A federal judge in Pennsylvania recently held that the IRS’s assessment of promoter penalties under IRC § 6700—which targets those who organize or promote abusive tax shelters and make false or fraudulent statements about tax benefits—does not violate the Seventh Amendment. In HDH Group v. United States, the court found that § 6700 is akin to common law fraud and thus triggers the right to a jury trial, but the statute is constitutional because taxpayers can receive a jury trial in a de novo district court refund suit after paying part of the penalty.
Since the Supreme Court’s 2024 Jarkesy decision, there’s been a wave of challenges over whether tax penalties can be assessed without a jury trial. HDH tested whether the Seventh Amendment entitles taxpayers to a jury trial before the IRS imposes promoter penalties.
HDH, an insurance broker, was hit with about $6.6 million in § 6700 penalties tied to a captive insurance arrangement. After the IRS assessed the penalties, HDH paid 15% (about $989,000) as required by § 6703(c) to pursue a refund in district court. There, HDH argued that Jarkesy requires a jury trial before penalties are even assessed. The IRS claimed that a post-assessment (and therefore, post payment) jury trial was sufficient to meet the requirements of the Seventh Amendment.
The district court concluded that under Jarkesy, taxpayers subject to § 6700 penalties have a right to a jury trial. However, the district court also concluded that HDH’s right to a post-assessment jury trial was sufficient to satisfy the Seventh Amendment, even though HDH was required to fork over nearly $1 million to get there.
When faced with different tax penalties, a district court in Texas concluded that the Seventh Amendment requires a pre-assessment right to a jury trial. In U.S. v. Sagoo, the IRS sued to collect previously assessed FBAR penalties. The Court held that the assessment was not valid because the jury had not considered the penalties prior to assessment. What’s more, unlike the taxpayer in HDH, the taxpayer in Sagoo was not required to pay any portion of the assessment before receiving a jury trial. Instead, the right to the trial commenced when the IRS sued to collect.
Bottom line: In a post-Jarkesy world, courts and taxpayers must now determine which IRS penalties give rise to the Seventh Amendment right to a jury trial, and when such a right arises. The answers to these questions could have significant implications on IRS enforcement actions moving forward. We will continue to monitor these developments.
