Does the Seventh Amendment Invalidate International Penalties?


Adjudicatory powers have been a power essential to federal agencies like the Internal Revenue Service (“IRS”), agencies supplement this power by assessing civil fines. Chapter 61 of the Internal Revenue Code contains countless reporting requirements regarding foreign information filing obligations. Many of the sections under Chapter 61 impose significant penalties for the failure to comply with the reporting requirements. The more well known reporting requirements and penalties are found in Chapter 61 and are as follows:
The Internal Revenue Code requires certain persons to provide the Internal Revenue Service or IRS with information regarding foreign corporations. This information is typically provided on Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The Form 5471 and schedules are used to satisfy the reporting requirements of Internal Revenue Code Section 6038 and 6046 along with the applicable regulations. Substantively, Form 5471 backstops various international provisions of the Internal Revenue Code such as Sections 901/904 (Foreign Tax Credit), Section 951(a) (Subpart F and Section 956), Section 951A (GILTI), Section 965 (transition Tax), Section 163(j) (interest deduction limitation), and Section 482 (transfer pricing). International information returns that often are associated with Form 5471s include Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation), Form 5713 (International Boycott Report), Form 8621 (PFIC), Form 8990 (Limitation on Business Interest Expense), and Forms 1116/1118 (Foreign Tax Credit).
In the Form 5471, at a minimum, the reporting agent must provide the following information regarding a foreign corporation:
i) Stock ownership, including current year acquisition and dispositions,
ii) The names of U.S. shareholders,
iii) GAAP income statement and balance sheet,
iv) An accounting of foreign taxes accrued and paid,
v) Current and accumulated earnings and profits, including any actual dividend distributions during the corporation’s taxable year,
vi) An accounting of each U.S. shareholder’s pro rata share of GILTI and Subpart F income, and
vii) Disclosure of any transactions between the foreign corporation and its shareholders or related persons.
The Form 5471 is ordinarily attached to a U.S. person’s federal income tax return.
The penalty for failure to file, or for delinquent, incomplete or materially incorrect filing is a reduction of foreign tax credits by ten percent and a penalty of $10,000, as well as a reduction in the taxpayer’s foreign tax credit. An additional $10,000 continuation penalty may be assessed for each 30 day period that noncompliance continues up to $60,000 per return, per year.
Similarly, Internal Revenue Code Section 6038A requires 25 percent foreign-owned domestic corporations and limited liability companies to report specified information as an attachment to a corporate tax return. This is done on Form 5471, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. In filing a Form 5472, the filer must provide information regarding its foreign shareholders, certain other related parties, and the dollar amounts of transactions that it entered into during the taxable year with foreign related parties. A separate Form 5472 is filed for each foreign or domestic related party with which the reporting entity engaged in reportable transactions during the year. The practical importance of the Form 5472 is that the IRS often uses this form as a starting point for beginning transfer pricing audits. Any reporting corporation or limited liability company that fails to file Form 5472 may be subject to a penalty of $25,000. If the failure continues for more than 90 days after notification by the IRS, there is an additional penalty of $25,000 for each 30 day period or fraction. There is no upper limit on this penalty.
Another well known provision in Chapter 61 is Section 6039F. Section 1905 of the 1996 Tax Act created new reporting requirements under Section 6039F for U.S. persons (other than certain exempt organizations) that receive large gifts (including bequests) from foreign persons. The information reporting provisions require U.S. donees to provide information concerning the receipt of large amounts that the donees treat as foreign gifts, giving the IRS an opportunity to review the characterization of these payments and determine whether they are properly treated as gifts. Donees are currently required to report certain information about such foreign gifts on Part IV of Form 3520.
Section 6039F(b) generally defines the term foreign gift as any amount received from a person other than a U.S. person that the recipient treats as a gift or bequest. However, a foreign gift does not include a qualified transfer (within the meaning of Section 2503(e)(2)) or any distribution from a foreign trust. A distribution from a foreign trust must be reported as a distribution under Section 6048(c)(discussed below) and not as a gift under Section 6039F.
Section 6039F(c) provides that if a U.S. person fails, without reasonable cause, to report a foreign gift as required by Section 6039F, then (i) the tax consequences of the receipt of the gift will be determined by the Secretary and ii) the U.S. person will be subject to a penalty equal to 5 percent of the amount for the gift for each month the failure to report the foreign gift continues, with the total penalty not to exceed 25 percent of such amount. Under Sections 6039F(a) and (b), reporting is required for aggregate foreign gifts in excess of $100,000 during a taxable year. Once the $100,000 threshold has been met, the U.S. donee is required to file a Form 3520 with the IRS.
