The TurboTax Defense argues that good-faith reliance on tax software constitutes reasonable cause for non-compliance, excusing penalties. In my 2012 post, I discussed Au v. Commissioner (T.C. Memo 2010-78), where the Tax Court rejected this defense. The court required evidence of a specific software error and diligent taxpayer effort to determine correct tax liability—neither of which the Aus provided. I wrote:
That case involved the TurboTax tax preparation software, and this defense is often referred to as the 'TurboTax Defense.' In the Au’s case, the Court found that the taxpayers did not provide evidence of a mistake in the software instructions, nor of a thorough effort by the taxpayers to determine their correct tax liability. This seemingly leaves the door open to the successful use of the TurboTax Defense if a taxpayer can actually prove up a mistake in tax preparation software or its instructions.
This suggested a narrow path for success, contingent on proving software error. Huang tests this path.
Huang v. United States: Case Summary
In Huang v. United States (No. 24-cv-06298-RS), pro se taxpayer Jiaxing Huang faced $91,238.75 in IRS penalties for late-filed Forms 3520 (2015 and 2016). Huang received large gifts from her non-resident foreign parents to relocate to the U.S. and buy a home. IRC § 6039F requires U.S. persons to report foreign gifts over a specific threshold via Form 3520. Huang, using TurboTax, claimed the software advised that only gift-givers, not recipients, needed to report. Relying on this, she filed the forms late in 2018 after learning of the filing requirement. The IRS assessed penalties, which Huang challenged, citing reasonable cause.
The government moved to dismiss, arguing Huang’s reliance didn’t establish reasonable cause. The court disagreed, finding her allegations plausible enough to survive dismissal and proceed to discovery. This ruling marks a shift from prior skepticism toward the TurboTax Defense.
Key Rulings in Huang
The court’s decision rests on several points:
- Software as Professional Advice: Huang alleged TurboTax explicitly advised no reporting was needed for gift recipients. The court equated this to reliance on a “competent professional,” citing Olsen v. Commissioner (T.C. 2011), which recognized software reliance as potential reasonable cause.
- Reasonable Cause Factors: Ignorance of the law alone isn’t enough, but combined with Huang’s inexperience and the complexity of Form 3520, it may support her claim.
- Distinguishing Precedent: The government cited Spottiswood v. United States (N.D. Cal. 2018), where a similar defense failed. The court noted Spottiswood was decided at summary judgment, not dismissal, allowing Huang’s case to advance.
Evolution Since 2012
In 2012, I noted the TurboTax Defense’s slim chances, requiring proof of software error and taxpayer diligence. Huang lowers this bar at the dismissal stage, accepting plausible allegations of erroneous software advice as akin to professional guidance. This reflects growing judicial recognition of tax software’s role and the complexities of international reporting, contrasting with Au’s stricter stance.
Implications
- Stronger Defense: Taxpayers relying on software in good faith may avoid penalties, especially for complex forms. This benefits pro se filers or those without access to tax professionals.
- Discovery Hurdles: Huang must prove TurboTax’s incorrect advice and reasonable reliance in discovery, highlighting the need to document software interactions. It remains to be seen what additional evidence Huang will need to prevail, such as whether she will need to prove the correct input of gift amounts and the language of and the required specificity of the advice of the program.
- Software Accountability: If the defense gains traction, providers like Intuit may face pressure to improve guidance accuracy for niche areas.
- IRS Enforcement: The IRS’ aggressive penalty assessments for late international filings suggest taxpayers must verify requirements, even with software.
Related Cases
Huang aligns with Olsen (2011), supporting software reliance, but contrasts with Au (2010) and Spottiswood (2018), where defenses failed due to evidence or procedural issues.
Conclusion
Huang v. United States revitalizes the TurboTax Defense, moving it from a long shot to a viable argument, at least early in litigation. As I noted in 2012, proving software error could open the door to success. Huang steps through, leveraging alleged TurboTax misguidance to challenge penalties. While discovery will test her claims, the case underscores tax software’s growing influence and the need for careful documentation. Taxpayers and professionals should verify complex requirements and preserve evidence of software advice, as the TurboTax Defense reshapes reasonable cause in the digital era.
Sources:
- Huang v. United States, No. 3:24-cv-062998-RS (N.D. Cal. 5/28/2025)
- "TurboTax Defense Fail"
- Olsen v. Commissioner, 2011 WL 5885082 (T.C. 2011)
