Saturday, September 22, 2012

Restitution in Tax Cases (9/22/12)

In United States v. Wirth, 2012 U.S. Dist. LEXIS 134429 (2012), here [will supplement with the link when my assistant pulls it down], the District Court determined restitution of $6,457,500.00 after the defendant pled guilty to one count of defraud / Klein conspiracy under 18 U.S.C. Section 371.  The opinion is straight-forward and blazes no new trails.  I post it only to remind students of the following points and then I include my Federal Tax Crimes text discussion of restitution in tax cases:
  1. Although restitution is normally not allowed for a tax crime of conviction under Title 26, it is allowed for a tax crime convicted under Title 18 -- here the defraud / Klein conspiracy to impair or impede the lawful functions of the IRS.
  2. I am surprised that the parties did not resolve this issue in the plea agreement.  I think the Government is now trying to do that in plea agreements.  (See excerpted provisions of my text below.)  Perhaps the parties were just too far apart and could not resolve it.  And, of course, when the case is fully worked over civilly, I suppose that the actual tax due could be determined to be less than the amount of the restitution.  I suppose there might be some way to correct the restitution awarded if that were to occur.  However, based on my limited anecdotal experience, I think that the Government's calculations of tax loss / restitution are generally so conservative that a lesser civil tax number later is very rare.  Indeed, since tax loss / restitution should include only the tax amount attributable to fraud, the defendant may conceptually owe more tax dollars after audit if the IRS wants to chase that down further.
  3. There is no indication of whether the defendant can pay the restitution / tax, so the issue in the long term may be moot.
  4. Like the tax loss for sentencing, the Government must prove the amount of restitution by a preponderance of the evidence.  Here is the "money" analysis by the Court:
Defendant argues that the Court, "cannot blindly accept the Government's representations as to loss without some evidentiary basis." United States v. Petters, No. 08-364, 2010 US Dist LEXIS 55040, at *7 (D. Minn. June 3, 2010). Unlike the Petters case, where the number of victims and the complexity of the scheme made restitution complex, here, the Government is the one identified victim. The Defendant argues that the calculation of restitution amount is also too complex, citing Id. at *10, but even though the Government took more than four years to review Mr. Wirth's accounts, most of the Government's work was investigating the crime and has not overly extended or complicated the restitution question. Once receipts and payments were tracked, the Government used a simple draw method to calculate the tax loss. In Pierce, the Government had a similar problem to the present case; that is, the accounting of the offending organization was fraudulent and thus the books were unreliable. 479 F.3d at 553-54 ("[Defendant] failed to maintain accurate financial records, and failed to submit audit reports as required."). The Court of Appeals  [*4] upheld the award of restitution despite these uncertainties, relying on the calculations of the Government agency, "given the available information." 479 F.3d at 554. The Government's calculations are also supported by the available information, as explained more fully below.
The Court then makes findings which seem to me to be rather cryptic.  I won't repeat them here.

For background on restitution in tax cases, I offer the following from my text (I omit the footnotes because they are too extensive for this blog presentation):
b. Restitution in Tax Cases. 
The statute permits restitution to the victim in convictions under Title 18 and certain specified other offenses, all of which are nontax offenses.  Tax crimes under Title 26 are not included among the offenses for which restitution is authorized in the statute.  Restitution is thus not allowed for a pure tax offense of conviction.  Of course, if the count(s) of conviction includes a Klein conspiracy or some other Title 18 offense, statutory restitution is permitted.  For this reason, the Government will usually charge false refund claims operations under the false claims act, 18 U.S.C. §  286. 