Form 3520-A is used to report information on a foreign trust with at least one U.S. owner. Under Section 6048 of the Internal Revenue Code, each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules is responsible for ensuring that the trust files Form 3520-A. The grantor trust rules are discussed in Sections 671 through 679 of the Internal Revenue Code. Form 3520-A is due on the 15th day of the third month following the end of the trust year. If a foreign trust fails to file a timely Form 3520-A, the U.S. owner may complete and attach a “substitute Form 3520-A” to their Form 3520.
Under Internal Revenue Code Section 6677, the IRS can assess a penalty for filing to timely file a Form 3520-A in the amount of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of the tax year the foreign trust fails to timely file a Form 3520-A or the U.S. person provides incorrect information to the IRS. If the IRS issues a continuation letter, and the U.S. person does not file a correct Form 3520–A within 90 days, an additional penalty of $10,000 for each 30-day (or fraction thereof) may be assessed by the IRS.
Finally, U.S. persons are required to disclose specified foreign financial assets on a Form 8938 to the IRS Specified foreign financial assets include: 1) financial accounts maintained by a foreign financial institution; 2) securities issued by an entity that is not a U.S. person; 3) any interest in a foreign entity; and 4) any financial instrument or contract that has an issuer or counterpart that is not a U.S. person. The Form 8938 filing threshold depends on whether the U.S. person is married or unmarried and whether the U.S. person resides in or outside the United States. Under Internal Revenue Code Section 6038D of the Internal Revenue Code, the IRS may assess a penalty of $10,000 for not timely filing a Form 8938. If the IRS sends a U.S. person a letter otherwise known as a “continuation letter,” the U.S. person has 90 days to file a Form 8938. If the U.S. person fails to file a Form 8938 within 90 days of receiving the Form 8938, the IRS can assess an additional $10,000 penalty for each 30-day period (or fraction thereof) until the taxpayer files a Form 8938. The maximum penalty for failing to timely file a Form 8938 is $60,000.
The IRS treats international penalties as summarily assessable, as they are not subject to deficiency procedures, wherein taxpayers receive a notice of deficiency alerting them of the potential assessment and explaining the taxpayer’s options for contesting or complying with the penalty assessment. The notice of deficiency also informs taxpayers of the last day to petition the United States Tax Court for pre-assessment and prepayment judicial review. Many penalties related to income tax filings are not summarily assessable (that is, they are generally subject to deficiency procedures). For example, deficiency procedures typically apply when the IRS determines noncompliance of a taxpayer resulted in an underpayment of some type of tax. Common penalties associated with the issuance of a notice of deficiency include an accuracy or negligence penalty under Section 6662 of the Internal Revenue Code. In other words, typically the IRS is required to issue a taxpayer a notice of deficiency and permit the taxpayer the ability to challenge an assessment before initiating collection actions.
Originally, penalties associated with Form 5471, Form 5472, Form 3520, Form 3520-A, and Form 8938 (hereinafter “international penalties”) were assessed manually on individuals and entities whose missing filings were discovered during an audit. The IRS is still assessing international penalties during audits. Several years ago the IRS began a systemic assessment of international penalties associated with the late filing of these returns. Although the IRS recently stated that it will no longer automatically assess certain international penalties, it is unclear if the IRS intends to reduce the volume of international penalty assessments in the future.
When the IRS assesses penalties for failing to timely file a Form 3520, Form 3520–A, Form 5472, Form 5471, or Form 8938, it assesses these penalties without juries. That route of lay wisdom is not the way of institutions whose raison d’ etre is efficiency and expertise. As the Supreme Court has said, “jury trials would be incompatible with the whole concept of administrative adjudication….” See Curtis v. Loether, 415 U.S. 189, 194, 94 S.Ct. 1005, 1008, 39 L.Ed 260 (1974). A safeguard, or an impediment to an efficient as well as fair and accurate mode of adjudication, depending on the point of view. The point of view the Supreme Court has favored federal agencies such as the IRS. Up until recently, it has found that federal agencies are generally not subject to the Seventh Amendment. The United States Supreme Court issued a recent, groundbreaking decision in SEC v. Jarkesy, 144 S.Ct. 2117, 2128 (2024) holding that a litigant has a Seventh Amendment right to trial by jury when the United States seeks to assess certain penalties. Under the recent precedent set forth in SEC v Jarkesy, taxpayers assessed an international penalty may potentially argue that they are entitled to defend against civil international penalties in front of a jury in an Article III court under the Seventh Amendment before the IRS can finalize and collect an international penalty. This article discusses the potential impact of SEC v. Jerkesy on the IRS’s ability to assess and collect internal penalties.
