Law of Tax Penalties

In a year marked by judicial scrutiny of government enforcement powers, federal courts have delivered a series of rulings that refine the boundaries of tax penalties, balancing the Internal Revenue Service's authority against constitutional protections and statutory limits. Four cases—Mukhi v. Commissioner, Silver Moss Properties, LLC v. Commissioner, Riddle Aggregates, LLC v. Commissioner, and United States v. Schwarzbaum—stand out for their insights into when penalties can be assessed, adjudicated without juries, and constrained by excessiveness concerns. These decisions, spanning from late 2024 to late 2025, highlight tensions in tax administration, particularly in areas like international reporting, conservation easements, and foreign bank accounts. While each case addresses distinct penalties, they collectively underscore a judicial push for precision in IRS actions, even as courts largely uphold the agency's core tools for ensuring compliance.

The Limits of Assessability: Mukhi v. Commissioner

The Tax Court's November 18, 2024, decision in Mukhi v. Commissioner, 163 T.C. No. 8, reaffirmed a controversial stance on the IRS's power to assess certain international information-return penalties, building on its earlier holding in Farhy v. Commissioner. Raju J. Mukhi, a Missouri resident, had formed foreign entities between 2001 and 2005, including Sukhmani Partners II Ltd., a foreign corporation under U.S. tax rules. For tax years 2002 through 2013, Mukhi failed to file timely Forms 5471, which disclose U.S. persons' interests in foreign corporations. This triggered penalties under Internal Revenue Code Section 6038(b)(1), which imposes a $10,000 fine per unreported year, escalating to $50,000 if non-compliance persists after notice.

The IRS assessed $120,000 in penalties via a September 2017 notice and pursued collection through a levy intent notice and federal tax lien. Mukhi requested a collection due process (CDP) hearing, where the IRS sustained the actions. He petitioned the Tax Court, arguing the penalties were not assessable under Section 6201(a), which authorizes the IRS to assess "all taxes (including interest, additional amounts, additions to the tax, and assessable penalties)." The court initially sided with Mukhi in April 2024, citing Farhy, but reconsidered after the D.C. Circuit reversed Farhy in May 2024, holding Section 6038(b)(1) penalties assessable.

In its reconsidered opinion, the Tax Court dug into statutory text and history. Section 6038(b)(1) lacks explicit language deeming the penalty assessable or collectible as a tax, unlike penalties in Chapter 68 (e.g., Sections 6665(a) and 6671(a)), which treat them as such. The court traced this to the 1954 Code recodification, when Congress shifted from broad assessment of "all taxes and penalties" to a narrower scope, implying only explicitly "assessable penalties" qualify. Absent such designation, the default is civil action in district court under 28 U.S.C. Section 2461(a). The court dismissed IRS arguments from legislative history—the 1982 Senate report adding Section 6038(b) emphasized simplification but didn't mention assessability—and administrative convenience, stressing that policy can't override text.

Judge Maurice B. Foley, writing for the majority, noted the penalty's coordination with Section 6038(c)'s foreign tax credit reduction doesn't imply assessability, as dual enforcement paths exist elsewhere in the Code. A dissent by Judge Kathleen Kerrigan argued the D.C. Circuit's reasoning should bind under the Golsen rule, but the majority held otherwise, as the case appealed to the Eighth Circuit. The ruling means the IRS must sue in district court to collect these penalties, potentially slowing enforcement but providing taxpayers pre-payment judicial review.

This narrow holding doesn't undermine assessability in other contexts. Fraud and accuracy-related penalties, as in Silver Moss and Riddle, are explicitly assessable under Section 6665(a), which deems them "taxes" for assessment purposes. Mukhi's logic hinges on textual absence, not a blanket bar, preserving IRS leverage in domestic underreporting cases.

Jury Trials and Fraud Penalties: Silver Moss Properties, LLC v. Commissioner

Shifting to constitutional challenges, the Tax Court's August 21, 2025, opinion in Silver Moss Properties, LLC v. Commissioner, 165 T.C. No. 3, addressed whether civil fraud penalties require jury trials. Silver Moss, a Mississippi partnership under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), acquired Florida land in 2017 and donated a conservation easement, claiming a Section 170 charitable deduction on its return. The IRS issued an FPAA disallowing most of the deduction and later asserted a 75% fraud penalty under Section 6663(a) via amended answer.

Silver Moss moved for partial summary judgment, invoking the Supreme Court's June 2024 decision in SEC v. Jarkesy, which required jury trials for SEC civil penalties resembling common-law fraud. The partnership argued Tax Court adjudication without a jury violated the Seventh Amendment. Judge Christine S. Pugh rejected this, holding sovereign immunity bars jury demands in suits against the government unless Congress consents—which it hasn't for TEFRA proceedings in Tax Court, district courts, or the Court of Federal Claims.

The court's reasoning distinguished Jarkesy on multiple fronts. First, TEFRA actions are taxpayer-initiated challenges to IRS adjustments, not government suits like Jarkesy's. Second, revenue collection involves "public rights," exempt from Seventh Amendment jury requirements under Atlas Roofing Co. v. Occupational Safety & Health Review Commission. Historical analysis showed 18th-century English and American tax penalties were administratively imposed without juries, often by commissioners or justices. U.S. precedents like Helvering v. Mitchell treated fraud penalties as remedial safeguards for revenue, not punitive exactions demanding juries.

