Can the IRS Assess $1 Million FBAR Penalty Before Giving Taxpayers a Jury Trial?

Fifth Circuit Reopens Constitutional Debate Over IRS FBAR Penalties and the Seventh Amendment

A Major Constitutional Question in FBAR Enforcement

A federal appeals court has ordered a Texas district court to reconsider its 2025 ruling involving approximately $1 million in civil penalties imposed against a taxpayer for failing to report foreign bank accounts.

The case, United States v. Sagoo, raises a constitutional issue extending beyond whether taxpayers are entitled to a jury trial when challenging civil FBAR penalties.

The more consequential question is whether the federal government can administratively assess substantial civil FBAR penalties before providing taxpayers an opportunity for a jury trial—and whether a subsequent jury trial in a federal collection proceeding adequately satisfies the Seventh Amendment.

The IRS generally assesses civil FBAR penalties administratively, without first obtaining a jury verdict. The Fifth Circuit’s October 2026 action calls for further consideration of the constitutional framework governing that enforcement process.

How the IRS Assesses Civil FBAR Penalties

Under the Bank Secrecy Act, certain U.S. persons must report foreign financial accounts when their aggregate value exceeds $10,000 at any time during the calendar year. The reporting obligation is satisfied through FinCEN Form 114, commonly known as the Foreign Bank Account Report (FBAR).

Failure to comply may result in substantial civil penalties under 31 U.S.C. § 5321(a)(5). For willful violations, the statutory penalty may reach the greater of $100,000, subject to applicable inflation adjustments, or 50% of the account balance at the time of the violation.

The IRS generally determines whether a violation occurred, evaluates willfulness, calculates the penalty, and administratively assesses the resulting liability. That assessment ordinarily precedes any federal lawsuit by the government to collect the penalty. This sequence creates the constitutional controversy.

The Seventh Amendment: Is a Jury Trial After Assessment Constitutionally Sufficient?

The Seventh Amendment preserves the right to a jury trial in certain civil actions. In FBAR enforcement, the issue concerns the timing, nature, and adequacy of judicial review—not merely whether a taxpayer can eventually request a jury.

Administrative assessment followed by judicial review: The IRS determines that a taxpayer willfully violated FBAR requirements and assesses a $1 million penalty. If the government later brings a federal collection action, the taxpayer may have an opportunity to contest liability before a jury.

Judicial determination before enforceable liability: The government must establish liability through a judicial proceeding providing any constitutionally required jury-trial protections before compelling payment.

These procedural routes are not necessarily constitutionally equivalent. The key inquiry is whether later judicial proceedings provide sufficient protection despite the earlier administrative determination. An administrative assessment is not necessarily equivalent to a final judicial determination.

The Supreme Court’s Decisions and Their Impact

SEC v. Jarkesy (2024)

In SEC v. Jarkesy, the Supreme Court held that the Seventh Amendment entitled defendants to a jury trial when the Securities and Exchange Commission sought certain civil penalties for securities fraud. The Court considered the nature of the claim and punitive remedy. Jarkesy did not specifically decide the constitutionality of administrative FBAR assessments.

FCC v. AT&T, Inc. (2026)

The Supreme Court’s subsequent decision in FCC v. AT&T, Inc. is especially relevant. It addressed the significance of a later full judicial determination where an administrative penalty decision does not conclusively establish liability. The Fifth Circuit’s reconsideration directive brings that distinction into focus for FBAR enforcement.

Why This Matters for Taxpayers Facing Million-Dollar FBAR Penalties

FBAR penalties can reach millions of dollars, especially when the IRS alleges willfulness. Taxpayers may face significant assessed exposure before a federal court independently determines whether the alleged violation occurred or the government’s willfulness determination is supported.

·         Administrative determination and assessment: The IRS determines the alleged violation and assesses the civil penalty.

·         Administrative review and collection procedures: The taxpayer may pursue applicable administrative remedies while the government considers available collection mechanisms.

·         Judicial enforcement and review: A federal court may determine liability in an appropriate proceeding, potentially including a jury trial where constitutionally required.

The Fifth Circuit’s remand does not establish that all FBAR assessments without a prior jury trial are unconstitutional, nor does it eliminate the government’s statutory enforcement authority.

What Should Taxpayers and Their Attorneys Consider?

