Can Jury Trial for IRS Penalty be Conditioned on Paying the Penalty First? – Houston Tax Attorneys

There have been a number of court cases that have considered whether various administrative agency determinations violate constitutional jury trial rights. These are often premised on the fundamental promise of American justice that courts should remain open to all.

The issue is presented when government agencies require substantial upfront payments before allowing judicial review. One can find themselves caught between accepting administrative determinations they believe are wrong or paying substantial sums just to be able to exercise their constitutional rights. At its extreme, one could argue that this situation could create a potential two-tiered system of justice where the wealthy can buy access to jury trials while others cannot.

The district court recently addressed this exact constitutional challenge in HDH Group, Inc. v. United States, No. 2:24-cv-00988 (W.D. Pa. Sept. 23, 2025). This court case involves an administrative determination by the IRS to impose penalties whether the action violates fundamental constitutional protections when the ability to get a jury trial requires a pre-payment of nearly $1 million.

Facts & Procedural History

The consultant in this case operated a captive insurance program between 2013 and 2018. In September 2015, the IRS began auditing the consultant. It ultimately made an administrative determination that the consultant had promoted an abusive tax shelter.

On November 13, 2023, the IRS assessed promoter penalties in excess of $7.5 million against the consultant. The penalties are intended for promoters of abusive tax shelters who make false or fraudulent statements about the tax benefits that participants will receive. The consultant paid approximately $989,000 of the penalties—representing at least 15 percent of the total assessed penalties as required by law—and filed a refund suit against the government to recover the payment to the IRS.

The IRS then began enforced collections, It issued notices in April 2024 indicating its intent to seize or levy the consultant’s property to collect the remaining unpaid penalties. The consultant filed an appeal from the notices of levy with the IRS.

The consultant’s legal strategy centered on the U.S. Supreme Court’s recent ruling in SEC v. Jarkesy. Specifically, the consultant argued that the IRS’s administrative assessment of fraud-based penalties violated the Seventh Amendment’s guarantee of a jury trial. The government countered with its own motion, seeking to reduce the unpaid penalties to judgment while defending the constitutionality of the tax code’s penalty assessment procedures.

About Section 6700 Promoter Penalties

Section 6700 of the tax code is one of the primary tools the government has for combating abusive tax shelter promotions. This penalty can be imposed on any person who organizes or assists in organizing partnerships, entities, investment plans, or other arrangements while making false or fraudulent statements about the tax benefits participants will receive.

The penalty can apply when someone both promotes a tax shelter and makes statements they know or have reason to know are false or fraudulent regarding the allowability of deductions, excludability of income, or securing of other tax benefits. Courts have interpreted this to require the government prove two elements: that the defendant was involved in an abusive tax shelter and that the defendant made statements about tax benefits that were false or fraudulent.

The financial impact can be substantial. For activities involving false statements about tax benefits, the penalty can be 50 percent of the gross income derived from the promotion. For gross valuation overstatements, the penalty is the lesser of $1,000 or 100 percent of the gross income per activity. This is in addition to other civil and criminal penalties, injunctions, and even being order to disgorge the fees earned for the work.

How Section 6700 Assessment Works

Section 6700 operates within the broader framework the IRS’s enforcement authority. Section 6201 authorizes and requires the Secretary of Treasury to make inquiries, determinations, and assessments of all taxes, including assessable penalties imposed by the tax code. This includes Section 6700 penalties.

The IRS can assess these penalties administratively without first obtaining court approval. Once assessed, the penalties become part of the individual’s account and are subject to standard collection procedures. Once the IRS sends the individual notice of the assessment and demand for payment, it can then generally move on to other collection actions if payment is not made. That is what happened in this case.

There are different procedures for challenging Section 6700 penalties. Unlike most other IRS penalties, the tax code provides a method for challenging Section 6700 penalties. This method includes meaningful judicial review. This is set out in Section 6703.