That restitution is not allowed for tax crimes is not an anomaly.  In tax cases, of course, the victim is the United States and the harm is the tax not paid.  The United States has “elaborate procedures” for determining and collecting tax independent of the criminal system.  As noted above, this system will be engaged after the criminal case is concluded at least when the taxpayer is the criminal defendant.  The IRS will conduct such further investigation as necessary to determine the correct civil tax liability and then send out a notice of deficiency for the taxes due.  As also noted, the amount the taxpayer may owe for civil tax purposes may be larger – sometimes much larger – than the criminal number used in the prosecution or the tax loss number used for sentencing.  Accordingly, restitution is not available in tax cases except where the defendant consents to it in the plea agreement. 
For the taxpayer defendant, the obligation of restitution for the tax evaded is, of course, redundant with the underlying obligation (at least the portion of the tax obligation – underpayment or “deficiency” in tax speak -- attributable to fraud) and, as noted, the Government (via the IRS) has elaborate mechanisms to determine and assess the amount of the tax and to collect the amount so assessed.  So the imperative to order restitution in the criminal phase, even if there is a required Title 18 offense, is not so great and sentencing for the Title 18 offense may just ignore restitution or state generally that the taxpayer will pay the tax determined ultimately to be due.  But, persons other than the “taxpayer” may be convicted of tax crimes – e.g., preparers or advisors may be convicted of conspiracy to violate §§ 7201 or 7206(2) related to other persons’ tax liabilities.  In this case, particularly where the Government is for some reason unable to collect from the taxpayer(s), the Government may seek an order of restitution but must, as noted, have a Title 18 crime of conviction to justify restitution.  If the Government does seek restitution it will have to prove the amount of the restitution.  In the sentencing phase where this is relevant, the Government’s proof is only the preponderance of the evidence standard and not the beyond a reasonable doubt standard required for conviction of the substantive criminal charges. 
Although the statute does not permit restitution in tax cases, the Court may provide restitution in the following instances: 
First, 18 U.S.C. § 3663(a)(3) permits a court to order restitution if the parties agree to it.  We noted above that, usually in tax cases, the quantum of the underlying civil tax liability will not be addressed in the criminal phase of the case.  Sometimes, however, the underlying tax liability may be addressed in the plea agreement.  The plea agreement is a contract.  It may be enforced as a contract, and the sentencing court may include the agreements reached in the sentencing terms.  Thus, if the parties in the plea agreement provide for restitution, the court may impose that term.  Usually, in the plea agreement – the “contract” – the Government will (i) include restitution not only for the year of conviction but for relevant conduct years and (ii) not use language committing the IRS to that amount as the ultimate civil tax liability (there may be noncriminal adjustments that support a higher ultimate tax liability). 
Second, the court may impose restitution as a condition of some benefit that it is giving the defendant, such as supervised release under 18 U.S.C. § 3583(d).  If the defendant wants the benefit, he has to accept the cost of the benefit.  In a tax case, quantifying the amount for restitution as a condition for supervised release could logically be viewed as the unpaid portion of the tax loss (which may be the tax loss for the count(s) of conviction or even all relevant conduct tax loss).  The Fifth Circuit has, however, cryptically limited the scope of the amount that can be required as a condition of supervised release as follows: 
Restitution is not allowed under § 3663 as part of the sentence in a federal tax evasion case. Restitution to the IRS may be imposed as a condition of supervised release under § 3583, but only if "the specified sum of taxes . . . has [] been acknowledged, conclusively established in the criminal proceeding, or finally determined in civil proceedings." As the exact amount of taxes owed by Nolen was not conclusively established at trial, restitution was inappropriate under § 3583 as well. In addition, the district court's order that Nolen “comply with any IRS requirements to pay delinquent taxes and penalties according to the schedule of payments that the IRS imposes” should serve the same purpose as restitution. Accordingly, we reverse the district court's order of restitution and remand for resentencing consistent with this opinion. 
Note the emphasis on conclusively established.  Is that a higher burden than beyond a reasonable doubt and what does conclusively established even mean?  In any event, it certainly is a higher burden than preponderance of the evidence which is the normal burden of proof for sentencing matters.  So, I am not sure I that the Fifth Circuit's language is not a just hyperbole which, like much judicial hyperbole, may get repeated without any ultimate meaning. 