History of Cases Discussing the Seventh Amendment and Federal Agencies
As indicated above, the recent precedent set forth in SEC v. Jarkesy held that taxpayers are entitled to defend against certain government assessed penalties before a jury in an Article III court under the Seventh Amendment. In order to understand the importance of the Jerkesy, it is important to understand this groundbreaking decision, one must consider the history of the application of the Seventh Amendment to federal government agencies.
In the late Thirties the newly created National Labor Relations Board, after finding the Jones & Laughlin Steel Corporation guilty of an unfair labor practice in firing employees active in union affairs, ordered the company to reinstate the employees with back-pay. See NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 57 S.Ct. 615, 81 L.Ed. 893 (1937). In NLRB v. Jones & Laughlin Steel Corporation, the Supreme Court held that Congress had acted within the commerce clause in enacting the National Labor Relations Act and establishing the National Labor Relations Board. The Court’s opinion addressed whether the back-pay remedy prescribed by the Board amounted to a “money judgment” in violating the Seventh Amendment.
The Seventh Amendment protects the right to a jury trial.
It provides that ‘[i] Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any Court of the United States, than according to the rules of the common law”
The Supreme Court resolved the jury trial issue by interpreting the Seventh Amendment according to a certain historical method. The amendment provides that the “right of trial by jury shall be preserved.” The Court emphasized the word “preserved,” and explained that the amendment preserved was the “right which existed under the common law when the Amendment was adopted.” By the use of the term “preserved,” the Seventh Amendment by its very text invites an historical mode of interpretation. It preserved that which had been. Because the National Labor Relations Act established a “statutory proceeding” that was “unknown to the common law,” the Supreme Court found that a civil jury was not required.
In 1974, however, the historical approach of Jones & Laughlin was undercut, by the Supreme Court’s unanimous decision in Curtis v. Loether, 415 U.S. 189, 94 S.Ct. 1005, 39 L.Ed.2d 260 (1974). In that case, the plaintiff claimed that a landlord had violated the fair housing provisions of the Civil Rights Act of 1968, because he had refused to rent her an apartment because of her race. She asked for actual and punitive damages as provided by the Act. The case was tried by a district court judge acting without a jury, who found for the plaintiff. The defendant-landlord appealed, and the question before the Supreme Court was whether the bench trial had violated his rights, if any, under the Seventh Amendment.
The plaintiff argued against the application of the amendment on grounds of policy and precedent, and was unsuccessful in both. On policy grounds, she claimed that a jury trial might expose her, a black woman, to racial prejudice of the jury and that the delay of a jury trial might impede a timely enforcement of the Act. But these policy reasons, the Supreme Court found, were in and of themselves “insufficient to overcome” a constitutional command.
In terms of precedent, the plaintiff relied on NLRB v. Jones & Laughlin Steel Corp and argued that “the Amendment is inapplicable to new causes of action created by congressional enactment.” But NLRB v. Jones & Laughlin Steel Corp and its historical method notwithstanding, the Supreme Court rejected the plaintiff’s argument. The Court stated:
“Whatever doubt may have existed should now be dispelled. The Seventh Amendment does apply to actions enforcing statutory rights and requires a jury trial upon demand, if the statute creates legal rights and remedies, enforceable in an action for damages in the ordinary court of law.” See 415 U.S. at 194, 94 S.Ct. at 1008.
Under this reasoning, whether an action existed when the Seventh Amendment was enacted is not key to determining if a civil jury trial must be available. Rather, the key seems to be the quality of the action, whether the action for which a civil jury is requested shares qualities of the common-law sort of action for which the jury trial is preserved. The Court explained that “a jury trial must be available if the action involves right and remedies of the sort typically enforced in an action at law,” and in relation to the case before it, the Supreme Court reasoned that:
A damage action [under the Civil Rights Act] is an action to enforce within the meaning of our Seventh Amendment decisions… A damage action under the statute sounds basically in tort- the statute merely defines a new legal duty, and authorizes the courts to compensate a plaintiff for the injury caused by the defendant’s wrongful breach. In Curtis v. Loether, the enforcement of statutory rights had been committed to a court rather than a federal agency, and this made all the difference. The Supreme Court explained that “when Congress provides for enforcement of statutory rights in an ordinary civil action in the district court, where there is obviously no functional justification for denying the jury trial right, a jury trial must be available..” See 415 U.S. at 195, 94 S.Ct at 1009.