A comprehensive defense should examine willfulness, penalty computation, limitations periods, administrative procedures, and potential constitutional defenses. The timing of any challenge matters, and taxpayers should not disregard assessments or deadlines while awaiting judicial proceedings.

Conclusion: The Timing of a Jury Trial May Be as Important as the Right Itself

The constitutional issue is not simply whether a taxpayer can eventually request a jury trial. It is whether the government may first administratively assess a substantial civil FBAR penalty and then satisfy the Seventh Amendment by making a jury trial available in a subsequent judicial proceeding.

The answer may affect the handling of substantial FBAR disputes and the procedures through which the government enforces offshore financial reporting obligations.

Protecting Taxpayers Facing Substantial FBAR Penalties

Marini & Associates, P.A. represents U.S. and international taxpayers in complex IRS controversies, including civil FBAR penalties, offshore account reporting disputes, IRS examinations, IRS Appeals, and federal tax litigation.

Facing A Substantial FBAR Penalty Or An IRS Investigation Involving Foreign Accounts?

 

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This article is for general informational purposes and does not constitute legal advice.

Sources 

1.       United States v. Sagoo, U.S. Court of Appeals for the Fifth Circuit, No. 25-11271 (October 2026 appellate proceedings).

2.       FCC v. AT&T, Inc., U.S. Supreme Court (2026).

3.       SEC v. Jarkesy, 603 U.S. 109 (2024).

4.       Bittner v. United States, 598 U.S. 85 (2023).

5.       U.S. Constitution, Seventh Amendment.

6.       31 U.S.C. § 5314 — Foreign Financial Account Reporting.

7.       31 U.S.C. § 5321(a)(5) — Civil FBAR Penalties.

8.       31 C.F.R. § 1010.350 — Reports of Foreign Financial Accounts.

9.       Internal Revenue Manual § 4.26.16 — Report of Foreign Bank and Financial Accounts.

10.   FinCEN, Report of Foreign Bank and Financial Accounts (Form 114).

11.   Law360, “5th Circ. Orders New Look at IRS Loss on FBAR Jury Rights,” October 22, 2026.

IRS Accepts a Tax Settlement After the Taxpayer Dies: Why the Tax Court Ruled It Was Invalid

What happens when the Internal Revenue Service accepts an offer to settle a taxpayer's outstanding tax liabilities, only to discover that the taxpayer died before the acceptance was issued?

In Estate of Farwell v. Commissioner, T.C. Memo. 2026-95 (September 28, 2026), the United States Tax Court addressed this unusual situation and upheld the IRS's refusal to recognize an offer in compromise that had purportedly been accepted after the taxpayer's death.

The decision highlights an important distinction in federal tax collection law: An IRS offer in compromise is not necessarily legally binding simply because the IRS issues a written acceptance. The taxpayer's death, the termination of representative authority, and the legal requirements governing acceptance can determine whether an enforceable agreement ever existed.

For taxpayers, executors, estate administrators, and tax professionals, the case provides important guidance on the intersection of IRS collection procedures and estate administration.

Background: A $100 Offer in Compromise

The taxpayer had submitted an offer in compromise proposing to resolve outstanding federal tax liabilities for just $100.

An offer in compromise, authorized under Internal Revenue Code Section 7122, allows the IRS to settle qualifying tax liabilities for less than the full amount owed. Such offers may be based on doubt as to collectibility, doubt as to liability, or the promotion of effective tax administration.

In March 2020, while the offer was still pending, the taxpayer died.

Several months later, in September 2020, the IRS issued a written acceptance of the $100 offer.

Ordinarily, written acceptance is a critical step in finalizing an offer in compromise. However, the taxpayer's death created a significant legal problem.

The taxpayer's attorney and her brother, who held a durable power of attorney, no longer possessed the same authority to act on her behalf after her death.

Consequently, the central issue became whether the IRS's written acceptance could create a binding compromise when the taxpayer had already died and no legally authorized recipient remained to receive that acceptance.

The Tax Court's Decision

The Tax Court granted summary judgment in favor of the IRS in a collection due process proceeding.

The Court concluded that IRS Appeals had not abused its discretion by sustaining a federal tax lien and declining to reinstate the previously accepted $100 offer.

Under Treasury Regulation Section 301.7122-1(e)(1), acceptance of an offer in compromise must be communicated in writing to the taxpayer or the taxpayer's representative.

