FBAR penalty case dismissed on constitutional grounds

In a Report of Foreign Bank and Financial Accounts (FBAR) proceeding, a district court dismissed the government’s suit to enforce FBAR penalties, holding that the government had violated the taxpayer’s right to a civil jury trial under the Seventh Amendment to the Constitution.

Facts: Sharnjeet K. Sagoo was a U.S. person within the meaning of 31 U.S.C. Section 5314(a) of the Bank Secrecy Act (BSA) for 2011, 2012, and 2013. During this time, Sagoo held interests in accounts at financial institutions in Kenya, India, and England. The balance of these accounts totaled $1,445,188 in 2011; $1,503,358 in 2012; and $1,769,355 in 2013. Despite the FBAR reporting requirements under 31 U.S.C. Section 5314(a) to disclose financial interests in foreign financial accounts, Sagoo failed to file timely FBARs (Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts) for those years.

On Dec. 2, 2020, the IRS assessed a penalty of $1,020,923 against Sagoo for willful failure to report the financial interests. A couple of weeks later, Sagoo received notice of the assessed penalties and a demand for payment, which she did not pay. The IRS subsequently “identified possible computational issues with the penalty.”

The government then filed suit to reduce the penalties to judgment in an amount that the IRS would recalculate “in future proceedings.” Sagoo moved to dismiss the action under Federal Rule of Civil Procedure 12(b)(6) for “failure to state a claim upon which relief can be granted.”

Issues: Under 31 U.S.C. Section 5314(a) of the BSA, a U.S. citizen or resident is required to file an FBAR with Treasury when that person has an interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country (31 C.F.R. §1010.350(a)). BSA Section 5321(a)(5)(C) imposes a civil penalty for noncompliance. The maximum penalty is equal to the greater of $100,000 or 50% of the balance in the foreign account at the time of the violation (31 U.S.C. §5321(a)(1)). Once assessed, it becomes a nontax debt to the United States and, if delinquent for more than 180 days, may be referred by Treasury to an executive agency to take appropriate collection action (31 U.S.C. §§3711(g)(1) and (4)).

Sagoo argued that the government acted in violation of (1) the Seventh Amendment; (2) the statutory language of 31 U.S.C. Section 5314; (3) the statutory language of 31 U.S.C. Section 5321(a)(5) and the Administrative Procedure Act; and (4) the Eight Amendment’s Excessive Fines Clause. The Seventh Amendment guarantees a trial by jury in civil suits.

The government conceded that, under the recent Supreme Court case SEC v. Jarkesy, 603 U.S. 109 (2024), Sagoo was entitled to a Seventh Amendment jury trial, which it agreed is “implicated when the IRS seeks FBAR penalties.” However, the government argued the Seventh Amendment had not been violated in this case because Sagoo “has access to a jury trial [in federal court] to determine de novo her liability for the willful FBAR penalties assessed against her.”

Sagoo argued that this suit was not one to determine whether to impose a penalty but rather to reduce an already assessed penalty to judgment. Therefore, according to Sagoo, the IRS’s underlying assessment was “invalid because the penalized individual is guaranteed a jury trial in an Article III court before such a penalty can be assessed.” An Article III court is one established by the Constitution’s Article III, generally including federal district courts, circuit courts of appeal, and the Supreme Court. The government argued that Sagoo had elected to forgo a jury trial, waiving her Seventh Amendment rights.

The district court followed the Fifth Circuit’s holding 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 rights guaranteed by the Seventh Amendment. The Fifth Circuit provided three reasons for its holding.

First, such an “after-the-fact jury trial” does not protect an individual’s Seventh Amendment rights since the agency has “already adjudicated liability” without the benefit of a “neutral factfinder,” making the government “prosecutor, jury, and judge” (id. at 242). In this case, the government investigated Sagoo, determined that she was liable for the penalties, and assessed a penalty based on its own “factual conclusions.” The court (citing Jarkesy, 603 U.S. at 133) found that the government had thus undermined a core function of the Seventh Amendment, which is to provide a neutral factfinder.

Second, an after-the-fact trial does not protect an individual’s Seventh Amendment right since “adjudication and civil penalties come with ‘real world impacts,'” including “the threat to either pay or get sued, reputational harm, and administrative offsets” (AT&T, 135 F.4th at 241–42; 31 U.S.C. §3716). In the current case, the real-world impact of the IRS’s assessment was that the government could seek collection against Sagoo for the FBAR penalties through “administrative offsets” before a jury could ever determine if she was liable.

Third, an after-the-fact trial does not protect an individual’s Seventh Amendment right when it is their only opportunity to exercise that right (AT&T, 135 F.4th at 241–42). According to the Fifth Circuit, “defying a multi-million-dollar penalty” and “wait[ing] for the [Department of Justice] to sue” just to gain access to Seventh Amendment rights is unconstitutional (id. at 242). Sagoo did not have the opportunity for a trial until after the penalty was assessed, and even then a trial was available only if she refused to pay the penalty and the government brought an action to convert the penalty into a judgment. Thus, her only opportunity to exercise her Seventh Amendment rights was in an after-the-fact trial.

Holding: The district court granted Sagoo’s motion and dismissed the government’s claims with prejudice. The court concluded that the government violated Sagoo’s Seventh Amendment rights because it adjudicated liability and levied civil penalties against her without the benefit of a neutral factfinder, the adjudication and the penalties had a real-world impact on her, and her only opportunity to exercise her Seventh Amendment rights was in an after-the-fact trial.

• Sagoo, No. 4:24-CV-01159 (N.D. Tex. 9/19/25)

— John McKinley, CPA, CGMA, J.D., LL.M., and Thomas Godwin, CPA, CGMA, Ph.D., are both professors of the practice in accounting and taxation in the SC Johnson College of Business at Cornell University. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.