The Changing Landscape for IRS Civil Fraud Penalties
The IRS’ longstanding authority to administratively assess civil fraud penalties faces major new questions in the wake of the Supreme Court’s 2024 decision in SEC v. Jarkesy. The Court held that imposing certain types of civil penalties without a jury might violate the Seventh Amendment. This reasoning has emboldened taxpayers to challenge the IRS’ use of its in-house penalty regime, especially for the severe 75% civil fraud penalty.
Two Recent Cases, Two Opposite Outcomes
The past month alone saw two federal courts go in opposite directions on this issue:
· In Silver Moss Properties LLC v. Commissioner (August 2025), the U.S. Tax Court rejected a post-Jarkesy constitutional challenge, upholding the IRS’ ability to assert civil fraud penalties within Tax Court refund litigation.
· Just weeks later, in U.S. v. Sagoo (September 2025), the U.S. District Court for the Northern District of Texas ruled that the IRS’ assessment violated the taxpayer’s constitutional right to a jury trial under the Seventh Amendment—dealing a blow to the agency’s current enforcement toolbox.
Why These Cases Matter for Taxpayers
These cases significantly impact anyone facing potential IRS civil fraud penalties, which are among the harshest in the tax law arsenal, reaching 75% of the underpayment amount. The Tax Court’s position currently leaves the IRS’ administrative process intact, but the Texas District Court’s opinion could pave the way for broader constitutional challenges and, possibly, a new Supreme Court showdown.
What Taxpayers Should Do Now
Tax practitioners and high-net-worth individuals under audit should watch this evolving legal landscape closely. When facing civil fraud allegations, it may become increasingly viable, depending on jurisdiction, to assert a constitutional jury trial defense, possibly changing how these penalties are assessed and resolved going forward.
Staying informed of future appellate decisions will be crucial, as the administration of IRS civil fraud penalties could change dramatically in the coming months. If you have questions or are under IRS audit threat, seeking experienced legal counsel who monitors these developments is more important than ever.
Legal Basis for Abatement!
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Marini& Associates, P.A.
Sources:
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