The taxpayer's death terminated the authority of her attorney and the durable power of attorney held by her brother. As a result, the IRS's September 2020 acceptance did not establish a valid compromise.

The decision illustrates that the legal effectiveness of an IRS settlement depends on more than administrative approval. The parties must also satisfy the applicable requirements for forming a binding agreement.

Why the IRS Could Reject Its Own Acceptance Letter

The estate argued that Treasury Regulation Section 301.7122-1(e)(5) generally prevents the IRS from reopening an accepted offer in compromise except under limited circumstances, including false information, concealment of assets, or mutual mistake of material fact.

However, the Tax Court distinguished between reopening a valid compromise and determining that a compromise was never legally formed.

The Court found that no binding agreement existed because the taxpayer had died before acceptance.

Importantly, the Court also relied on Internal Revenue Manual Section 5.8.7.5, which directs the IRS to terminate consideration of an offer when a sole offeror dies.

Although the Internal Revenue Manual does not carry the force of law, the Court determined that its procedures were consistent with Section 7122 and the applicable Treasury regulations.

The Court also rejected the estate's objections concerning the independence of IRS Appeals and alleged improper communications between Appeals and IRS collection personnel.

Five Important Lessons for Taxpayers and Estate Representatives

1. An offer in compromise must be finalized before death. A pending offer, even one recommended for acceptance by an IRS examiner, does not automatically become enforceable.

2. A power of attorney generally terminates at death. A durable power of attorney does not ordinarily authorize an individual to continue representing a deceased taxpayer.

3. Executors must establish their authority. The estate's personal representative should promptly notify the IRS, ordinarily using Form 56, and arrange for any necessary new representation authorization.

4. A new offer may be necessary. If the taxpayer dies before the IRS accepts an offer, the estate may need to submit a new Form 656 through its authorized fiduciary, subject to applicable IRS procedures.

5. Estate administration and tax collection must be coordinated. Outstanding federal tax liabilities can complicate probate, distributions to beneficiaries, and the administration of estate assets.

Implications for Estate Planning and IRS Tax Controversies

Estate of Farwell demonstrates why unresolved federal tax liabilities should be addressed as part of comprehensive estate planning.

When a taxpayer is elderly, seriously ill, or facing significant financial hardship, delays in IRS collection proceedings can have substantial consequences.

Tax professionals should carefully evaluate the status of pending offers in compromise, installment agreements, collection appeals, and federal tax liens.

For estate representatives, the case also reinforces the importance of identifying outstanding tax liabilities early in probate and ensuring that communications with the IRS are conducted by individuals with proper legal authority.

The decision does not establish that every tax settlement becomes invalid upon a taxpayer's death. Rather, it addresses the particular situation in which the taxpayer died before the IRS completed the legally required acceptance process.

Conclusion

The Tax Court's decision in Estate of Farwell v. Commissioner reinforces a fundamental principle of federal tax settlement law: An IRS compromise must satisfy the statutory and regulatory requirements for a binding agreement.

Even an official IRS acceptance letter may be ineffective when the taxpayer has died before acceptance and the authority of the taxpayer's representatives has terminated.

For taxpayers and their families, the lesson is clear: Timely tax resolution, proper estate planning, and effective coordination between tax controversy counsel and estate representatives can help prevent costly disputes.

For practitioners, the decision serves as an important reminder that procedural compliance is essential in IRS collection matters.

How Marini & Associates, P.A. Can Help

At Marini & Associates, P.A., we assist clients with complex federal tax controversies, IRS collection disputes, offers in compromise, tax liens, and estate-related tax matters.

Our practice focuses on helping individuals, businesses, and estate representatives understand their rights, evaluate available tax resolution strategies, and navigate disputes with the Internal Revenue Service.

If you are administering an estate involving outstanding federal tax liabilities or facing an IRS collection matter, obtaining experienced legal guidance early can make a meaningful difference.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

Sources:

• Estate of Farwell v. Commissioner, T.C. Memo. 2026-95 (Sept. 28, 2026) — United States Tax Court.

• Internal Revenue Code § 7122 — Compromises.

• Treasury Regulation § 301.7122-1(e)(1) — Acceptance of an offer in compromise.

• Treasury Regulation § 301.7122-1(e)(5) — Reopening accepted offers.

• Internal Revenue Manual § 5.8.7.5 — Death of Taxpayer.