In Atlas Roofing Co. v. Occupational Safety & Health Review Commission, 430 U.S. 442, 455, 97 S.Ct. 1261, 51 L.Ed.2d 464 (1977), the argument was that absent a jury, the process was constitutionally deficient. This argument was brought by an employer, which after exhausting the administrative process offered by the Commission found itself assessed with a six hundred dollar civil fine. As the employer saw it, Curtis v. Loether stood for the proposition that general rules of law backed by money fines required a jury trial. The employer argued that “a suit in a federal court by the government for violation of a statute..is classically a suit at common law.” The Supreme Court did not deny that a court action in damages for violation of a statute was “classifically a suit at common law.” Instead, the Supreme Court found that this proposition was inapposite, because here the civil action was a federal agency and not a court as had been the case in Curtis v. Loether. The Supreme Court justified this distinction between courts and agencies by resorting to the historical method and by a new angle under this method.
As reiterated in Atlas Roofing, the historical approach is that the Seventh Amendment is “declaratory” in nature. Under the law at the time the Seventh Amendment was enacted, the Supreme Court explained, the availability of a jury trial depended on the identity of the forum. When the amendment was added to the Constitution, equity, admiralty, and military courts operated without juries and the jurisdiction of these forums at times overlapped with law courts. Consequently, the same or similar issues might or might not have been decided by juries, depending on the forum. The Supreme Court thus concluded that under a historical approach the “right to a jury trial turns not solely on the nature of the issue to be resolved but also on the forum in which it is to be resolved.” See 430 U.S. at 461 97 S.Ct. at 1272. This being so, the function of the Seventh Amendment, the Supreme Court said, was to “prevent Congress from depriving a litigant of a jury trial in a ‘legal action’ before a tribunal customarily utilizing a jury as its factfinding arm…”
Under this identity of the forum key to the Seventh Amendment, Congress does not violate the Seventh Amendment as it assigns civil actions to an agency, because the agency is not “a tribunal customarily utilizing a jury as its factfinding arm.” The Supreme Court also explained that the identity of the forum approach had its agreeable policy implications. “Congress,” the Court said, “is not required by the Seventh Amendment to choke the already crowded federal courts with new types of litigation or prevent them from committing some new types of litigation to administrative agencies with special competence in the relevant field.
In Atlas Roofing, the petitioner argued that if the Seventh Amendment may be avoided simply by assigning a civil action to a federal agency rather than a court, then Congress could “utterly destroy the right to a jury trial by always providing for administrative rather than judicial resolution of a vast range of cases.” This argument, the Supreme Court said, was “well put.” But it was, the Court added, ultimately, “unpersuasive.” It was unpersuasive in the light of a certain limitation to Congress’ power to avoid the amendment by assigning civil cases to federal agencies. Congress, the Court explained, could not assign any case to a federal agency free of the Seventh Amendment. Instead, the amendment was inapplicable only when Congress assigned “public rights” to a federal agency.” Consequently, “Wholly private tort, contract, and property cases, as well as a vast range of other cases [were] not at all implicated.” In short, because Congress might assign only public rights to an agency free of the Seventh Amendment, there was no chance that Congress might eliminate Seventh Amendment rights simply by transferring civil actions en mass to federal agencies.
But when Congress commits a matter which previously had been subject to the Seventh Amendment to a federal agency, by that very act the matter becomes a public right of the Seventh Amendment. For example, the Commodities Futures Trading Commission is empowered to hear claims sounding in deceptive sales practices and fraudulent transactions for damages brought by customers against brokers selling options in commodities. In Myron v. Hauser, 673 F.2d 994, 997 (8th Cir.1982), the Commission had found that a broker had “committed fraud” by not disclosing relevant information and by making misleading statements to a customer. The Commission awarded the customer $24,000 for his “out-of-pocket losses.”
The broker claimed that the agency action was essentially a private action for money damages in violation of the Seventh Amendment. The court of appeals did not accept this argument. On the authority of Atlas Roofing, the court found that the Commission damage process amounted to a public right exempted from the jury trial requirements. But the public right was created by Congress out of these circumstances: At least seventy-five per cent of all claims [heard by the Commission] involved fraud, a cause of action known to the common law since at least 1789-two years before the adoption of the Seventh Amendment. The remedy of the Commission’s damage award is the same remedy available at common law. Thus, the Commission’s damage award is simply an old remedy in a new forum. In repose to the argument that the public rights approach to the Seventh Amendment was just a matter of switching labels, the Supreme Court had previously said that “purely taxonomic” changes in a cause of action are insufficient to avoid the Seventh Amendment. The Supreme Court also had previously endorsed the proposition that “Congress may fashion causes of action that are closely analogous to common-law actions and place them beyond the ambit of the Seventh Amendment by assigning their resolution to a forum in which jury trials are unavailable. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 52, 61 109 S.Ct. 2782, 2796, 2800, 106 L.Ed.2d 26 (1989).
