When TurboTax Isn't Enough: What the Huang Case Teaches About Reasonable Cause

In an increasingly digital world, many taxpayers turn to tax preparation software like TurboTax to file their returns. However, the recent case of Huang v. United States (N.D. Cal. 2025) highlights the risks of relying solely on software—especially for taxpayers with international reporting obligations.

The Case in Brief

Jiaxing Huang, a U.S. taxpayer, received sizable monetary gifts from her non-resident parents in 2015 and 2016. Using TurboTax, she filed her tax returns but did not file Form 3520, which is required to report certain foreign gifts. TurboTax advised her that gifts did not need to be reported—a statement generally true for domestic gifts, but not for foreign-sourced gifts.

When Huang later discovered her reporting obligation, she promptly filed the missing Forms 3520, most likely as a “quiet disclosure” and not through the Streamline procedures. Despite her corrective action, the IRS assessed penalties exceeding $90,000. Huang sought abatement, arguing that she had "reasonable cause" because she relied on TurboTax’s advice and acted quickly to correct the issue once aware. The IRS denied her request.

Huang subsequently filed a refund suit in federal court, asserting four claims: (1) she had reasonable cause for the late filing, (2) the IRS acted arbitrarily by inflating her penalties, (3) the IRS lacked authority to assess the penalties, and (4) the IRS failed to properly obtain supervisory approval for the penalties.

The court ruled in favor of Huang on one key issue: her reasonable cause argument. The other claims were dismissed. Notably, the court found that Huang plausibly alleged she relied on TurboTax in good faith—analogous to relying on a competent tax professional—and that her inexperience and the complexity of the international reporting obligations could amount to reasonable cause. Her case will now proceed on the reasonable cause issue.

Why This Case Matters for Taxpayers Using Tax Software

This decision is significant for individuals who rely on tax software, particularly those with international reporting requirements like Forms 3520, 5471, or FBARs. These forms involve complex rules that most standard software platforms are not well-equipped to handle.

The Huang case signals that courts may be willing to treat reliance on reputable tax software as reasonable cause, at least at the motion to dismiss stage. The court acknowledged that TurboTax’s erroneous guidance—advising that gifts did not need reporting—could mislead a taxpayer exercising ordinary business care and prudence. Importantly, the court also noted that ignorance of the law alone is insufficient; however, combined with other factors such as the complexity of the law and immediate corrective actions, a reasonable cause defense could be viable.

For clients with international elements in their financial lives, this case emphasizes that even honest mistakes made while using widely available tax tools could potentially be excused, provided they act diligently to remedy errors once discovered.

Where This Case May Not Help Clients Using Tax Preparers

However, Huang may prove to have its limits. Taxpayers who use human tax return preparers instead of software face a different legal standard. Courts generally expect that tax professionals—even non-CPAs or unenrolled preparers—are competent and that taxpayers exercise some oversight. If a preparer fails to file required forms or provides incorrect advice, the taxpayer may not be able to simply claim reliance as a defense.

Unlike software, where it seems like courts may be sympathetic to arguments that the platform’s limitations or misinformation led to a reasonable misunderstanding, reliance on a human preparer often requires showing that the taxpayer did not ignore warning signs, asked reasonable questions, and disclosed all necessary facts.

Additionally, courts scrutinize whether the preparer was qualified and whether the taxpayer’s reliance was truly in good faith. This standard stems from case law such as United States v. Boyle, 469 U.S. 241 (1985), where the Supreme Court held that taxpayers have a non-delegable duty to file tax returns on time, even if relying on an agent or preparer. Courts have consistently applied this principle to tax preparer reliance cases, requiring a showing that the preparer was competent and that the taxpayer acted prudently. Blind reliance on an unqualified or unvetted preparer is unlikely to establish reasonable cause. By contrast, Huang’s reliance was on a commercially reputable software product widely used by millions.

Practical Lessons

For clients with foreign gifts, inheritances, investments, or business interests, this case underscores the need to:

1. Understand Software Limitations: Tax software is designed for broad use and may not flag niche international reporting requirements.

2. Seek Professional Help for Complex Issues: When international elements are involved, consulting a tax professional experienced in cross-border matters is crucial.

3. Act Quickly if Mistakes are Found: Immediate corrective action, as Huang took, can be a strong factor in demonstrating reasonable cause.

4. Document Reliance and Communications: Keeping records of software guidance or preparer advice can help support a reasonable cause defense if penalties are assessed.

While Huang opens a potential path to relief for taxpayers misled by software, it also serves as a cautionary tale. For complex international tax matters, an investment in qualified advice is likely far cheaper than litigating a penalty dispute years later.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com.

Protecting Attorney-Client Privilege in IRS Streamlined Filing Compliance Submissions: The Role of Kovel Agreements

The IRS Streamlined Filing Compliance Procedures (which includes the Streamlined Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures) offer a critical path to compliance for taxpayers who failed to report foreign financial assets but whose conduct was non-willful. While these procedures provide relief from certain penalties, the decision to come forward is often accompanied by sensitive discussions about intent, omissions, and timing—issues that could be pivotal if the IRS challenges the non-willfulness assertion. This raises an essential question: how do we protect those communications during the disclosure process?

I. Privilege Concerns in Tax Compliance

Attorney-client privilege exists to protect confidential communications between a client and their attorney when made for the purpose of obtaining legal advice. However, this privilege does not extend to accountants—even when they are providing advice on complex tax matters—unless specific structures are put in place.

