Prosecutor, Jury, and Judge? Courts Split on IRS Penalty Power Post Jarkesy

In the aftermath of the Supreme Court’s 2024 landmark decision in SEC v. Jarkesy, courts across the country are grappling with a high-stakes constitutional question: can federal agencies unilaterally impose civil penalties without violating the Seventh Amendment’s guarantee of a jury trial? In a series of closely watched decisions, three courts have split in addressing this issue in the context of Internal Revenue Service (IRS) penalties—with potentially seismic consequences for administrative enforcement across the US government.

On 19 September 2025, the Northern District of Texas issued a significant order in United States v. Sagoo, directly challenging the federal government’s long-standing approach to imposing civil penalties for failure to report foreign bank accounts (so-called FBAR penalties). In this case, the IRS, following its own examination, concluded that defendant Sharnjeet Sagoo—a US citizen with significant financial accounts in Kenya, India, and England—failed to file the required reports and imposed FBAR penalties totaling US$1,020,922.50.¹ When she did not pay, the government sought to reduce these assessments to judgment in federal court.² Sagoo countered that the assessments themselves violated her constitutional rights under the Seventh Amendment.³ 

In assessing the constitutionality of the penalty, the court relied on the Supreme Court’s decision in Jarkesy, which held that the Securities and Exchange Commission’s decision to assert civil securities fraud penalties “in-house” violated the defendant’s Seventh Amendment right to a jury trial.⁴ The court reasoned that such penalties were akin to common law fraud and did not fall within the Seventh Amendment’s public rights exception, which exempts from the jury trial right certain cases between the government and private individuals.

Applying this precedent, the court in Sagoo held that the IRS’s assessment of FBAR penalties was unconstitutional because the agency had effectively acted as “prosecutor, jury, and judge” when it investigated Sagoo, determined liability, and imposed financial penalties.⁵ According to the court, the mere availability of an after-the-fact jury trial in district court could not cure the constitutional defect, since the penalties had already been imposed before the involvement of an impartial factfinder.⁶

The court emphasized that the Seventh Amendment requires liability and penalties to be determined in the first instance by a neutral jury, not after an agency has already imposed sanctions carrying real-world consequences.⁷ Because the government had adjudicated liability and levied penalties without affording Sagoo her right to a jury trial, the court granted her motion to dismiss.⁸ 

The Sagoo decision stands in sharp contrast to a ruling days later from the Western District of Pennsylvania. On 23 September 2025, in HDH Group, Inc. v. United States, that court upheld a US$6.6 million civil fraud tax penalty assessed under I.R.C. § 6700 against plaintiff HDH Group Inc. HDH argued that, under Jarkesy, the IRS’s administrative assessment deprived it of a Seventh Amendment jury right.⁹ The court rejected that contention, emphasizing that taxpayers who partially pay assessed penalties may file refund suits in federal district court, where liability is adjudicated de novo and a jury trial is available.¹⁰ Unlike in Sagoo, where the court viewed post-assessment judicial review as constitutionally insufficient, the Pennsylvania court concluded that § 6700’s framework implicates but does not violate the Seventh Amendment, because the IRS’s findings receive no deference and the government bears the burden of proof anew before a jury.¹¹  

Similarly, the Tax Court recently addressed these issues in Silver Moss Properties v. Commissioner and, like the HDH Group court, declined to extend Jarkesy to civil tax fraud penalties under I.R.C. § 6663(a). In Silver Moss, the petitioner argued that, under Jarkesy, adjudication of a fraud penalty without a jury trial violated the Seventh Amendment.¹² The Tax Court rejected this argument on two principal grounds. First, it emphasized that the United States, as sovereign, is immune from suit unless Congress consents, and Congress has not authorized jury trials in Tax Equity and Fiscal Responsibility Act partnership-level proceedings.¹³ Thus, the absence of jury trials in Tax Court reflects the limits of sovereign immunity, not a constitutional defect.¹⁴

Second, and more significantly, the Tax Court invoked the longstanding “public rights” doctrine.¹⁵ The Tax Court explained that while Jarkesy held securities fraud penalties to be private rights akin to common law causes of action, tax assessments and penalties are fundamentally different.¹⁶ The Tax Court concluded that revenue collection and associated civil penalties fall squarely within the public rights category.¹⁷ Fraud against the government in the form of tax understatements is thus not comparable to private fraud claims, according to the court, and may be adjudicated administratively or judicially without a jury. 

Taken together, Sagoo, HDH Group, and Silver Moss illustrate the sharp divisions emerging in post-Jarkesy jurisprudence in the tax context. The divergent outcomes, with appeals likely, also point to significant implications beyond the realm of tax enforcement. Many federal agencies—including the Environmental Protection Agency and Federal Communications Commission—rely on administrative adjudication to impose substantial monetary penalties under regulatory schemes. It remains unclear whether courts confronting those penalties will follow Sagoo’s view that agency-imposed penalties are unconstitutional, absent a jury trial, or embrace the alternative approach and leave the assessments intact. That uncertainty leaves open fundamental questions about the durability of administrative enforcement—and whether the fault lines exposed here mark the beginning of a broader constitutional realignment.

The firm, with its deep bench of white collar and tax controversies lawyers, can assist clients in identifying and litigating challenges to administrative assessments.