• Internal Revenue Code §§ 6320 and 6330 — Collection Due Process rights.

From GILTI to NCTI: The 2026 Tax Changes Every U.S. Owner of a Foreign Business Should Know

U.S. Taxation of Foreign Business Income

For purposes of this discussion, a “U.S. person” generally includes a U.S. citizen, lawful permanent resident (green card holder), an individual who satisfies the substantial presence test, and a domestic corporation, partnership, trust, or estate.

When a U.S. person owns an interest in a foreign operating company, several layers of taxation and reporting may apply. These can include the corporate income tax imposed by the foreign country, foreign withholding taxes on distributions, U.S. federal income tax, state income tax in certain jurisdictions, and extensive international information-reporting requirements.

One of the most important—and frequently misunderstood—features of the U.S. international tax system is that the United States does not necessarily wait until foreign earnings are distributed to the U.S. owner.

Under the anti-deferral provisions of the Internal Revenue Code, principally Subpart F and Section 951A, profits earned inside certain foreign corporations can be taxable to a U.S. shareholder in the year the income is earned, even if the foreign corporation makes no distribution to the shareholder.

Beginning with taxable years of foreign corporations beginning after December 31, 2025, the Section 951A regime changed significantly. The legislation enacted on July 4, 2025, commonly referred to as the One Big Beautiful Bill Act (“OBBBA”), replaced the familiar concept of Global Intangible Low-Taxed Income (“GILTI”) with Net CFC Tested Income (“NCTI”).

Although NCTI retains much of the framework of GILTI, several important changes can materially affect U.S. owners of foreign businesses.

Controlled Foreign Corporations

Both GILTI and NCTI operate through the Controlled Foreign Corporation (“CFC”) rules.

Generally, a foreign corporation is a CFC when more than 50 percent of the corporation’s total combined voting power or total value is owned by “United States shareholders.”

For this purpose, a United States shareholder generally is a U.S. person that owns at least 10 percent of the foreign corporation’s voting power or value.

Determining ownership can be more complicated than simply examining the shareholder register. U.S. tax law applies direct, indirect, and constructive ownership rules, including attribution among certain family members and related entities. As a result, CFC status can exist even when a taxpayer does not believe that he or she directly controls the foreign company.

Entity classification is also determined under U.S. federal tax principles rather than solely by the entity’s classification under foreign law. Depending on the circumstances and available elections, a foreign entity may be treated for U.S. tax purposes as a corporation, partnership, or disregarded entity.

GILTI 

GILTI was introduced by the Tax Cuts and Jobs Act of 2017.

Under the former regime, U.S. shareholders of CFCs generally were required to include their share of the CFCs’ “tested income,” subject to statutory exclusions and adjustments.

One particularly important feature was the Qualified Business Asset Investment (“QBAI”) exclusion. GILTI generally permitted a deemed 10 percent return on certain depreciable tangible property used in the foreign business, subject to adjustments including certain interest expense.

The practical result was that businesses with substantial investments in factories, machinery, hotels, agricultural equipment, and other tangible assets could potentially reduce their GILTI exposure through the QBAI calculation.

For an eligible domestic corporation, Section 250 generally provided a 50 percent deduction for GILTI, resulting in an effective federal corporate tax rate of approximately 10.5 percent before foreign tax credits.

In addition, a domestic corporate shareholder generally could claim a deemed-paid foreign tax credit for 80 percent of qualifying foreign income taxes attributable to the GILTI inclusion.

Now Beginning in 2026 NCTI Changes

NCTI retains the basic Section 951A anti-deferral structure but significantly changes the calculation.

The QBAI Exclusion Is Gone

Perhaps the most significant conceptual change is the elimination of the deemed tangible-asset return.

Under NCTI, the former QBAI-based reduction no longer applies. This means tested income is no longer reduced by a deemed 10 percent return on qualified tangible business assets.

The change can be particularly significant for capital-intensive foreign businesses, including manufacturers, hotels, agricultural operations, transportation companies, and businesses with substantial machinery or equipment.

The Section 250 Deduction Is Reduced

For eligible domestic corporations, the Section 250 deduction applicable to NCTI is 40 percent, rather than the former 50 percent GILTI deduction.

At the current 21 percent corporate income tax rate, this produces an effective federal rate of approximately 12.6 percent on NCTI before taking foreign tax credits into account.

