Federal & International Tax Advisory | Future of IRS Penalties in Doubt After Sagoo

On September 19, 2025, the Northern District of Texas dismissed a government suit to collect willful foreign bank account report (FBAR) penalties, further complicating Internal Revenue Service (IRS) penalty enforcement. Relying on the Supreme Court’s 2024 decision in SEC v. Jarkesy, the court ruled that the IRS had already “acted as prosecutor, jury, and judge” at the assessment stage. 

In Jarkesy, the Supreme Court held that when the Securities and Exchange Commission (SEC) seeks to impose civil penalties for securities fraud, defendants are entitled to a jury trial in an Article III court. Applying a two-step analysis, the Court held the government’s claim was a “suit at common law” requiring a jury trial under the Seventh Amendment and that the “public rights” exception did not apply because similar penalties had been imposed judicially rather than administratively.

In U.S. v. Sagoo, the Northern District of Texas extended that reasoning, finding that (1) a post-assessment jury trial cannot cure the Seventh Amendment violation; (2) collection consequences attach immediately after assessment; and (3) taxpayers have no practical way to demand a jury until the government sues.

Historically, the IRS has pursued willful FBAR violations aggressively. But if Sagoo is upheld, the IRS will likely weigh the significant litigation risks more carefully because the ruling requires civil court enforcement for willful FBAR penalties and guarantees a jury trial unless the taxpayer waives that right. As a result, the IRS may instead take measures that encourage taxpayers to self-correct, potentially expanding eligibility for programs such as the IRS Streamlined Filing Compliance Procedures. 

Broader Implications

Several other IRS penalty regimes may now be at risk after Sagoo. The ruling establishes three principles: 

1. A civil money penalty that resembles a common-law cause of action (fraud, conversion, negligence) is a “suit at common law.”
2. If an agency seeks to impose such a penalty administratively, the Seventh Amendment requires an Article III court and a jury before the penalty is fixed.
3. An “after-the-fact” refund or collection lawsuit is insufficient to negate a potential Seventh Amendment violation. 

Broadly, assessable IRS penalties are at risk. These are penalties the IRS can impose and collect from a taxpayer immediately upon notice and demand, without following standard deficiency procedures. By contrast, deficiency penalties can be disputed in Tax Court before assessment.

For example, international information-return penalties under Section 6039F (Foreign Gifts) and those associated with the Foreign Account Tax Compliance Act (FATCA) may be particularly at risk. These penalties are not tied to revenue loss and escalate with culpability. Unlike income-tax deficiencies, these penalties cannot be stayed by a petition to the U.S. Tax Court; the taxpayer’s first judicial stop is a collection suit or refund action. Whether the “public-rights” exception – traditionally strong in revenue cases – survives Jarkesy in this context remains uncertain. Early signals from other non-tax cases suggest skepticism.

The trust fund recovery penalty (TFRP) under Section 6672 may also be vulnerable. Taxpayers cannot demand a jury until the Department of Justice (DOJ) sues or a partial payment refund suit is filed – the exact “pay-and-pray” scenario Sagoo condemned.

Other penalties are likely to remain safe. Accuracy-related penalties under Section 6662 are generally imposed through deficiency procedures, and taxpayers can obtain a refund suit with a jury if desired. Similarly, civil fraud penalties under Section 6663 are unlikely to be affected. Excise taxes such as Section 4980B (COBRA) also remain secure since they are tied directly to revenue and fall within the “collection of revenue” public-rights line.

Practical Takeaways for Advisers

Tax advisers should be mindful of several points in the wake of Sagoo:

1. Preserve the Procedural Record. Obtain administrative file copies and document all willfulness findings, which are now jury questions under Sagoo.
2. Leverage Eighth Amendment Arguments. Even if the Seventh Amendment challenge fails, outsized penalties may be slashed under the Excessive Fines Clause.
3. Watch the Circuits. The D.C. Circuit reinstated IRS assessment authority under Section 6038(b)(1) in Farhy II, reversing a Tax Court decision contrary to Jarkesy. By contrast, the Northern District of Texas in Sagoo took the opposite approach. Other recent cases further complicate the reach of Jarkesy. Just last week, in HDH Group Inc. v. United States, the Western District of Pennsylvania upheld a $6.6 million civil fraud tax penalty under Section 6700, rejecting a Jarkesy-based Seventh Amendment challenge on the grounds that taxpayers Jarkesy may file refund suits in federal district court, where liability is adjudicated de novo and a jury trial is available. These rulings highlight sharp disagreements among courts, and appellate guidance will be critical.

The consequences of Sagoo extend far beyond FBAR enforcement; the ruling invites a constitutional recalibration of the IRS’s broader penalty arsenal. Several categories of IRS penalties now stand on contested ground. Until appellate courts articulate clear boundaries, taxpayers confronting large, administratively assessed penalties have a powerful new defense against an IRS that may be acting “as prosecutor, jury, and judge.” Any assessable penalty that is determined administratively, rests on a mental-state finding, and exceeds purely compensatory amounts now sits under a Sagoo and Jarkesy cloud.

If you have any questions, or would like additional information, please contact one of the attorneys on our Federal & International Tax team.

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