IRS Attacks Another Form 3520 Turbo Tax Reasonable Cause Defense

The IRS is increasingly challenging claims for reasonable cause relief related to late international information returns, focusing particularly on taxpayers’ reliance on tax preparation software like TurboTax.

In a notable case, Zhang v. IRS, the government contends that taxpayer Zhang cannot claim reasonable cause for her late Form 3520 filing because TurboTax did not provide guidance on it. Despite Zhang’s background as a CPA and her reliance on the software, the IRS argues that she should have independently verified her reporting obligations.

In 2017, Zhang received significant foreign gifts but only realized she missed the Form 3520 deadline in 2018 after reading an article on the topic. After filing the form, she faced a $71,777 penalty, which was partially reduced after an appeal. The IRS’s position leans on the Supreme Court’s Boyle decision, suggesting blind reliance on tax software does not constitute reasonable cause. Critics argue this stance fails to reflect the realities faced by new U.S. residents unfamiliar with complex filing requirements.

Overall, Zhang’s case highlights the difficulties taxpayers encounter when trying to comply with international reporting obligations, as the IRS aims to enforce penalties strictly, potentially discouraging voluntary compliance from others who might miss deadlines.

Taxpayers in similar situations are advised to submit strong reasonable cause statements to improve chances of penalty relief.