Foreign Tax Credit Relief Improves

At the same time, the deemed-paid foreign tax credit percentage increases.

Under the former GILTI regime, only 80 percent of qualifying foreign taxes were generally creditable. Under the new NCTI rules, that percentage increases to 90 percent.

As a simplified mathematical matter, a 12.6 percent U.S. effective rate divided by a 90 percent credit percentage produces a break-even foreign tax rate of approximately 14 percent, although the actual result depends on the taxpayer’s facts, foreign tax credit limitation, expense allocation, and other applicable rules.

The new law also modifies the allocation of expenses for purposes of the Section 951A foreign tax credit limitation. In particular, interest expense and research and experimental expenditures generally are not allocated to the NCTI category in the same manner as under prior law. For some multinational groups, this can significantly increase the amount of usable foreign tax credits and reduce or eliminate residual U.S. tax.

There is an important counterpoint. The new rules generally disallow a foreign tax credit for 10 percent of certain foreign taxes imposed on distributions of previously taxed Section 951A earnings, including qualifying previously taxed earnings and profits (“PTEP”). Thus, foreign withholding taxes imposed when previously taxed NCTI or GILTI earnings are later distributed require careful analysis.

The Timing Rules Are Broader

OBBBA also significantly changed who bears a CFC inclusion when ownership changes during the year.

Under the former rules, a U.S. shareholder generally needed to own CFC stock on the last relevant day of the foreign corporation’s taxable year to have the corresponding Subpart F or GILTI inclusion.

Beginning under the new rules, a U.S. shareholder can have an inclusion based on the portion of the CFC year during which the shareholder owned the stock while the foreign corporation was a CFC.

This change is particularly important in mergers, acquisitions, and sales of foreign businesses.

A seller generally can no longer assume that selling the CFC stock before year-end eliminates the current-year inclusion. Purchase agreements involving CFC stock should therefore address the allocation of Subpart F and NCTI exposure between buyers and sellers.

The Treasury Department and IRS have already issued proposed guidance addressing these revised pro rata share rules.

The One-Month CFC Deferral Election Was Repealed

OBBBA also repealed the one-month deferral election previously available under Section 898(c)(2).

Foreign corporations that previously used the election—often resulting in a November 30 year-end where the majority U.S. shareholder used a calendar year—may have a short taxable year as they transition to the required year.

IRS Notice 2025-72 provided interim guidance addressing the allocation of foreign income taxes affected by this transition, and the Treasury Department and IRS subsequently issued proposed regulations addressing the allocation rules.

The transition should be reviewed carefully because the Section 898 amendments and the new Section 951A rules have different effective-date provisions.

Other Important International Tax Changes

OBBBA made several related changes that should be considered together with NCTI.

The Section 954(c)(6) CFC look-through rule, which generally permits qualifying dividends, interest, rents, and royalties received from related CFCs to avoid treatment as foreign personal holding company income, was made permanent.

The former Foreign-Derived Intangible Income (“FDII”) terminology was also replaced with Foreign-Derived Deduction Eligible Income (“FDDEI”). For taxable years beginning after December 31, 2025, the Section 250 deduction for qualifying FDDEI is 33.34 percent, producing an effective federal corporate tax rate of approximately 14 percent at the current 21 percent corporate rate.

Individual Shareholders and the Section 962 Election

The 12.6 percent NCTI rate described above applies to eligible domestic corporate shareholders. The treatment of an individual shareholder can be dramatically different.

An individual who owns CFC shares directly generally does not automatically receive the Section 250 deduction or the indirect foreign tax credit available to a domestic corporation. Without additional planning, a Section 951A inclusion can therefore be taxed at ordinary individual income tax rates.

Section 962 can change that result. An individual who holds shares directly or through a partnership or S corporation receives no Section 250 deduction and no credit for the corporate-level foreign taxes. The inclusion is taxed as ordinary income at graduated rates reaching thirty-seven percent. 

An election under Section 962 allows an individual to be taxed as though a domestic corporation stood in the chain, capturing the forty percent deduction and the ninety percent credit, at the cost of additional tax when the earnings are ultimately distributed; that later distribution can qualify for the 20 percent dividend rate if the CFC is resident in a treaty country. 