Unlike Jarkesy's private fraud on investors, Section 6663(a) targets fraud on the government, omitting common-law elements like reliance. The court cited post-Jarkesy cases, including the Eleventh Circuit's denial of mandamus in In re Hirsch, affirming no jury right for similar penalties. This public-rights framework aligns with Murray's Lessee v. Hoboken Land & Improvement Co., allowing summary executive processes for customs and taxes.

The holding denies jury trials for fraud penalties in Tax Court, preserving administrative efficiency. It contrasts with Mukhi's statutory limits by affirming explicit assessability under Section 6665(a), but echoes Schwarzbaum's scrutiny of penalty severity, though without invoking the Eighth Amendment.

Extending the Logic: Riddle Aggregates, LLC v. Commissioner

The Tax Court reinforced this in Riddle Aggregates, LLC v. Commissioner, 165 T.C. No. 12, decided December 15, 2025. Riddle, another TEFRA partnership, claimed a $45 million easement deduction for 2017. The IRS's FPAA disallowed it and imposed accuracy-related penalties under Section 6662(a)-(h), including 20% negligence, 20% substantial understatement, 20% substantial valuation misstatement, and 40% gross valuation misstatement.

Riddle's summary judgment motion mirrored Silver Moss, citing Jarkesy for jury rights. Judge Kerrigan denied it, incorporating Silver Moss's analysis verbatim. The court classified accuracy penalties as public rights, akin to Mitchell's negligence additions, serving remedial purposes like deterrence and revenue protection. Legislative consolidation in 1989 didn't alter their nature.

Distinguishing Jarkesy, the court emphasized taxpayer initiation and sovereign immunity. It rejected FBAR analogies from United States v. Schwarzbaum, noting Eighth Amendment classifications don't govern Seventh Amendment issues. Historical ties to 1926 revenue acts confirmed administrative tradition.

This decision extends Silver Moss to non-fraud penalties, signaling Tax Court resistance to broad Jarkesy expansions. Compared to Mukhi, it highlights statutory differences: Section 6662 penalties are assessable per Section 6665(a), unlike Section 6038(b). Yet, both curb IRS overreach—Mukhi via text, Riddle via constitution—while Schwarzbaum adds proportionality checks.

Proportionality and Excessive Fines: United States v. Schwarzbaum

The Eleventh Circuit's 2025 opinion in United States v. Schwarzbaum, 127 F.4th 259, introduced Eighth Amendment limits to willful Foreign Bank and Financial Accounts Report (FBAR) penalties. Isac Schwarzbaum, a naturalized U.S. citizen with German roots, held unreported Swiss and Costa Rican accounts exceeding $10,000 from 2007-2009. His accountants erred in advising no reporting needed; he filed incomplete FBARs himself. The IRS found reckless willfulness and assessed penalties under 31 U.S.C. Section 5321(a)(5)—up to 50% of account balances or $100,000.

After district court proceedings and a prior appeal vacating calculations, the IRS recalculated $13.5 million, but the government sought $12.6 million. Schwarzbaum appealed, arguing excessiveness. The circuit held FBAR penalties are "fines" under the Eighth Amendment, as they serve punitive ends: deterrence (post-2004 amendments boosted compliance from <20%), culpability ties (willful mens rea mirrors criminal fines), and severity untethered to costs. Rejecting the First Circuit's remedial view in United States v. Toth, the court applied Austin v. United States and United States v. Bajakajian, finding partial punitiveness triggers review.

Proportionality assessed per account/year: $300,000 on a low-balance account (~$10,000) was grossly disproportionate (6-10x value), but others—e.g., $4.3 million on an $8.6 million account—were upheld, totaling $12.3 million. Factors included evasion harm, comparable criminal penalties, and concealment scale.

Schwarzbaum's punitive framing contrasts Silver Moss/Riddle's remedial public-rights view, but aligns with Mukhi's textual scrutiny. Fraud/accuracy penalties might face similar challenges if deemed fines, though Mitchell suggests otherwise. Explicit assessability shields them from Mukhi's fate.

Interconnections and Broader Implications

These cases interlink through themes of IRS authority and taxpayer safeguards. Mukhi's non-assessability stems from textual gaps, unlike the explicit language in Sections 6663 and 6662, which Silver Moss and Riddle leverage for administrative adjudication. Both easement cases reject Jarkesy expansions, emphasizing public rights and historical non-jury tax enforcement, while Schwarzbaum applies Bajakajian to cap punitive elements.

Legal reasoning diverges on penalty purpose: Silver Moss/Riddle see them as remedial revenue tools, Schwarzbaum as deterrent fines. Mukhi avoids this, focusing on procedure. Comparisons reveal judicial caution—e.g., Silver Moss's historical dive mirrors Schwarzbaum's proportionality factors, both curbing excess.

For taxpayers, Mukhi offers pre-payment challenges for information penalties; Silver Moss/Riddle streamline disputes but deny juries; Schwarzbaum caps FBAR hits. IRS faces procedural hurdles in international cases but retains fraud/accuracy muscle. As appeals unfold, these rulings may reshape enforcement, potentially inviting legislative fixes for assessability gaps.