A review of the history of cases involving federal agencies and the Seventh Amendment indicates that trial by jury was “incompatible” with an “administrative forum,” and to save this forum, the courts held that federal agencies were free of jury requirements. Under this theory, the IRS has been free to assess significant penalties against taxpayers for failing to timely disclose their foreign assets on an international information return without being subject to the constraints of the Seventh Amendment.
The Impact of SEC v. Jarkesy on the Seventh Amendment in Federal Agency Cases
Recently, the Supreme Court decided SEC v. Jarkesy, 144 S.Ct. 2117, 2128 (2024). The Supreme Court removed the Securities and Exchange Commissions’ (“SEC”) ability to use an administrative hearing when assessing civil penalties against individuals accused of fraud. This case represents a significant departure from earlier Supreme Court decisions in which it found that agencies were not subject to the Seventh Amendment. Jarkesy held that the Seventh Amendment is a right that is “fundamental and sacred to the citizen, whether guaranteed by the Constitution or provided by statute, and should be jealousy guarded by the courts. The Supreme Court noted that where a civil sanction does not serve a purely remedial purpose, but rather serves retributive or deterrent purposes, it is a punishment which can only be obtained through an Article III court which offers a right to a trial by jury. In Jarkesy, the Supreme Court stressed that the Seventh Amendment’s guarantee of the right by jury includes statutory claims that are “legal in nature.” The factors determining whether claims are legal in nature include: 1) whether the claims resemble common law causes of action, and 2) whether the remedy is the sort that was traditionally obtained in a court of law.
It is easy to envision the Supreme Court’s reasoning in Jarkesy can be utilized to strip the IRS of its ability to assess international penalties without offering a jury trial. Depending on the facts and circumstances of each case an international penalty associated with failing to timely file an international return may be synonymous with a common law cause of action for negligence or fraud. A penalty for failing to timely file an international return can range from $10,000 to several million dollars. The assessment of these penalties do not serve a remedial purpose, but rather they serve a retributive and deterrent purpose. Penalties of this type are traditionally obtained in an Article III court with the protections of the Seventh Amendment.
The only exception to the right to a jury trial for claims implicating the Seventh Amendment is found in the “public rights” exception. However, the Supreme Court in Jarkesy stated that “matters concerning private rights may not be removed from Article II courts.” See 144 S.Ct. at 2132. If a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.” The assessment of an international penalty by the IRS is a common law action concerning private rights that does not implicate the “public rights” exception.
The Supreme Court in Jarkesy listed a few categories of proceedings that fall under the public exception: cases related to relations with Indian tribes, administration of public lands, granting of public benefits such as payments to veterans, pensions, and patent rights. The one common thread linking these examples is if any federal agency seeks a punitive penalty for violation of a federal statute does not fall under the public rights exception. The Supreme Court went on to say where an agency enforces a remedy for a civil penalty, the enforcement of the penalty involves a private, rather than a public right. Because international penalties involve a common law claim that does not implicate public rights exception, arguably, individuals are entitled to a jury trial under the Seventh Amendment prior to the assessment and collection of an international penalty. Similarly, the assessment of an international penalty without Seventh Amendment protections may violate the Fifth Amendment’s Due Process Clause.
Conclusion
The substance of earlier Supreme Court opinions regarding federal agencies and the Seventh Amendment was simple in that trial by jury was “incompatible” with the “administrative forum.” The Supreme Court decision in Jarkesy has eroded this line of legal reasoning. The contours of the Supreme Court’s ruling in Jarkesy are not immediately clear and will likely be subject to further litigation in the coming years. Courts will have to determine if the right to a jury trial attaches to all punitive penalties assessed by federal agencies or SEC fraud enforcement actions. Although the impact of Jarkesy is uncertain, the Jarkesy has opened the door to Seventh Amendment protections to taxpayers assessed by international penalties.
Anthony Diosdi is an international tax attorney at Diosdi & Liu, LLP. Anthony has litigated many international penalty cases before the United States Tax Court, United States Court of Federal Claims, and United States district courts throughout the United States. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.
Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.

Written By Anthony Diosdi
Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.