Whether that election helps depends on the foreign rate, the distribution policy, treaty status, and the owner’s other income.Where the CFC’s foreign effective rate exceeds 18.9 percent, the high-tax exclusion may remove the income from NCTI altogether.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

Sources:

• Public Law 119-21 (July 4, 2025), One Big Beautiful Bill Act (OBBBA) — particularly §§ 70321–70323 and related international tax provisions. The statute changes the §250 deduction to 40% for NCTI, replaces GILTI terminology with NCTI, and eliminates the former QBAI/deemed tangible-income return. Congress.gov
  Public Law 119-21 — Full Text

• Internal Revenue Code §951A — Net CFC Tested Income — principal statutory provision governing current inclusions of NCTI by U.S. shareholders of CFCs, as amended by OBBBA. Congress.gov

• Internal Revenue Code §250 — FDDEI and NCTI Deduction — provides the 40% deduction for qualifying NCTI and 33.34% deduction for FDDEI for applicable post-2025 taxable years. Congress.gov

• Internal Revenue Code §§951, 957, 958 and 960 — governing Subpart F inclusions, CFC status, stock ownership and attribution, pro rata shares, and deemed-paid foreign tax credits.

• IRS Notice 2025-72, 2025-51 I.R.B. — guidance concerning repeal of the §898(c)(2) one-month deferral election and allocation of foreign income taxes during the transition. IRS
  IRS Notice 2025-72

• 2026 Proposed Regulations under §§951, 951A and 6038 — Treasury and IRS guidance addressing the new pro rata share rules and NCTI provisions for post-2025 taxable years. IRS
  IRS Internal Revenue Bulletin 2026-39

• IRS Form 5471 and Instructions — reporting requirements for certain U.S. persons with interests in foreign corporations, including CFC reporting and the post-2025 §898 year-end rules. IRS
  IRS Instructions for Form 5471

• IRS Form 8992 — Calculation of Net Controlled Foreign Corporation Tested Income (NCTI) and Form 8993 — Section 250 Deduction for FDDEI and NCTI. The IRS's 2026 draft forms expressly incorporate the new NCTI terminology and calculations. IRS
  IRS 2026 Draft Tax Forms

• IRS FATCA Guidance / Form 8938 — reporting requirements and penalties concerning specified foreign financial assets; Form 8938 reporting is separate from FBAR reporting. IRS
  IRS FATCA Information for Individuals

Innocent Spouse Relief Does Not Erase a Federal Tax Lien on an Ex-Spouse’s Property Interest

A recent U.S. Tax Court decision provides an important warning for divorcing spouses, family-law attorneys, and tax practitioners: obtaining innocent spouse relief does not necessarily protect property from a federal tax lien attributable to an ex-spouse.

In Hasznos v. Commissioner, T.C. Memo. 2026-100, the Tax Court addressed whether a taxpayer who had obtained innocent spouse relief was entitled to recover the full amount paid to the IRS from the proceeds of real property that had been addressed in her divorce proceedings.

The answer depended not simply on the divorce judgment, but on who actually owned the property when the federal tax lien attached.

The Dispute

Emese Hasznos and her former husband had outstanding federal income tax liabilities for tax years 2012 through 2016. The IRS ultimately received $623,701 from the sale of real property and applied those funds toward the couple's outstanding liabilities.

Hasznos sought innocent spouse relief and requested a refund of the amount collected from the sale proceeds.

The innocent spouse issue itself was not the central problem. Instead, the dispute turned on the ownership of the real estate and the effect of the federal tax lien against her former husband's interest.

Under federal tax lien principles, when a taxpayer neglects or refuses to pay a federal tax liability after demand, the resulting lien generally attaches to all property and rights to property belonging to that taxpayer. Whether the taxpayer possesses a property interest is generally determined under applicable state law, while federal law determines the consequences of that interest for purposes of the federal tax lien.

The Divorce Judgment Did Not Transfer Title

The case illustrates an important distinction between being entitled to the proceeds from property and actually owning the entire property.

The divorce judgment contemplated the disposition of the real estate and gave Hasznos rights to the net proceeds. But the Tax Court examined Florida property law and concluded that the divorce proceedings did not eliminate her former husband's ownership interest in the property.

Following the divorce, sufficient incidents of ownership remained with the former husband for him to possess a 50% tenancy-in-common interest.

That distinction proved decisive.