Under Section 6703(c)(1)

Under Section 6703(c)(1), if within 30 days after notice and demand of any Section 6700 penalty, the individual pays not less than 15 percent of the penalty amount, the individual may file a claim for refund of the amount paid. More specially, under Section 6703(c)(2), the individual may pay 15 percent of the penalty, file a claim for refund, and if the claim is denied, file an action in federal district court for refund within 30 days of the claim denial. This creates an administrative process within the IRS for reviewing the penalty assessment without requiring 100% of the penalty to be paid up front. Most other refund claims require 100% payment up front before suit can be filed.

These district court proceedings operate under different …

These district court proceedings operate under different rules than typical administrative penalty appeals. With these proceedings, the burden of proof shifts to the government under Section 6703(a). The government then has to establish liability for the penalty from scratch. The court conducts a de novo review, meaning it owes no deference whatsoever to the IRS’s administrative findings. Most importantly for this case, jury trials are available in these refund actions.

What Did the Supreme Court Decide in Jarkesy?

To understand the dispute in this case, we have to consider the Jarkesy case. The Supreme Court’s 2024 decision in SEC v. Jarkesy changed the administrative process for penalty assessments. The case involved the SEC’s practice of seeking civil penalties for securities fraud through internal administrative proceedings rather than federal court litigation and how this lines up with the Seventh Amendment. The Seventh Amendment ensures the right to a jury trial.

Jarkesy established a two-part test for determining when administrative penalties violate the Seventh Amendment. First, courts must determine whether the penalty implicates the Seventh Amendment by examining whether the underlying claim resembles common law causes of action or seeks legal rather than equitable remedies. Second, if the Seventh Amendment applies, courts must consider whether the penalty falls under the “public rights exception” that allows Congress to assign certain matters to administrative agencies.

The U.S. Supreme Court found that securities fraud penalties implicated the Seventh Amendment because they targeted the same conduct as common law fraud and sought civil penalties—a punitive remedy designed to deter wrongdoing rather than compensate victims. The Court emphasized that these penalties were “a type of remedy at common law that could only be enforced in courts of law.”

The Supreme Court then rejected the argument that securit…

The Supreme Court then rejected the argument that securities fraud penalties fell under the public rights exception. The Court explained that fraud claims involve private rights that “historically could have been determined exclusively by [the executive and legislative] branches” and must be adjudicated in Article III courts with jury trial protections.

Section 6700 and the Seventh Amendment

This brings us to the question in this case. Does Section 6700 penalty assessed administratively, which requires a substantial up front payment before one can get to court, implicates the Seventh Amendment?

The Court concluded that Section 6700 penalties do just that under Jarkesy‘s first prong. Like the securities fraud provisions in Jarkesy, Section 6700 targets conduct that closely mirrors common law fraud. Section 6700 requires proof that a defendant made statements “which the person knows or has reason to know is false or fraudulent as to any material matter.” This language deliberately incorporates common law fraud terminology and concepts. The essential elements—false statements about material matters made with knowledge or reason to know of their falsity—directly parallel traditional fraud claims that have been resolved by juries for centuries.

The remedy analysis also supports Jarkesy‘s application. Section 6700’s penalties are explicitly punitive, calculated as a percentage of the promoter’s gross income from the abusive activity. Like the SEC’s civil penalties, these sanctions are designed to punish and deter wrongdoing rather than compensate victims or restore the status quo. The court found that Section 6700’s close relationship with common law fraud and its punitive monetary penalties clearly implicated the Seventh Amendment under Jarkesy‘s framework. Congress deliberately used “fraud” and other common law terms of art in the statutory formulation of the Section 6700 penalty.

Why the Constitutional Challenge Failed

Despite finding that Section 6700 penalties implicate the Seventh Amendment, the court rejected the consultant’s constitutional challenge on a fundamental procedural ground. The court concluded that the consultant had not actually been deprived of its right to a jury trial because the tax code’s refund procedure provides that protection.

