Saturday, February 4, 2012

TIGTA Report on IRS Processing of Restitution (2/4/12)

TIGTA has released a report dealing with restitution  in federal tax criminal cases.  See TIGTA, Report 2012-30-012 (1/27/12), titled Procedures Are Needed to Improve the Accounting and Monitoring of Restitution Payments to Prevent Erroneous Refunds, here.

The Report deals with processing issues that have resulted in improper administrative action with respect to restitution.  For background on restitution in criminal tax cases, readers might want to review the relevant portion of my book, here.  See also my blog discussions on restitution by clinking the key word below.

Here are some other comments on the TIGTA report.

1. Restitution, where ordered, is not the same thing as a tax assessment.  In order for the IRS to use the IRS collection tools available for tax assessments, a formal tax assessment is required.  Since tax assessments related to the underlying conduct generally do not precede sentencing for tax crimes, the IRS needs to move promptly to make the assessment so that the IRS administrative procedures are in place.

2. The report does note the 2010 change in the law (discussed in my excerpt) to permit immediate assessment of tax amounts imposed as restitution.  Note that the IRS can still investigate and make supplemental assessments beyond the amount of restitution, provided that the statute of limitations is still open as it often will be after criminal conviction because of the unlimited statute in the case of fraud.  A conviction of a tax crime other than tax evasion is not preclusive of fraud; in that type of case, the IRS must still assert and prove fraud by clear and convincing evidence.  Moreover, even the award of restitution, like the determination of a tax loss for sentencing, is not preclusive of fraud.


  1. Jack,

    Whether restitution payments constitute "fines" under the IRS Tax Whistleblower statute (IRC s. 7632) for purposes of calculating the reward under that section was discussed and commented on at length at the recent IRS hearings on s. 7632. Writing loosely, the current IRS position, as reflected in the IRM, is that restitution payments do not qualify for reward, as they constitute "fines."

    Personally, I believe there is a fair amount of confusion as to what, in a criminal tax case, a restitution payment represents. Without reflecting on the subject, I had thought restitution was a proxy for the taxes owed, and avoided the necessity for a separate civil action by IRS civil. Others have said no, and that the IRS (civil) maintains a separate civil action crediting the restitution action against the amounts owed.

    Not having a dog in the fight, I didn't figure out the correct answer to what actually happens in a criminal/civil tax case. What does restitution actually represent and who does the calculation, how and when?

    Can you throw any light on this? Even for practicing tax lawyers, as the rambling, eye-glazing discussions at the recent IRS hearings on the WB statute attest, this is a confusing topic!

    Jack, please don't post this comment if you would prefer not to wade into this controversy.



    1. Patrick,

      I have not followed this issue enough, so what I say may be superficial. So take my comments with a grain of salt (or glass of red).

      My understanding is that, in criminal tax cases, the restitution when ordered is to the Government for the taxes involved. (In my cases, it has been the criminal tax numbers.) As I understand it, the IRS receives the restitution payments. Then, to close the loop, the IRS is supposed to assess the amount of the restitution (plus any additional amounts that represent civil numbers it thinks is due, but will have to go through the deficiency procedures for those) and credit the restitution payments received to the taxes assessed. At the point the restitution payments are applied to the taxes assessed, it seems to me, the amounts should be in the whistleblower's reward base. The IRS has collected the tax, albeit in the case of restitution through the restitution mechanism.

      Now, if the criminal tax case has other charges with other "victims" than the IRS and restitution is awarded to those other victims, then it would not and should not be in the reward base.

      Could you refer me to the particular IRS hearings you are citing? I would like to take a look at them, because on its face it just doesn't make sense.

      Thanks as always for your comments,


    2. Jack,

      The candle may be worth more than the light with this one, but here are a couple of references to articles and blogs by tax whistleblower attorneys on the topic:

      Bear in mind, these are written by tax lawyers who specialize in whistleblower representation so....

      My suspicion is that, at the bottom of all this, is a dilemma presented to the IRS and DOJ by Mr. Birkenfeld: should he be entitled to a percentage of the $700M penalty imposed on UBS. After all he reported what the Swiss banks were up to, but, also, he was sentenced to 4 years for what he did himself.

      The confusion is between fines, restitution and assessments. As I implied, red wine is not needed if one delves into this debate!

      Best, Patrick

  2. Patrick,

    Restitution is different from criminal fines. Fines are punishment; restitution is merely reimbursing the victim. So, I can see that the might balk at paying Birkenfeld or any whistleblower a reward for a fine.

    I have not done the work to determine whether, under the statute, fines should be included in the reward base. If the statute does not include fines, then the issue of whether it should is one best addressed to Congress. That, of course, just begs the question of whether the words used in the present statute are flexible enough to cover fines.

    My quick read of the statute is that fines are probably not included. I think the sense of the statute is that it is meant to cover proceeds collected by the IRS as taxes, penalties and interest and additional amounts (the latter being a term of art in the Code, referring to certain types of add-ons often like penalties), not to proceeds that are collected as fines. Indeed, I am not even sure that the IRS gets the fines collected by the Government.

    At any rate, I can offer anything particularly helpful on that.

    I can say that fines are different than restitution and I would think that restitution of taxes, penalties and interest would qualify for inclusion in the whistleblower base.

    Jack Townsend

  3. Gentlemen, the IRS realizes that they have no choice but to pay Birkenfeld his whistleblower reward because he satisfies all of the touchstones contained within the statute.

    Interestingly, trying to deny him a reward based upon the "planned and initiated" bar (whereby those who "planned and initiated" the conduct being reported on are barred from collecting) fails because of the very wording of the Deferred Prosecution Agreement (DPO). In the DPO, UBS admitted to engaging in this conduct as far back as 2000 whereas Birkenfeld wasn't even hired by UBS until 2001. So he couldn't have possibly "planned and initiated" this, no matter how hard the IRS might try to redefine the term, "planned and initiated".

    Furthermore, trying to attach different labels to the $580 Million IRS fine is a transparent ploy to pull an end-run on the whistleblower law. Such efforts would surely be shot down by the U.S. Tax Court (where there is a direct right of appeal, and review of, IRS whistleblower determinations).

    The bottom line is this: The IRS can call the $580 Million collected from UBS anything they want. However, they only collected those monies from UBS because of the inside information that was provided by the whistleblower, Birkenfeld. This is confirmed by the SEC and U.S. Senate investigations into UBS.


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