Can the IRS Penalize You for Following Incorrect Tax Software Advice? A 2025 Federal Court Case
Huang v. United States — May 28, 2025
Millions of Americans use tax preparation software to prepare their income tax returns.
But what happens when the software gives you incorrect advice, you follow that advice, and the IRS imposes a substantial penalty?
Should you have to pay the penalty even though you believed you were doing everything correctly?
That is the question raised in a 2025 federal court case, Huang v. United States.
What Happened?
Jiaxing Huang received money as gifts from her parents, who lived outside the United States.
She used TurboTax to prepare her taxes.
According to Huang, the software advised her that a person receiving a gift did not need to report it because reporting was the responsibility of the person giving the gift.
She followed that advice.
But there was a problem.
Under federal tax law, a U.S. person who receives more than $100,000 in gifts from foreign individuals during a year generally must report those gifts to the IRS on Form 3520, even though the gifts themselves generally are not taxable income.
Huang did not file the required forms on time.
When she discovered the requirement, she promptly filed the missing forms.
Nevertheless, the IRS imposed approximately $91,000 in penalties.
After additional proceedings and adjustments, approximately $36,500 in penalties remained.
Huang paid the remaining penalties and went to federal court seeking a refund.
The Important Difference: Tax-Free Does Not Always Mean Reporting-Free
Many taxpayers assume that if money is not taxable, they do not have to tell the IRS about it.
That is not always correct.
Consider this simple example:
| Question | Gift from U.S. parents | Gift from foreign parents |
| You receive $200,000 as a genuine gift. Is it generally taxable income to you? | No | No |
| Must you generally report receiving the gift on Form 3520? | No | Yes, if you are a U.S. person and the applicable foreign-gift reporting rules are met |
| Can failing to file the required Form 3520 trigger penalties? | Not applicable | Yes |
The lesson is simple:
You can owe no income tax on a gift and still face substantial penalties for failing to report it.
What Did the Taxpayer Argue?
Huang did not dispute that the forms had been filed late.
Instead, she argued that she had a reasonable explanation for the failure.
Her position was essentially:
“I used tax preparation software, followed the instructions it gave me, and corrected the mistake as soon as I discovered it.”
Federal tax law permits relief from certain penalties when the taxpayer establishes reasonable cause.
In ordinary language, reasonable cause means that the taxpayer had a legally sufficient explanation for the failure, considering the particular facts and circumstances.
What Did the Federal Court Decide?
On May 28, 2025, the U.S. District Court for the Northern District of California ruled that Huang’s reasonable-cause claim could proceed.
The court considered several important circumstances that Huang alleged:
- Incorrect advice: TurboTax allegedly affirmatively advised her that she did not need to report the gifts.
- Lack of specialized knowledge: She was unfamiliar with the foreign-gift reporting rules.
- Complex tax requirements: The reporting obligation was not necessarily obvious to an ordinary taxpayer.
- Prompt correction: She filed the missing forms after discovering the requirement.
The court concluded that these allegations, if proven, could support a reasonable-cause defense.
But there is an important limitation.
The court did not decide that Huang was entitled to have her penalties cancelled.
It decided only that her allegations were sufficient for her reasonable-cause claim to continue in court.
Does This Mean Tax Software Mistakes Automatically Excuse IRS Penalties?
No.
There is an important difference between these two situations:
| Situation #1 | Situation #2 |
| Tax software simply does not mention a reporting requirement. | Tax software affirmatively gives incorrect advice that reporting is unnecessary. |
| The taxpayer assumes there is nothing else to file. | The taxpayer relies on specific incorrect guidance. |
| The taxpayer may have difficulty establishing reasonable cause based on the omission alone. | The incorrect guidance, combined with other facts, may strengthen a reasonable-cause defense. |
Neither situation automatically eliminates an IRS penalty.
The taxpayer’s actions, the information available, the nature of the mistake, and the efforts made to correct it can all matter.
What Should Taxpayers Learn From This Case?
The practical lessons are straightforward.
First: Do not assume that money is exempt from IRS reporting merely because it is not taxable income.
Second: Tax preparation software can be useful, but it may not identify every specialized filing requirement.
Third: If you discover a reporting mistake, investigate and correct it promptly. Delaying correction can make a penalty dispute more difficult.
Fourth: If the IRS imposes a penalty, do not automatically assume that the penalty is legally unavoidable. Depending on the circumstances, a reasonable-cause defense may be available.
Why Having Both a CPA and Tax Attorney Can Matter
As both a CPA and Tax Attorney, I approach IRS penalty disputes from two perspectives.
As a CPA, I can examine the underlying tax reporting requirements, determine what should have been filed, and analyze how the mistake occurred.
As a Tax Attorney, I can evaluate whether the facts support a legal defense, examine the applicable tax law, and represent taxpayers in appropriate IRS administrative proceedings and federal tax litigation, subject to applicable court requirements.
A significant IRS penalty is not necessarily the end of the matter.
The important question is whether the penalty is legally justified under the taxpayer’s particular circumstances.
The Bottom Line
Huang v. United States teaches that a taxpayer who follows incorrect tax-software advice may have a reasonable-cause defense against IRS penalties.
But the taxpayer must establish that defense. Simply blaming the software is not enough.
The federal court allowed Huang to pursue her claim. It did not issue a final ruling cancelling her penalties.
For taxpayers facing significant IRS penalties, the distinction can be extremely important.
Case Reference: Huang v. United States, No. 24-cv-06298-RS (N.D. Cal., May 28, 2025).
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This article is for general educational purposes and does not constitute legal or tax advice. The availability of reasonable-cause relief depends on the applicable law and the specific facts of each case.