A US district court has dismissed a USD1-million penalty for wilful non-filing of a foreign bank account report (FBAR), finding the US Internal Revenue Service (IRS) had violated the Seventh Amendment to the US constitution by 'acting as prosecutor, jury, and judge'.
The penalty was imposed on defendant Sharnjeet Sagoo, a US citizen with significant financial accounts in England, India and Kenya. The IRS has historically pursued wilful FBAR violations aggressively. When it concluded Sagoo had failed to file the required FBAR reports it followed its long-standing policy of heavy civil penalties, in this case USD1,020,922.
When Sagoo did not pay, the government sought to reduce these assessments to judgment in a federal court. Sagoo countered that the assessments themselves violated her constitutional rights under the Seventh Amendment, which guarantees the right to a jury trial in most cases. It fell to the Northern District of Texas to assess the constitutionality of the penalty.
The court relied on the US Supreme Court's (the Supreme Court’s) 2024 decision in the Jarkesy case, in which the Securities and Exchange Commission had sought to impose 'in-house' civil securities fraud penalties on a defendant. In Jarkesy, the Supreme Court decided this violated the defendant’s Seventh Amendment right to a jury trial. Following this reasoning, the Texas court in Sagoo held that such penalties were akin to common-law fraud and the IRS' claim to charge a penalty was a 'suit at common law' requiring a jury trial. The Seventh Amendment's public rights exception did not apply because similar penalties had been imposed judicially rather than administratively (WL 2689912 ND Tex, 19 September 2025).
Assuming the judgment is upheld and applied broadly, Sagoo would require civil court enforcement for wilful FBAR penalties, granting the right to a jury trial to assess penalties instead of administrative assessments. This may lead the IRS to take a more cautious approach to enforcement, at least in some of its penalty regimes.
According to law firm Alston and Bird, the IRS' main risk concerns 'assessable penalties'. It can impose these and collect them from a taxpayer immediately upon notice and demand, without following standard deficiency procedures. International information-return penalties under s.6039F on foreign gifts and those associated with the Foreign Account Tax Compliance Act may be particularly at risk, says Alston and Bird. These penalties are not tied to revenue loss and escalate with culpability. They cannot be stayed by a petition to the US Tax Court.
The trust fund recovery penalty under s.6672 may also be vulnerable. In such cases, taxpayers cannot demand a jury until the US Department of Justice sues or a partial payment refund suit is filed, which is the scenario condemned by the North Texas court in Sagoo.
'The consequences of Sagoo extend far beyond FBAR enforcement', says Alston and Bird. 'The ruling invites a constitutional recalibration of the IRS' broader penalty arsenal [and] several categories of IRS penalties now stand on contested ground.'
However, the matter is far from settled. Two other recent rulings, in the cases of HDH Group and of Silver Moss, came to the opposite conclusion to that of Jarksey and Sagoo. The divergent outcomes, with appeals likely, point to significant implications beyond the realm of tax enforcement, says law firm K&L Gates. '[This] uncertainty leaves open fundamental questions about the durability of administrative enforcement', it said.