The Court emphasized the difference between Section 6700’s enforcement mechanism and the administrative penalty systems struck down in other post-Jarkesy cases. In securities fraud cases, OSHA violations, and similar regulatory penalty schemes, administrative law judges make liability determinations that receive only deferential appellate review. The penalized party never gets a true jury trial on the question of liability.

Section 6703’s refund procedure operates differently. Once the individual paid the required 15 percent and filed its refund action, it obtained a completely fresh proceeding in federal district court. The IRS must prove the individual’s liability de novo in that proceeding without any deference to the administrative assessment. And the individual can demand a jury trial on all factual issues relating to whether it actually violated Section 6700.

The Court stressed that this situation contrasted with the defendants in Atlas Roofing, Jarkesy, and recent Third Circuit decisions like Axalta and Sun Valley. In those cases, administrative agencies made final liability determinations that courts could only review for substantial evidence or similar deferential standards. The defendants never received the full Article III court adjudication with jury trial rights that the Seventh Amendment requires.

This presumes that the consultant can actually pay the he…

This presumes that the consultant can actually pay the hefty penalty, which he could and did in this case. The Court did not consider or address what happens if the person, like the consultant in this case, cannot afford to pay the hefty penalty up front.

The Takeaway

The court’s decision clarifies that administrative penalty assessments can survive Seventh Amendment challenges even after Jarkesy. To do so, they have to include adequate procedural protections for obtaining jury trials. The court concluded that the tax code’s refund procedure accomplishes this by allowing penalized parties to obtain complete de novo judicial review in federal district court where the government bears the burden of proving liability to a jury.

This distinction between administrative assessment and ultimate liability determination is the focus for this constitutional analysis. While agencies may continue assessing penalties administratively for efficiency purposes, constitutional violations occur only when parties cannot ultimately obtain jury trials on liability questions. The court here said that the tax code for 6700 penalties avoids this problem by treating administrative assessments as provisional determinations subject to full judicial review upon payment of a portion of the penalty.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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Can a Criminal Prosecution Delay a Civil Tax Case? – Houston Tax Attorneys

Imagine that you earned significant income and failed to file tax returns. You later file the tax returns once the IRS caught on to you, but you omitted a large part of your income.

The government indicts you on criminal tax evasion charges, and starts an IRS audit. Before the criminal trial, the IRS audit concludes and results in a large deficiency that you do not agree with.

You file a petition with the tax court to challenge the liability, but you do not want to participate in the tax court proceedings as you fear that this may have a negative impact on the pending criminal case. So you ask the tax court to hold off on the civil court case pending the criminal case–and the tax court says no. The result, by exercising your right to not self incriminate, you lose your ability to challenge the civil tax liability.

Is this legally correct? The court addresses this in Gottesman v. Commissioner, T.C. Memo. 2025-94. This is a case where the taxpayer asserted that fear of criminal prosecution should justify delaying civil tax assessment efforts.

Facts & Procedural History

The taxpayer in this case operated a medical practice in Arizona from 2009 through 2012. He worked as an independent contractor for various medical clinics. He also ran his own medical services business as a sole proprietorship and held membership interests in two medical partnerships.

Despite earning substantial income as a doctor, he failed to file federal income tax returns for tax years 2009 through 2012. He did not request extensions for time to file or make payments for this period.

The IRS began examining the taxpayer in 2014 for his 2008 through 2013 tax years. The court notes that the doctor refused to cooperate with the tax audit process, he failed to maintain adequate books and records for his businesses, and he used nominee arrangements to conceal assets and income from IRS investigators.

The IRS revenue agent did a bank deposit analysis using bank records obtained through administrative summonses and third-party information returns. This showed that the doctor had signficant income and income tax liabilities.

