Thursday, May 21, 2009

Obama Legislative Proposal - Assessment of Restitution as Tax

I have previously blogged here a very brief summary of the President's tax related legislative agenda, presented in which is known as the "Greenbook" and is available here. I now discuss in more detail some of the proposals. Today, I discuss the following proposal (pp. 97-98 of the Greenbook):


Current Law

In criminal tax cases, a District Court may issue an order requiring the defendant to pay restitution of existing tax liabilities. The District Court has authority to order restitution under the criminal provisions of Title 18, not the Internal Revenue Code (Code). Because the assessment procedures under the Code apply only to taxes imposed by the Code, those procedures do not apply to restitution orders issued under Title 18, even if the restitution order relates to an existing tax liability.

Reasons for Change

Because court-ordered restitution in criminal tax cases cannot be assessed as a tax, the IRS cannot use its existing assessment systems to collect and enforce the restitution obligation. This leads to unnecessary duplication of efforts, delays, and confusion in the administration of court-ordered restitution.


The proposal would allow the IRS and the Treasury Department to immediately assess, without issuing a statutory notice of deficiency, and collect as a tax debt court-ordered restitution. The taxpayer would not be able to collaterally attack the amount of restitution ordered by the court, but would retain the ability to challenge the method of collection.

The proposal would be effective after December 31, 2010.

By way of background, and as noted in the cryptic statement of current law, restitution is not statutorily authorized for convictions of pure tax offenses. The reason is that the IRS has assessment and collection mechanisms for collecting taxes that are deemed quite effective for collecting taxes and hence Congress did not deem it appropriate to overlay the separate system for collecting restitution. Notwithstanding this general notion that restitution is not available in tax cases, many tax crimes are charged along with Title 18 offenses for which restitution is allowed. Thus, for example, the indictment in tax crimes often includes a defraud / Klein conspiracy (18 U.S.C. § 371) charge that is a separate crime under Title 18 and thus permits the Court to impose restitution. More importantly, the Department of Justice Tax Division requires that plea agreements contain a restitution provision for tax and some of the penalties regardless of whether, absent the plea agreement, the sentencing court could impose restitution. (For the DOJ Tax CTM discussion of Restitution in tax cases, see here., which among other things provides that the prosecutor cannot word the restitution agreement as a compromise of the underlying civil tax liability.) As best I understand DOJ Tax's policy decision to require restitution in tax cases, it is not to end-run the congressional judgment to not allow restitution in tax cases, but to force some monetary resolution in the criminal case in advance of the IRS using its collection enforcement tools.

Usually, the IRS is unable to marshall its collection enforcement tools right away because, most of the taxes involved in criminal cases, require a predicate notice of deficiency and then permit prepayment administrative review and litigation before the IRS can assess the tax. Assessment is the predicate act required to using the IRS enforcement tools. The proposal allows the immediate assessment of the amount of the restitution without any other applicable statutory or administrative predicates. Thus, the restitution amount can be assessed without a notice of deficiency and the remedies / delay opportunities it affords.

Of course, in many cases where restitution is agreed upon as part of the plea bargain, the defendant will have the incentive to fully pay the restitution amount in order to obtain sentencing benefits. The proposal thus affects only restitution amounts that are not paid at or before sentencing.

Finally, the proposal does not address the defendant upon whom restitution is not imposed. In tax cases, this could occur where the only crime(s) of conviction are tax crimes and the defendant does not agree to restitution or accept some benefit having a condition of restitution. The IRS will then have to issue a notice of deficiency for those taxes where one is required (income and estate and gift tax) and await the taxpayer's pursuit of administrative or judicial remedies before assessing. This will be true even if the sentencing court determines a tax loss number in the sentencing phase. (On a related topic, I have previously discussed here the application of collateral estoppel on the basis of events at the sentencing.)


  1. Excellent post Jack. Recently a SDNY sentencing jusdge ordered the defendent pay restitution as part of the terms of supervised release event though there was no provision in the plea agreement for restitution and even though restitution is not authorized in Title 26 tax cases.


  2. Thanks, John.

    Your comment is correct and is excelletn. A judge can order restitution as a condition of some sentencing benefit that the judge is not required to give. I suppose that, if the defendant does not want the benefit, he can object and avoid restitution. I just have not heard of that happening, though.


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