ArticleA recent federal court decision, Huang v. United States,[1] offers important guidance for U.S. persons who have received large gifts from foreign persons, and failed to timely file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The decision is notable because the Court allowed the taxpayer’s “reasonable cause” defense (i.e., reliance on consumer tax preparation software) to proceed to the merits, signaling judicial willingness to scrutinize the IRS’s rigid penalty enforcement posture in this area.
Background: Form 3520 and Section 6039F Penalties
Under Internal Revenue Code Section 6039F, U.S. persons who receive gifts or bequests exceeding $100,000 from nonresident alien individuals or foreign estates in a given tax year must report the gift on Form 3520. Failure to timely file triggers a penalty of 5% of the amount of the unreported foreign gift for each month the failure continues, capped at 25%. The penalty applies unless the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.
Historically, the IRS automatically assessed these penalties upon receiving a late-filed Form 3520, requiring taxpayers to bear the burden of challenging the penalty after the fact (i.e., even when they submitted reasonable cause explanations alongside their filings). This approach was modified in late 2024, when IRS Commissioner Daniel Werfel announced that the IRS would begin reviewing reasonable cause statements before assessing penalties for late-filed Forms 3520. While this was a welcome administrative change, the Huang decision demonstrates that disputes over what constitutes “reasonable cause” continue to play out in litigation.
The Huang Case
The plaintiff, Ms. Jiaxing Huang, received substantial gifts from her nonresident alien parents in 2015 and 2016 to help her relocate permanently to the United States, and purchase a home. Ms. Huang used TurboTax to prepare her tax returns for those years. According to her complaint, TurboTax affirmatively advised users that recipients of foreign gifts do not need to report them (i.e., reporting was required by the gift-giver). Relying on this advice, Ms. Huang did not file Form 3520.
In 2018, Ms. Huang learned of her obligation and promptly filed the required Forms 3520 for both years. The IRS responded by automatically assessing penalties totaling over $91,000. Following an administrative appeal, the IRS abated a significant portion of the penalties (the agency’s resolution apparently having considered the potential “hazards of litigation”), but sustained approximately $36,500 in penalties on the basis that Ms. Huang failed to demonstrate reasonable cause. She paid the remaining penalties, filed a refund claim, and subsequently brought suit.
The Court’s Ruling
Ms. Huang claimed, among other things, that she had reasonable cause for the late filings. The Court denied the government’s motion to dismiss with respect to that claim, holding that Ms. Huang’s allegations (i.e., her reliance on TurboTax’s affirmative, and allegedly incorrect advice, her inexperience, and the complexity of international reporting rules) were sufficient at the pleading stage to state a plausible reasonable cause defense. The Court noted that reliance on tax preparation software is analogous to reliance on a “competent professional,” citing the Tax Court’s earlier recognition in Olsen v. Commissioner[2] that good-faith reliance on tax software can support a reasonable cause defense.
Key Takeaways and Practical Considerations
The Huang decision, while only at the motion-to-dismiss stage, carries several implications for practitioners and their clients:
- Reliance on software may constitute reasonable cause;
- Document everything;
- Raise all arguments at the administrative level; and
- Take prompt remedial action.
Conclusion
The Form 3520 foreign gift reporting rules remain a trap for the unwary, but both the IRS’s recent policy change and the Court’s reasoning in Huang suggest that good-faith compliance efforts are receiving more favorable treatment. We encourage clients who have received large gifts or bequests from foreign persons to consider their reporting obligations carefully, and consult with experienced tax counsel who (i) understand the nuanced reporting and compliance requirements (i.e., proper, as well as corrective filings); (ii) can identify potential exposure; and if necessary (iii) can advise with respect to penalty abatement opportunities and procedures (including the need for a carefully crafted reasonable cause explanation).
[1]Huang v. United States, 135 AFTR 2d. 2025-1737 (N.D. Cal. May 28, 2025).
[2]Olsen v. Commissioner, No. 11658-10S, 2011 WL 5885082.