This distinction was made clear in United States v. Arthur Young & Co., 465 U.S. 805 (1984), where the Supreme Court held that there is no accountant-client privilege under federal law in criminal or civil tax proceedings. The Court emphasized that the public has a right to “every man’s evidence,” and that accountants serve as “public watchdogs,” not confidential advisors.

In Florida, attorney-client privilege is codified in § 90.502, Florida Statutes, which protects communications made for the purpose of securing legal services. Importantly, this privilege may extend to third parties—such as accountants—when their involvement is necessary to facilitate legal advice. This is where the doctrine established in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), becomes crucial.

II. The Kovel Agreement: Bridging Legal and Accounting Expertise

The Kovel doctrine allows attorneys to extend privilege to non-lawyers, such as accountants, if the non-lawyer is acting as a “translator” or facilitator of legal advice. In Kovel, the Second Circuit held that communications with an accountant working under the direction of an attorney could be protected as part of the attorney-client relationship.

For this protection to apply:

1. The accountant must be engaged by the attorney, not the client directly.

2. The accountant’s role must be to assist the attorney in providing legal advice, not to provide standalone accounting services.

3. A formal agreement should be in place—often called a Kovel letter—outlining the scope of engagement.

IRS Chief Counsel has acknowledged the application of privilege in these settings in internal memoranda, but also cautions that the privilege is narrowly construed and does not apply to the preparation of tax returns or communications intended for eventual disclosure.

III. Streamlined Procedures and the Risk of Disclosure

The Streamlined Filing Compliance Procedures require the taxpayer to submit amended or delinquent tax returns, FBARs, and a signed Certification of Non-Willfulness—a narrative explanation of their conduct. This certification becomes a key document if the IRS later audits the submission or disputes the taxpayer’s good-faith intent.

Discussions surrounding how to frame the facts, what to include or omit, and whether the taxpayer qualifies for the streamlined program are all potentially sensitive. If these discussions occur outside of the protection of attorney-client privilege—such as directly with an accountant—they may be discoverable.

In contrast, if a taxpayer first retains an attorney, and the attorney then brings in an accountant via a Kovel agreement, these same communications may be shielded. The attorney oversees the legal analysis, and the accountant supports the legal work with technical calculations, data reconstruction, or return preparation.

IV. Best Practices for Maintaining Privilege

To ensure the protection of privilege in Streamlined or other voluntary disclosures:

• Engage legal counsel early. Privilege applies from the first confidential consultation, so the initial point of contact matters.

• Use a Kovel agreement to structure the engagement of accountants. Ensure the accountant is working at the direction of the attorney and only for purposes of facilitating legal advice.

• Document the relationship clearly. A Kovel letter should define scope and confirm that communications flow through legal counsel.

• Avoid mixing privileged and non-privileged functions. Tax return preparation is not privileged—even if done by an accountant under Kovel.

V. Limits of Privilege: The Crime-Fraud Exception

Even when attorney-client privilege exists, courts can pierce that protection under the crime-fraud exception. This exception applies when a client uses legal advice or attorney communications to further a crime or fraud—even unknowingly.

In United States v. Lax, No. 1:18-cv-04061 (E.D.N.Y. 2022), the court addressed whether privilege protected communications in a civil tax enforcement action. The IRS alleged that the taxpayer, Lax, had engaged in fraudulent behavior with the assistance of counsel. The court permitted the government to access attorney communications under the crime-fraud exception, finding sufficient evidence that the legal advice may have furthered a scheme to mislead the IRS.

This case serves as a warning: privilege is not absolute. If a taxpayer provides false information to an attorney or misuses the legal process, those communications may lose protection. In the context of the Streamlined Procedures, where a signed certification of non-willfulness is central, the stakes are particularly high.

VI. Legal Authority for the Streamlined Filing Compliance Procedures

It is important to understand that the Streamlined Filing Compliance Procedures (SFCP) are not grounded in statute. Instead, they were developed and announced administratively by the IRS, originally in 2012 and substantially revised in June 2014, in response to increasing offshore noncompliance among U.S. taxpayers.

The SFCP exists as an exercise of IRS enforcement discretion, grounded in general statutory authority, including:

• IRC § 6201 – authority to assess tax,

• IRC § 7801 and § 7803 – authority of the Secretary of the Treasury and the IRS Commissioner to administer the Internal Revenue Code, and

• Treasury regulations granting discretion in enforcement and penalty administration.

There is no safe harbor or codified right to participate in the streamlined program. It is not found in the Internal Revenue Code or the Code of Federal Regulations, nor has it been published as formal guidance in the Internal Revenue Bulletin. Instead, its terms are laid out in IRS FAQs, website pages, internal memoranda, and taxpayer forms such as Form 14654 (U.S. residents) and Form 14653 (non-residents).

Because of its administrative nature, the IRS may modify or terminate the program at any time. Likewise, a taxpayer who submits under SFCP has no formal appeal rights if the IRS later determines that the submission was invalid due to willfulness or other deficiencies.

VII. Conclusion

Taxpayers seeking relief under the Streamlined Filing Compliance Procedures may be exposing themselves to legal risk if they do not structure their representation properly. Attorney-client privilege, when preserved through a Kovel agreement, can provide essential protection—especially when the narrative surrounding intent is at the heart of the submission.

As the IRS continues to scrutinize offshore compliance, maintaining privilege isn’t just good practice—it’s a critical safeguard.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com