FBAR Penalty Invalidated Under Seventh Amendment

(Parker Tax Publishing October 2025)

A district court granted a taxpayer's motion to dismiss an action by the government against a taxpayer to reduce to judgment penalties for failing to file a Foreign Bank and Financial Accounts Report (FBAR) after finding that the FBAR penalty assessment did not comply with the Seventh Amendment's guarantee of the right to a jury trial. The court found that the Treasury Department and the IRS "acted as prosecutor, jury, and judge" by investigating the taxpayer, determining that she was liable, and assessing a penalty based on their own factual conclusions. U.S. v. Sagoo, 2025 PTC 322 (N. D. Tex. 2025).

Background

The government brought an action against Sharnjeet Sagoo to reduce assessed penalties to judgment for Sagoo's failure to report timely her financial interests in foreign bank accounts for 2011-2013.

Section 5314(a) of the Bank Secrecy Act (BSA) requires a United States citizen or resident to file a Foreign Bank and Financial Accounts Report (FBAR) to the Secretary of the Treasury when he or she "makes a transaction or maintains a relation for any person with a foreign financial agency." Under 31 C.F.R. Sec. 1010.350(a), a relationship with a foreign financial agency is defined as a United States person's "interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country."

Section 5321(a)(5)(C) of the BSA authorizes the Secretary of the Treasury to impose civil penalties for willful failure to comply with the reporting requirements of Section 5314(a). The maximum penalty equals the greater of $100,000 or 50 percent of the balance in the foreign account at the time of the violation. Upon assessment, FBAR penalties become a nontax debt to the United States. Once that debt has been delinquent for more than 180 days, the Treasury Secretary may refer the debt to an executive agency to take appropriate collection action. One avenue of collection is referral to the Department of Justice for litigation.

During 2011, 2012, and 2013, Sagoo was a United States person who held an interest in multiple financial accounts at financial institutions in Kenya, India, and England. In 2011, the total balance of these accounts was $1,445,188. In 2012, the total balance of these accounts was $1,503,358. And in 2013, the total balance of these accounts was $1,769,355.

Despite Section 5314(a)'s reporting requirements to disclose financial interests in foreign financial accounts, Sagoo did not timely file FBARs for those years. So in 2022, the IRS assessed a penalty of $1,020,922.50 against Sagoo for willfully failing to report her foreign financial interests in 2011, 2012, and 2013. The IRS sent Sagoo a notice of the assessed FBAR penalties and a demand for payment. Sagoo did not pay the FBAR penalties assessed against her. After her failure to pay, the government filed suit, requesting that a district court reduce the assessed FBAR penalties to judgment.

Sagoo filed a motion to dismiss the government's complaint. She argued that the government acted in violation of (1) the Seventh Amendment, which guarantees the right to a jury trial; (2) the statutory language of Section 5314; (3) the statutory language of Section 5321(a)(5) and the Administrative Procedure Act; and (4) the Eighth Amendment's Excessive Fines Clause.

In SEC v. Jarkesy, 603 U.S. 109 (2024), the Supreme Court held that when the Securities and Exchange Commission seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. In this case, the government conceded that Sagoo had a right to a jury trial under Jarkesy but disputed whether the Seventh Amendment had already been violated. According to the government, because Sagoo had access to a jury trial in federal court to determine de novo her liability for the willful FBAR penalties assessed against her, her Seventh Amendment right had not been violated. By contrast, Sagoo explained that this lawsuit was not one to determine whether to impose a penalty; rather, it was one to reduce an already-assessed penalty to judgment. She contended that the IRS's underlying assessment is invalid because the penalized individual is guaranteed a jury trial before the penalty can be assessed.

Analysis

The district court held that the FBAR penalty assessment did not comply with the Seventh Amendment and granted Sagoo's motion to dismiss. The court concluded that, because the government (1) adjudicated liability and levied civil penalties against Sagoo (2) that had real world consequences, and (3) an after-the-fact trial brought by the government would be Sagoo's sole opportunity to appear before a jury, the government violated Sagoo's Seventh Amendment right to a jury trial.

The court found that an "after-the-fact" jury trial does not protect an individual's Seventh Amendment right because the IRS already adjudicated liability without the benefit of a neutral factfinder. In the court's view, the Treasury Department and IRS acted as "prosecutor, jury, and judge." It investigated Sagoo, determined that she was liable, and assessed a penalty based on their own factual conclusions. The court found that this fundamentally undermined a core function of the Seventh Amendment to provide a neutral factfinder for suits at common law.

The court further found that an after-the-fact trial does not protect an individual's Seventh Amendment right because the adjudication and civil penalties come with "real world impacts" under the Fifth Circuit's reasoning in AT&T, Inc. v. FTC, 135 F.4th 230 (5th Cir. 2025). In AT&T, the Fifth Circuit held that a jury trial that follows an agency's assessment of civil penalties falls short of what the Seventh Amendment guarantees, in part because of the "real world impacts" of a civil penalty assessment - including the threat to either pay or get sued, reputational harm, and administrative offsets. In this case, the court found that a real-world consequence of the IRS's assessment was that the government could collect Sagoo's FBAR penalties through administrative offsets before a jury ever determined that she was liable to the government for any amount of money.

In addition, the court found that an after-the-fact trial violates the Seventh Amendment when the after-the-fact trial is the only opportunity for an individual to exercise her right to a jury trial. The court noted that Sagoo would have access to a federal court with a jury only after the penalty had been assessed. And even after the penalty was assessed, Sagoo would not have the opportunity to exercise her Seventh Amendment rights unless she refused to pay the penalty and the government chose to bring an action to convert the penalty into a judgment.

For a discussion of FBAR penalties, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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