IRS’s Penalty Policy for Foreign Gifts Discourages Compliance

While the IRS reportedly will no longer automatically assess penalties for failures to report foreign gifts and bequests, that hasn’t stopped it from treating certain taxpayers as ATMs.

A federal judge in California recently told the government it wouldn’t dismiss a taxpayer’s suit for refund of a penalty paid for failing to report a foreign gift.

The taxpayer in question, Jiaxing Huang, received significant gifts from her nonresident alien parents in 2015 and 2016 to help her permanently relocate to the US and buy a house. Like most people who aren’t cross-border tax professionals, she knew nothing about the obscure rules for reporting foreign gifts and depended on TurboTax for guidance.

She tried to persuade the IRS she had reasonable cause for failing to report the foreign gifts, but the agency was unmoved.

IRS Appeals later abated part of the penalty, based on “hazards of litigation.” Huang paid the IRS and asked for a refund. When it wasn’t granted, she filed a complaint in California district court.

The government argued that Huang’s lawsuit was improper because her refund claim with the IRS hadn’t fully explained her reasonable cause defense. However, she had previously given the IRS chapter and verse, and they were hardly disadvantaged by her failure to tell them the whole story all over again. And, as emphasized by the district court, Huang had prepared the refund claim precisely as instructed by the IRS.

With the district court’s refusal to dismiss the complaint, Huang’s reasonable cause argument lives to fight another day. Whether it ultimately will be accepted is unclear.

It’s well established that reliance on professional tax advice can be reasonable. But when or whether information provided by TurboTax can constitute advice or otherwise can contribute to reasonable cause remains to be determined.

In a 2011 Tax Court summary opinion cited by the district court, a taxpayer’s reasonable cause defense was upheld when he incorrectly entered certain information from a Schedule K-1 into his tax preparation software. Due to that “isolated transcription error,” the income item from the Schedule K-1 was omitted from his return.

As a summary opinion, however, it technically isn’t considered precedent. And while helpful, that case arguably is more about the court’s approval of the taxpayer’s diligent attempt to properly compute his tax liability than any guidance provided by his software.

The Huang case is reminiscent of the infamous “Polish lottery case,” where Krzysztof Wrzesinski received substantial gifts in 2010 and 2011 from his nonresident mother, who had won the Polish lottery. He called his accountant—twice—and was told both times that there was nothing he needed to do.

Years later, when he learned his accountant had erred, he promptly filed the delinquent disclosures and was penalized. The IRS determined that checking with his accountant twice just wasn’t good enough. IRS Appeals abated part of the penalty based on “hazards of litigation” but still demanded $41,500.

After paying the IRS and filing an unsuccessful refund claim, Wrzesinski filed a complaint in district court. The government declined to file an answer and conceded the case in 2023, possibly because any answer it would have filed would have looked ridiculous.

But focusing on whether the government can successfully extract life-changing penalties from those who are unschooled in the art of foreign gift disclosure misses the larger point of whether it should.

What does the IRS realistically expect taxpayers to do? Must every low-or-middle-income taxpayer with any foreign connection hire a tax professional to avoid being severely penalized? And would that even be good enough, or would the IRS argue that they all need international tax specialists?

The Internal Revenue Manual states that the IRS “has an obligation to advance the fairness and effectiveness of the tax system.” This means, among other things, that penalties should “encourage noncompliant taxpayers to comply” and should be “objectively proportioned to the offense.”

A take-no-prisoners approach accomplishes neither of these objectives. Even apart from the patent offensiveness of the government’s stingy interpretation of reasonable cause, it’s enormously counterproductive.

Once they realized that they’d relied on bad advice, Wrzesinski and Huang promptly, albeit belatedly, disclosed their foreign gifts. This is what the government should want people to do. But the message they’re sending is, “Do the right thing and you’ll be sorry you did.”

Message received.

The case is Huang v. United States, 2025 BL 183680, N.D. Cal., 24-cv-06298-RS, 5/28/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Michael J. Miller is a partner at Roberts & Holland who has provided US tax advice to domestic and international clients for more than 20 years.

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