In 2015, the doctor submitted delinquent tax returns for the years in question. He did so as part of a collection due process hearing. The tax returns may have included fraudulent understatements of his actual tax liability, according to the court. This included underreported business income on Schedule C, omitted partnership distributions and guaranteed payments, and unreported investment income. The discrepancies were substantial. For 2009, the doctor’s corrected tax liability per the IRS was $206,125, but his tax return showed only $89,285. The total deficiencies for all of the years exceeded $328,000.

In 2019, a federal grand jury indicted the doctor for tax evasion under Section 7201. The indictment alleged that from 2009 through 2019, he willfully attempted to evade payment of income tax for tax year 2008. The doctor had relocated to Mexico by this time and remained outside U.S. jurisdiction despite an active arrest warrant.

The IRS issued a IRS Notice of Deficiency in May of 2021. The doctor timely petitioned the U.S. Tax Court for redetermination. In his amended petition, he acknowledged being under criminal investigation and expressed “imminent fear of prosecution.” The doctor’s participation in the tax court case was minimal. He filed seven motions for extensions of time throughout the proceedings. When the IRS filed its answer containing factual allegations, the doctor failed to respond. The court deemed all undenied allegations admitted under Tax Court Rule 37(c).

The IRS moved for summary judgment based on the deemed admissions and supporting evidence. Rather than responding to this motion, the doctor filed a motion to stay all proceedings. He argued that his pending criminal indictment and fear of arrest justified postponing the civil case indefinitely. He also asserted a blanket Fifth Amendment privilege against self-incrimination.

Tax Evasion Under Section 7201

Section 7201 makes it a felony to willfully attempt to evade or defeat any federal tax. This is the primary criminal tax evasion provision. It calls for up to five years imprisonment and substantial fines.

To establish tax evasion, prosecutors have to prove three elements under Section 7201. First, they have to show that additional tax was due and owing. Second, they have to show that the defendant willfully attempted to evade or defeat payment of that tax. Third, they have to show that the defendant committed an affirmative act constituting evasion.

The willfulness requirement distinguishes criminal tax evasion from civil tax violations. Mere failure to pay taxes, even if substantial, does not constitute criminal evasion without proof of willful intent to avoid known legal duties. This requires an “affirmative act.” These “affirmative acts” of evasion typically include filing false returns, maintaining inadequate records, concealing assets, using nominee accounts, or dealing primarily in cash to avoid detection–as noted by the tax court in this case. Compare that to passive failure to file returns or pay taxes. Passive failures generally do not satisfy this element without additional evasive conduct.

How Do Civil Deficiency Proceedings Work?

Evasion claims are criminal proceedings, on the civil side of it, there are deficiency proceedings.

A civil tax deficiency case begins when the IRS determines that a taxpayer owes additional taxes beyond what was reported on their returns. This usually means an IRS audit. The IRS must issue a statutory notice of deficiency before assessing additional taxes, except in limited circumstances.

Taxpayers then have 90 days (150 days if addressed outside the United States) to petition the tax court for redetermination of the deficiency. Filing a timely petition stops IRS collection efforts and the tax court is then tasked with determining the correct tax liability.

Tax Court Rule 142(a) generally places the burden of proof on taxpayers to show that IRS determinations are incorrect. This burden reflects the presumption that IRS deficiency determinations are correct. Taxpayers meet this burden by introducing evidence proving the deficiency is erroneous or excessive. This is the general rule. Section 7491 is an exception. It may shift the burden of proof to the IRS if taxpayers meet certain requirements.

There are also exceptions for unreported income, which the IRS has to first make an evidentiary showing connecting the taxpayer with alleged income-producing activities before the burden shifts back to taxpayers to prove by a preponderance of evidence that IRS determinations are arbitrary or erroneous.

This case involved unreported income. So the IRS had the burden. If the doctor in this case did not participate in the case, the IRS would have met its burden by default basically. That would mean that the doctor could not challenge the IRS’s determinations or meet his burden of proof. This is why the request for stay is so important in this case. It effectively decides the case and does so for the IRS if granted.

