   

Background Facts

Zhang was born in China and graduated from a Chinese college with a background in accounting.  She later moved to the United States to obtain a master’s degree in accounting.  Although she moved back to China after graduation, she successfully acquired a certified public accountant’s (CPA) license in 2015. 

Shortly thereafter, Zhang married another Chinese citizen who resided in the United States.  After the marriage, Zhang relocated permanently to the United States in 2017. 

As is customary under Chinese traditions, Zhang received significant wedding gifts from her parents, grandparents, and uncles in China.  In total, she received $287,108 of foreign gifts in 2017. 

In early 2018, Zhang prepared her and her husband’s 2017 income tax return.  Because Zhang had never prepared a U.S. income tax return, she relied on TurboTax software.  As conceded in the government’s motion for summary judgment, discussed later in this article, “TurboTax is one of, if not the most, widely used consumer return-preparation software in the United States.”

In their 2017 joint return, Zhang reported on Schedule B that she had a financial interest in or signature authority over foreign accounts.  Because TurboTax does not prepare FBARs, Zhang prepared and filed a timely FBAR for 2017 outside of the TurboTax software. 

Zhang discovered the missed Form 3520 filing in October 2018.  Shortly after reading an accounting article that mentioned the reporting obligation, she confirmed with a CPA friend that she had missed the Form 3520 deadline.  Zhang prepared a Form 3520 in October 2018 and filed it with the IRS. 

Upon receipt, the IRS assessed a late Form 3520 penalty against Zhang in the amount of $71,777 (25% of $287,108).  Zhang appealed the penalty determination to the IRS Independent Office of Appeals, which agreed to reduce the penalty by 20%.  Zhang paid the balance and filed a refund claim against the United States in the United States District Court for the Northern District of California.  

Government’s Motion for Summary Judgment

The government filed a motion for summary judgment on June 25, 2026.  Relevant to Zhang’s reasonable cause defense, the motion contends:  (i) Zhang cannot show reasonable cause because TurboTax provided her with no tax advice concerning the Form 3520, (ii) it was unreasonable for Zhang to rely on TurboTax for an uncommon foreign reporting obligation, and (iii) other facts and circumstances show that Zhang, a CPA, did not exercise ordinary business care and prudence. 

Unsurprisingly, the government’s motion devotes significant discussions to the Supreme Court’s seminal decision in U.S. v. Boyle, 469 U.S. 241 (1985).  In that case, the Supreme Court concluded that taxpayers lack reasonable cause for defense of a late filing penalty where they blindly rely on a third party to file the return by the filing deadline.  However, the Supreme Court in Boyle distinguished this blind reliance from circumstances in which taxpayers rely on third parties for substantive tax advice concerning the filing deadline, which may constitute reasonable cause. 

According to the government, Zhang does not meet the reliance defense because TurboTax never provided her tax advice regarding the Form 3520 filing obligation.  In support, the government cites to deposition testimony from an Intuit corporate representative (the parent company of TurboTax) who acknowledged that TurboTax does not prepare Forms 3520 and therefore does not ask any questions associated with the preparation of the information return. 

Because TurboTax does not prepare Forms 3520, the motion further contends that Zhang’s own negligence contributed to the late filing.  In this regard, the motion argues that Zhang, a CPA, should have conducted her own independent research to confirm whether TurboTax was capable of preparing the form based on her “uncommon financial situation,” i.e., the receipt of substantial foreign gifts in 2017.

Significantly, the government’s motion also devotes several pages to a discussion on how Zhang could have discovered the filing requirement.  According to the government, a simple Google search would have alerted her to the information return with numerous IRS online resources and third-party articles devoted to the subject.   

Analysis

The government’s litigation posture in Zhang is unfortunate, particularly for taxpayers who (like Zhang) first relocate to the United States.  In many of these instances, taxpayers are reasonably unaware of the panoply of international information returns that must be filed upon obtaining U.S. person status (i.e., U.S. citizen, green-card holder, or U.S. residency under the substantial presence test).  Because the receipt of gifts or inheritance (foreign or domestic) is generally not a taxable event under U.S. income tax principles, the imposition of significant penalties for merely not filing an information return seems unjust and unfair. 

Moreover, the government’s reliance on Boyle is outdated and distinguishable.  When Boyle was decided in 1985, taxpayers were not relying on tax software to prepare their income tax returns.  Therefore, Boyle’s discussion concerning the requirement of federal tax advice to meet reasonable cause necessarily hinged on receiving that advice from a human person and not a computer.  In its motion, the government conceded that TurboTax is widely used by taxpayers to ensure compliance with the federal income tax laws.  Given its ubiquitous use, wouldn’t it also be reasonable to assume that taxpayers who first relocate to the United States sensibly believe that TurboTax will adequately inform them of all tax return obligations including Form 3520?

The government also misses the mark to some extent based on policy concerns.  Zhang admittedly missed the Form 3520 filing deadline, but she also came forward voluntarily to file the information return notwithstanding the potential penalties.  To the extent the government takes a hard stance against these taxpayers, the government undoubtedly misses out on other taxpayer information return filings as those taxpayers choose not to regain compliance by filing late due to the very real threat of penalties.  Indeed, in its motion, the government starts off with an assertion that the information return requirements are necessary so that the government may learn of abusive international transactions. 

As things stand now, taxpayers who miss a Form 3520 filing deadline must exercise caution when attempting to regain compliance through a late filing.  Prior to October 2024, the IRS automatically assessed late-filing penalties for Form 3520.  But under current procedures, the IRS has suggested that it reviews reasonable cause statements submitted with the late information returns prior to assessing penalties.  Taxpayers can substantially improve their likelihood of penalty abatement by submitting a strong reasonable cause statement that clearly explains the relevant facts and circumstances and supporting law that warrants relief.  If the IRS refuses to grant relief based on the reasonable cause statement, taxpayers should be mindful that they have other options such as challenging the penalty determination through the IRS Independent Office of Appeals or in federal litigation, if necessary. 

If you have any questions about this blog post or another tax-related topic, please feel free to contact me at 214-749-2434 or mroberts@meadowscollier.com.