Because the former husband continued to own an interest in the property, the federal tax lien against him could attach to that interest. The divorce judgment's allocation of the sale proceeds to Hasznos did not retroactively eliminate the property interest to which the federal tax lien had attached.

Innocent Spouse Relief Has Limits

Section 6015 of the Internal Revenue Code can provide significant protection to a spouse who otherwise would be jointly liable for taxes attributable to a joint return.

But Hasznos demonstrates that innocent spouse relief and federal tax lien law address different questions.

Innocent spouse relief can eliminate or reduce a taxpayer's personal liability for a joint tax debt. It does not necessarily eliminate a federal tax lien that validly attached to property owned by the other spouse.

Thus, although Hasznos was entitled to innocent spouse relief, she could not recover the portion of the proceeds attributable to her former husband's ownership interest.

The Tax Court effectively limited her recovery to 50% of the net sale proceeds, leaving approximately $311,851 attributable to the former husband's interest available to satisfy the federal tax lien.

The Indemnification Provision Was Not Enough

The divorce arrangement also provided Hasznos with rights against her former husband. But contractual rights between former spouses do not necessarily defeat the government's federal tax lien.

The practical problem was particularly significant because the former husband had reportedly left the United States and could not be located.

The Tax Court recognized the difficulty this created for Hasznos, but the Court could not simply shift the economic loss to the government on equitable grounds. Her remedy for the amount attributable to her former husband's interest was essentially against the former husband under the parties' indemnification arrangements.

That remedy may have had little practical value if he could not be found or collection against him was impossible.

A Critical Lesson for Divorce and Tax Planning

Hasznos is a reminder that a divorce decree stating that one spouse is entitled to property—or to all of the proceeds from its eventual sale—should not automatically be treated as equivalent to a completed transfer of legal title.

When real estate is involved, practitioners should determine:

• Who holds legal title after the divorce?

• Did the divorce judgment itself transfer ownership under applicable state law?

• Was a deed or other appropriate transfer instrument executed and recorded?

• Are there existing federal tax liens against either spouse?

• Could a lien attach between the divorce and a later sale or transfer?

• Does the settlement merely allocate future sale proceeds rather than actually transferring the underlying property?

These questions can have dramatically different federal tax consequences.

Practical Takeaway

The result in Hasznos might have been very different if the former husband's ownership interest had been properly transferred before the federal tax lien attached.

For taxpayers and advisers, the lesson is straightforward: do not assume that a marital settlement agreement or divorce judgment allocating property economically also accomplishes the necessary legal transfer of title.

When one spouse is intended to become the sole owner of real estate following a divorce, practitioners should confirm that the transfer has actually occurred under state law and that the public records accurately reflect the intended ownership.

Tax liens follow property rights—not merely the parties' economic intentions.

Hasznos v. Commissioner therefore sits at an important intersection of divorce law, state property law, innocent spouse relief, and federal tax collection. A failure to coordinate those rules can turn what appears to be a favorable divorce settlement into a substantial and unexpected federal tax collection problem.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

Mistake or Fraud? What the GAO's New $304 Billion Estimate Means for Taxpayers

On September 25, 2026, the U.S. Government Accountability Office released a report titled "Tax Fraud: The Federal Government Loses an Estimated $116 Billion to $304 Billion Annually." It is the first comprehensive federal estimate of how much revenue is lost to tax fraud each year, as opposed to honest mistakes or ordinary noncompliance.

The headline number will get attention in Washington. For taxpayers and their advisors, the more useful question is what the report says about where IRS enforcement is likely headed.

The Numbers

GAO estimates annual federal tax fraud losses at $116 billion to $304 billion, based on data from 2018 through 2024. Applied to tax year 2022, that is roughly 2% to 6% of all federal tax owed.

Put another way, against a 2022 total tax liability of about $4.6 trillion and a gross tax gap of about $696 billion, fraud may account for 17% to 43% of the tax gap.

GAO built the estimate from three sources of data:

• IRS cases of actual and potential fraud;

• The portion of the tax gap attributable to potential fraud; and

• Tax evasion from the "shadow economy," meaning economic activity deliberately hidden from the government.

GAO ran these inputs through a Monte Carlo simulation. The low end of the range comes from IRS case data and tax-gap fraud; the high end comes from a separate estimate of shadow-economy evasion. GAO acknowledges that the figures are "inherently uncertain" but says they reflect the best available evidence and methods.