Moreover, as suggested in the quote, the district court can achieve most of the same effect as restitution by ordering, as a condition of supervised release or pursuant to the plea agreement, that the defendant file or correct past tax returns and pay any resulting tax.  Such an order also requires the defendant to satisfy an obligation he or she already has.  And, since it is not restitution, the Government cannot employ the collection tools that it would have available if it were restitution.  But, practically, an order to comply with past tax obligations achieves most of the effects of an order of restitution. 
DOJ Tax has a policy that prosecutors “must consider” including a restitution requirement in the plea agreement for a criminal tax case.  Further, restitution is the rule rather than the exception and is available by plea agreement in virtually every criminal tax case.  This means that restitution will be included barring some compelling reason not to.  Furthermore, the contractual restitution that include not only the amount for the agreed count(s) of conviction, but also taxes for the dismissed counts and perhaps even relevant conduct for noncharged years (although as noted above there are practical considerations mitigating the inclusion of noncharged years).  The purpose of this restitution requirement is to give the Government immediate access to collection of the amount specified without having to go through the predicate procedural requirements to assess the tax liability and collect it.  This may not be all bad because it may lay the foundation, by prepayment before sentencing, for a finding extraordinary restitution which is a favorable sentencing factor.  But, there may be one downside to contractual restitution for taxes; the IRS apparently takes the position that the restitution amount even though for the tax liability and applied to the tax liability, is not itself a tax liability that is subject to the procedures that permit the IRS to compromise tax liabilities.  This means that, if the taxpayer foregoes or can forego contractual restitution in the plea agreement, he or she may be able to do an offer in compromise for the resulting civil tax, penalties and interest, but can’t do that if it is contractual restitution.  
Even in the absence of restitution, prudence may dictate that the civil tax liability be resolved (if possible) and paid prior to sentencing, if possible, in order to strengthen the argument that the defendant qualifies for the acceptance of responsibility downward adjustment. 
Amounts paid as restitution for taxes are applied to the taxpayer’s tax liabilities for the year(s) to which the restitution applies.  Notwithstanding that the restitution is applied against those taxes, the restitution and payment itself is not a determination and assessment of the tax liability and the IRS must independently determine and assess the liability. 
In the section immediately below I discuss fines, but some courts have used fines as a substitute for restitution in tax cases.  In a recent § 7202 case involving unpaid taxes withheld from employees, the tax loss substantially exceeded the indicated fine range under the Sentencing Guidelines.  The sentencing court noted that it could not order restitution but, at the Government’s request, could impose a fine outside the Guidelines range, based upon § 3571's grant of authority to impose an “alternate fine based upon gain” to the defendant. 
Restitution (whether for taxes or otherwise) may be enforced under the Federal Debt Collection Practices Act (“FDCPA”).  The Government’s ability to enforce restitution under the FDCPA is made subject to the Consumer Credit Protection Act (“CCPA”), but if the restitution is for taxes, the garnishment restrictions of the CCPA are not applicable. 
Finally, Congress amended the Code in 2010, to make the amount ordered for restitution of tax immediately assessable and collectible without the usual predicate notice of deficiency.  The IRS is required to assess the restitution amount once the criminal judgment becomes final.  A notice of deficiency is not required as a predicate to assessment of the restitution amount.  The defendant / taxpayer may not thereafter contest civilly the tax restitution amount so assessed.  Although it is clear that the provision applies to tax restitution ordered for a count of conviction under Title 26 (the Internal Revenue Code), it is perhaps not clear that the provision applies to tax restitution for a count of conviction under Title 18 or, for that matter, an FBAR count of conviction under Title 31.  These provisions allow the IRS to use its powerful nonjudicial collection tools (lien and levy) to collect the tax underlying an order of restitution of taxes.

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