Appeals Court Decision May Affect FBAR Penalties

 Posted on October 17, 2025 in Taxation Law

U.S. taxpayers who own foreign assets are subject to a number of requirements, and they may face penalties if they fail to report information to the IRS correctly. One of the key issues that may affect taxpayers with foreign investments is the requirement to file a Foreign Bank and Financial Account Report (FBAR). The failure to do so can lead to serious penalties, including large fines. However, a recent court ruling may affect the penalties that may be assessed in these cases.

Understanding the ways tax laws and policies may change due to court decisions or other actions by the government can be difficult for the average person. An attorney with an understanding of tax laws can provide guidance for taxpayers, helping to determine the best ways to respond to IRS inquiries or defend against penalties.

Understanding FBAR Penalties

The penalties that taxpayers may face for the failure to file FBARs can be harsh. When the failure to file an FBAR is "non-willful," the maximum penalty is $10,000 per FBAR form (per year). However, in cases involving "willful" violations, the penalty may be either $100,000 (adjusted for inflation) or 50% of the balance of unreported foreign account(s) at the time of the violation, whichever amount is greater.

In many cases involving alleged FBAR violations, the IRS will claim that a taxpayer’s actions were willful due to the fact that when filing a tax return, Schedule B of Form 1040 contains a question asking whether a taxpayer has one or more foreign accounts and references the requirement to file an FBAR. In many cases, the IRS has argued that by signing this form, taxpayers knew or should have known that they understand their FBAR filing requirements, and thus, the failure to meet these requirements is willful.

U.S. v. Sagoo and FBAR Penalties

In 2024, the United States Supreme Court issued a ruling in the case of SEC v. Jarkesy stating that because the Seventh Amendment guarantees a right to a jury trial in civil disputes with the federal government, a government agency cannot impose civil fraud penalties without offering a person the opportunity for a jury trial. A recent appeals court case heard in the Northern District of Texas found that this decision applies to the assessment of FBAR penalties by the IRS.

In the case of U.S. v. Sagoo, a taxpayer who held foreign financial accounts failed to file FBARs as required between 2011 and 2013. After a tax audit, the IRS assessed willful FBAR penalties of over $1 million. After the IRS initiated a lawsuit to collect the penalties, the taxpayer filed a motion to dismiss the lawsuit, claiming that the assessment of the penalties was a violation of the Seventh Amendment. The IRS argued that the right to a jury trial had not been violated because the taxpayer could request a jury trial following the assessment of the penalties.

The appeals court ruled in the taxpayer’s favor, finding that the IRS had "acted as prosecutor, jury, and judge" when assessing penalties. Since the taxpayer only had the opportunity for a jury trial after the IRS had interpreted the law, determined that a violation occurred, and assessed a penalty, this was a violation of the Seventh Amendment. 

Because this decision may affect the IRS’s ability to assess and collect FBAR penalties, it is likely that it will be appealed. Currently, taxpayers may be able to challenge the assessment of penalties, but future court rulings, the passage of new laws, or the implementation of new IRS policies could affect the ways these cases are handled. Legal assistance from an attorney who understands the applicable tax laws can be crucial in these situations to ensure that all applicable legal standards and court rulings are considered correctly.

Contact Our San Jose Tax Law Attorney

At John D. Teter Law Offices, our San Jose, CA tax lawyer can provide representation in cases involving FBAR penalties, foreign asset reporting requirements, or other issues that may affect taxpayers. We work to help our clients avoid or minimize penalties and resolve tax issues successfully. To set up a consultation and get legal help with tax-related issues, contact us at 408-866-1810.