What Are the Standards for Granting Stays?

Federal courts have broad discretion to stay civil proceedings when justice requires such relief. The courts do not do them all that often–and not for long periods of time. The courts have generally said that stays pending criminal proceedings are “extraordinary remedies” requiring careful consideration.

Most courts apply a multi-factor test when evaluating stay requests in cases with parallel criminal proceedings. The specific factors vary by jurisdiction, but courts typically examine the relationship between civil and criminal actions, burdens on the court system, hardships to the parties, and the duration of any requested stay.

The relationship between cases considers whether they involve the same parties, time periods, legal theories, and evidence. Greater overlap between civil and criminal cases generally supports granting stays. But courts may proceed with civil cases that address different issues or time periods than pending criminal cases.

Judicial burden examines whether stays would promote efficiency and avoid duplicative proceedings. If criminal resolution might eliminate civil disputes or streamline discovery, courts are more inclined to grant stays. However, if civil cases can be resolved independently through documentary evidence, courts often prefer to proceed.

Hardships to parties weigh the prejudice each side would suffer from granting or denying stays. Criminal defendants worry about self-incrimination if forced to participate in civil proceedings. But plaintiffs may suffer from fading memories, lost evidence, or increasing difficulty collecting judgments over time.

Duration is often the most significant factor. Courts strongly disfavor indefinite stays, particularly when criminal defendants appear to be using delay tactics. Stays that might last years while defendants avoid prosecution are rarely granted.

In this case, the tax court found most of the factors in favor of not granting the stay. It concluded that the stay should not be granted. This begs the question of whether a taxpayer should effectively lose their ability to challenge an underlying tax liability when they are exposed to criminal liability for the same tax.

Losing the Ability to Challenge the Liability

The practical effect of denying the doctor’s stay motion was to force him into a difficult impossible choice. He could participate in the civil proceedings and risk providing evidence that prosecutors could use against him in the criminal case. Alternatively, he could remain silent and allow the IRS to win on the liability by default through deemed admissions and summary judgment.

This dilemma highlights a fundamental tension in the parallel track system. The Fifth Amendment protects against compelled self-incrimination, but it does not guarantee that taxpayers can avoid all consequences of asserting the privilege. When criminal and civil cases proceed simultaneously, taxpayers often find themselves caught between competing legal pressures.

The tax court’s analysis reveals how procedural defaults can effectively eliminate a taxpayer’s ability to contest the underlying merits of their case. The doctor’s failure to respond to pleadings resulted in deemed admissions that established both the deficiencies and the elements needed for civil fraud penalties. Once these facts were deemed admitted, summary judgment became virtually automatic regardless of whether the taxpayer had valid defenses.

This creates a circular problem. The civil judgment establishing tax liability and fraudulent intent could potentially be used as evidence in the criminal case to prove elements of tax evasion. While criminal cases require higher burdens of proof and independent evidence of willfulness, a civil judgment based on deemed admissions creates additional hurdles for criminal defense. The taxpayer’s exercise of Fifth Amendment rights in the civil case may inadvertently strengthen the government’s criminal case by allowing unchallenged factual findings to stand. And this all hinges on the court’s decision as to whether to grant or deny a stay in the civil case.

The Takeaway

This case shows that fear of criminal prosecution alone cannot justify indefinitely delaying civil tax proceedings. The court will scrutinize stay requests using multi-factor tests that weigh judicial efficiency, party hardships, and the duration of potential delays. Blanket Fifth Amendment assertions to avoid civil proceedings entirely may not work. And they may result in adverse judgments regardless of underlying merits or criminal exposure. This is a harsh reality for taxpayers facing parallel civil and criminal proceedings. The government’s dual-track enforcement strategy effectively forces taxpayers into difficult strategic choices about when and how to assert constitutional rights.