Fraud Is Not the Same as a Mistake

GAO defines fraud as a "willful misrepresentation to obtain something of value". That distinction matters, and it is where the IRS pushed back.

In the IRS's formal response, IRS CEO Frank Bisignano wrote that the report "does not sufficiently distinguish fraud with broader taxpayer noncompliance," noting that underreported income or inaccurate reporting "do not necessarily meet the legal threshold for fraud." GAO disagreed. It said its estimate excludes non-fraud noncompliance and uses a definition consistent with the IRS's own.

This is more than a technical argument. Under the tax law, the line between negligence and fraud has major consequences:

• Penalties. An accuracy-related penalty for negligence or substantial understatement is generally 20% of the underpayment (IRC § 6662). The civil fraud penalty is 75% (IRC § 6663).

• Statute of limitations. The IRS normally has three years to assess additional tax. When a return is fraudulent, there is no limitations period at all (IRC § 6501(c)(1)).

• Criminal exposure. Willful evasion can be prosecuted under IRC § 7201, and willfully filing a false return under § 7206(1).

• Burden of proof. The IRS must prove civil fraud by clear and convincing evidence (IRC § 7454(a)). That is a higher bar than it faces for ordinary deficiencies.

A report that puts a large dollar figure on "fraud" adds to the political pressure to treat questionable positions as more than honest error. Taxpayers with a legitimate explanation for a reporting problem should make sure that explanation is documented early.

What the IRS Does Today

The report credits the IRS with real results. Its Return Review Program, an automated system that screens individual returns for identity theft and refund fraud, stopped about $88 billion in invalid and potentially fraudulent refunds from 2018 through 2024. Over the same period, the IRS closed more than 4.8 million audits recommending an average of $24.9 billion a year in additional tax. That figure covers all types of noncompliance, not just fraud.

GAO also found that IRS auditors are trained to spot fraud indicators during routine exams. When they do, the case can lead to civil penalties, a criminal investigation, or referral for prosecution.

The report gives one example: a Georgia man who filed two 2021 returns under different Social Security numbers, claimed losses from a supposed gold-mining business in Ghana, and received a refund of more than $3.3 million. He was sentenced in January 2026 to 14 years and seven months in prison.

What GAO Recommends

GAO's main criticism is organizational. The IRS assesses fraud risk routinely but has no antifraud strategy and no designated antifraud entity to manage fraud risk "in a strategic and coordinated manner". GAO made two recommendations to the Commissioner:

1. Develop and document an antifraud strategy, either agency-wide or within operating divisions.

2. Designate an entity to coordinate and oversee fraud risk management.

The IRS partially agreed with both. It said it would "consider developing an agency wide antifraud strategy" and that its Chief Tax Compliance Officer already serves as the coordinating entity. GAO called that designation "a positive step" but said the IRS still needs to document that office's full responsibilities.

The report has also entered the IRS funding debate. Rep. Richard Neal, the ranking Democrat on the House Ways and Means Committee, cited it as evidence that the IRS needs staffing and enforcement funding.

Practical Takeaways

• Expect more fraud-focused screening, not less. GAO designed the estimate to help Congress and the IRS weigh the cost of new controls against the losses they would prevent. More automated filters usually mean more legitimate returns get flagged along with fraudulent ones.

• Refund claims deserve extra care. Large refunds, amended returns, and claims driven by business losses or credits draw the most scrutiny. Keep documentation ready before you file.

• Protect your identity. An IRS Identity Protection PIN blocks anyone else from filing a return under your Social Security number. You can request one through the IRS website.

• Correct problems before the IRS finds them. If a past return has an error, fixing it voluntarily is almost always better than waiting for an exam. That applies with extra force to unreported foreign accounts, offshore income, and cash-business receipts, which sit close to the "shadow economy" GAO is measuring.

• If an examiner raises fraud, get counsel right away. Fraud referrals change the stakes: higher penalties, no statute of limitations, and possible criminal exposure. How you answer the first questions can shape the rest of the case.

Bottom Line

GAO's estimate is a range built on imperfect data, and the IRS disputes parts of it. Still, it gives Congress a concrete number to point to at a time when IRS funding and enforcement priorities are being debated. Taxpayers should read it as a sign that fraud detection will stay a priority. The best protection remains accurate reporting, good records, and prompt correction of past errors.

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This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.