Question 10: If the amount of criminal restitution ordered and the subsequent restitution-based assessment is determined to be excessive by a subsequent examination, can the Service abate any portion of the assessment?
Answer 10: If the Service determines, pursuant to examination, that the restitution amount ordered is excessive, the Service should contact the Justice Department's Tax Division or the proper U.S. Attorney's Office and request a modification of the restitution order. When the restitution order is amended, the Service may abate the related assessment under section 6404 to bring it in line with the amount in the amended order. Although the taxpayer is not precluded from seeking abatement under section 6404 before the restitution order is modified (notwithstanding the restrictions of section 6404(b)), a valid and meritorious section 6404 request by the taxpayer still requires the taxpayer or the Service (through the Justice Department) to seek modification of the restitution order in order to reduce the amount because the Service is bound by the actual terms of the restitution order in making an assessment under section 6201(a)(4)(A).Q&A 10 is then modified by CC-2013-012 (7/31/13), here, which reasons:
The treatment of a restitution-based assessment as separate and distinct from an actual determination of tax liability for the same tax period requires clarification and revision of Question and Answer 10 in Chief Counsel Notice CC-2011-018, The Assessment and Collection of Criminal Restitution. The answer to question 10 in that document addressed the situation where restitution ordered "is excessive" compared to the amount of tax liability determined by civil examination for the same tax periods. By using the term "excessive," Question 10 erroneously assumed that the amount of restitution is directly related to, comparable with, or an aspect of tax liability as determined by the Service's examination. On the other hand, Question and Answer 10 properly concluded that the Service may only abate a restitution-based assessment to bring it in line with an amended restitution order from the sentencing court. Regardless of whether the civil examination for the same tax period covered by the restitution order results in deficiency determination greater or lesser than the amount of restitution, the Service shall assess and collect the full amount of restitution ordered.
It should be clarified that a federal district court may only modify a restitution order in the limited circumstances listed in 18 U.S.C. § 3664(o)(1); therefore, a taxpayer's opportunities to seek modification of his or her restitution order are more limited than implied by Question and Answer 10. The Service should not contact the Justice Department's Tax Division or U.S. Attorney's Office to request a modification of the restitution order based on the results of the civil exam. Defendants who wish to challenge the amount of restitution must do so as part of the criminal case and cannot wait until the civil examination to argue that the amount of criminal restitution is too high. Only if the federal district court amends the restitution order pursuant to 18 U.S.C. § 3664(o)(1) will the Service assess and collect an amount of restitution different from that originally ordered in the initial criminal sentence.
Although criminal restitution and a civil tax liability are distinct, the Service may not collect both for the same period because that would be impermissible double collection. See Tucker, 217 F.3d at 962 (explaining that criminal restitution for a tax crime should be ordered in favor of the IRS and calculated based on the tax owed and that "any amounts paid to the IRS as restitution must be deducted from any civil judgment IRS obtains to collect the same tax deficiency"); Helmsley, 941 F.2d at 102 ("[W]e believe it is self-evident that any amount paid as restitution for taxes owed must be deducted from any judgment entered for unpaid taxes in such a civil proceeding.").
Any payments made to satisfy the restitution-based assessment must also be applied by the Service to satisfy the civil tax liability for the same tax period. The proper application of payments is achieved through the use of a mirrored assessment of restitution order and ultimate civil liability for the same period.Does this mean that, if a preparer makes restitution, the taxpayers who actually owe the tax are relieved from the liability to pay the tax? (If so, there are follow-through questions, such as whether the taxpayers have cancellation of indebtedness income?)
In United States v. Al-Suqi, 2013 U.S. Dist. LEXIS 152450 (ED VA 10/22/13), a preparer was convicted and ordered to make restitution to tax liability related to the fraudulent returns. The defendant complained that restitution should be reduced by any amount that the taxpayers paid. The Court states the defendant's argument and its resolution as follows (emphasis supplied):
Defendant objects to the restitution figure of $73,870.00 provided in Paragraph 77 of the PSR. Defendant argues that the restitution figure should be reduced in the amount that Defendant's taxpayer clients are required to pay to the Internal Revenue Service ("IRS"). (Def. Obj. to PSR at 1.)
The Court will overrule Defendant's objection, but will enter an order that does not permit the IRS obtain a double-recovery of the deficiencies owed by Defendant's clients. Pursuant to 18 U.S.C. §§ 3583(d), 3563(b)(2) and 3556, a court may include an order of restitution as a condition of supervised release. Here, the PSR lists a restitution amount of $73,870.00, the sum of the tax losses incurred by the IRS because of the charged conduct by Defendant. These amounts were proven at trial. (See Gov't Ex. 40-1.) n1
n1 The PSR states that restitution is required in this case pursuant to 18 U.S.C. § 3663A. (PSR ¶ 18.) Section 3663A, the Mandatory Victims Restitution Act ("MVRA") does not apply to offenses under Title 26. Defendant's only offense that does not fall under Title 26 is False Statement to Federal Agent, in violation of 18 U.S.C. § 1001. As noted in the PSR, this offense did not cause a loss to the IRS. (PSR ¶ 19.) Accordingly, in this case the Court may only order restitution as a condition of supervised release pursuant to 18 U.S.C. § 3583(d), which allows for an order of restitution to be imposed for any criminal offense, including those in Title 26.
While the IRS will receive full restitution of this amount, it is not entitled to a double-recovery. See United States v. Smith, 398 F. App'x, 938, 942 (4th Cir. 2010) (noting that the district court had erred in "failing to order restitution to the IRS in the full amount of its losses, with the amount to be later reduced by amounts recouped from taxpayers."); United States v. Cadet, 664 F.3d 27, 34 (2d Cir. 2011) (noting that in imposing restitution as a condition of supervised release, the district court erred in failing to "reduce the total to be paid under the restitution order to account or payments that the taxpayer-clients have made to the IRS. . ."). Defendant's individual taxpayer clients, while uncharged in the instant action, are nevertheless required to satisfy their outstanding tax liabilities. Thus, the Court will enter an order providing that restitution payable to the IRS will be offset by any and all amounts collected by the IRS from the taxpayers for tax returns prepared by Defendant for the 2007-2010 tax years.The the second IRS publication cited above, amending the first, the concept seems to be that the restitution applies against the tax liability so that the IRS cannot collect the tax liability. The answer may have been in the context of a taxpayer being the one subject to restitution and the tax liability in which case it makes sense. In the example I posit, the defendant subject to restitution is not the taxpayer, so the Al-Suqi case resolves the possibility of the IRS double collecting by ordering the IRS to reduce the restitution obligation by the amount of the tax collected from the taxpayers.
The analyses in the various IRS publications seem to suggest that the requirement to pay restitution and the resulting tax assessment are incontestable and unchangeable. Yet the Al-Suqi court says it can be reduced by taxpayer payments, at least where the court's order so provides.
But, that seems to be permitted only if the required reduction is part of the order of restitution. What if the restitution order is in a specific amount without any requirement for reduction and the IRS thereafter collects from the taxpayers? Will restitution be reduced? Can it be refunded to the preparer / defendant subject to the restitution order? Is there a statute of limitations as to when a party paying restitution can get this type of credit for payments made by the taxpayers owing the tax?
I would appreciate readers thoughts on this questions presented by this situation.