The Impact of SEC v. Jarkesy on Civil Tax Fraud Penalties

Abstract

On June 27, 2024, the U.S. Supreme Court issued its decision in Securities and Exchange Commission v. Jarkesy. It held that when the SEC sought a $300,000 civil penalty against Mr. Jarkesy for securities fraud, the Seventh Amendment entitled him to a jury trial in an Article III court. The week before, the Tax Court, an Article I court, issued a decision upholding the IRS’s imposition of a $6.3 million civil penalty against a taxpayer for tax fraud. No jury was available. That has been true since 1862: no jury has ever been available to taxpayers facing fraud penalties, unless they pay first.

This Article considers whether Jarkesy now requires adjudication of civil tax fraud penalties in an Article III court with access to a jury. That question is more nuanced than it might first appear. The answer depends on how one balances government administrative needs against individual liberty interests. Jarkesy inverts prior teachings on how courts should perform that balancing.

The Article first reviews why courts have found the pay-first structure of tax administration constitutional. That case law, however, mostly involves collection of taxes, not penalties. It then considers whether the result in Jarkesy, the logic by which it reached that result, and recent changes in tax administration together open a plausible path for a different conclusion as to the imposition of tax fraud penalties.