NOL carrybacks or carryovers to, or other deductions in, a tax period for which an amount of restitution was ordered and assessed pursuant to section 6201(a)(4)(A) reduce a taxpayer's civil tax liability for that tax period. Such deductions, however, do not in any way affect the Service's assessment or collection of the amount of restitution itself. Regardless of the amount of civil tax liability for that period, the Service must collect the entire amount ordered as restitution under section 6201(a)(4)(A).The reasoning is, in steps:
1. Section 6201(a)(4)(A) provides in material part (emphasis supplied):
The Secretary shall assess and collect the amount of restitution under an order pursuant to section 3556 of title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.2. "Criminal restitution and civil tax liability are separate and distinct." This may be a difficult proposition to grasp immediately, so I quote; the entire paragraph backing up that opening sentence:
Criminal restitution and civil tax liability are separate and distinct. Section 6201(a)(4)(A) recognizes the distinction in requiring the Secretary to collect the amount of restitution ordered pursuant to 18 U.S.C. § 3556 in the same manner "as if such amount were such tax." The distinction between criminal restitution and tax liability is perhaps most starkly presented when a return preparer convicted of aiding and assisting in the preparation of the false returns, in violation of 26 U.S.C. § 7206(2), is ordered to pay restitution calculated with reference of the tax owed by his clients, a tax for which the return preparer is not civilly liable. The distinction is further illustrated by the fact that the amount of restitution ordered may differ depending on how the criminal case is resolved. Restitution determined under the Mandatory Victim Restitution Act of 1996, Pub. L. No.1 04-132, § 204(a), 111 Stat. 1227 (1996) (codified as amended at 18 U.S.C. § 3663(A)), applies to certain tax cases and directs that the amount of restitution is generally the amount of property taken from the victim (an actual loss to the government in a tax case) under 18 U.S.C. § 3663A(b)(1)(A) and (B), whereas restitution ordered pursuant to a plea agreement may be "to the extent agreed to by the parties in a plea agreement" for any amount greater or less than the loss attributable to the criminal offense. 18 U.S.C. § 3663(a)(3). See, e.g., Sloan, 505 F.3d at 695; Cooper, 498 F.3d at 1158. Restitution ordered in a criminal case may vary depending on how the case was ultimately resolved,independent -- at least in part -- of the defendant's actual tax liability for the tax period at issue.This seems to be the gravamen of the PMTA's conclusion. The two are just different. The restitution based assessment may or may not be the tax due for the period, although, at least in my mind, when restitution is assessed it should be the unpaid tax for the period (setting aside the effects of any carryovers).
3. For the IRS to assess tax independent of the authority to assess restitution under Section 6201(a)(4), the IRS must go through the deficiency procedures. JAT Comment: This, of course, is true but I am not sure what that has to do with the issue.
4. Moving back to the point that tax liability and restitution are different (1 footnote omitted):
Because the assessment of restitution under section 6201(a)(4) is not itself a determination of the actual civil tax liability for the tax period for which restitution was ordered, and is assessed only "as if such amount were such tax," the Service does not treat the amount of restitution as the minimum tax liability for the relevant tax period. A restitution-based assessment is independent of the Service's determination of the civil tax liability for the same period, and NOL carrybacks, carryovers and other deductions may be applied to reduce the ultimate civil tax liability for that period, irrespective of the restitution amount. n1 A taxpayer, of course, may, if permitted, elect not to carryback the NOL due to a lack of financial benefit resulting from the restitution ordered, and to carry the NOL forward only.5. "The Service must collect the entire amount ordered as restitution under section 6201(a)(4)(A), regardless of whether the civil tax liability for the same period is less than the amount ordered as restitution." Basically, the concept is that the orders of a court, including restitution in this case, are final as determined under the law applicable to such orders. A restitution is a final judgment and becomes final. The authority under Section 6201(a)(4)(A) to assess the restitution means that the IRS cannot change that assessment. The reasoning is as follows:
n1 For example, a taxpayer is ordered to pay $100,000 in restitution for the tax period ending December 2010 and the Service subsequently examines the taxpayer for the same tax period. Pursuant to the examination, the Service determines that the taxpayer has a civil tax liability of $150,000. The taxpayer timely requests that a NOL deduction from the tax period ending December 2011 be carried back to the tax period ending December 2010, which would reduce his tax liability by $100,000. If the Service allows the NOL carryback, the taxpayer's civil tax liability would be reduced to $50,000. The Service may allow the NOL carryback, even though it would reduce the tax liability below the restitution-based assessment of $100,000 because the civil tax liability is separate and independent from the restitution-based assessment. The Service is required to collect $100,000 from the taxpayer for tax period ending December 2010 to satisfy the restitution-based assessment because the Service must assess and collect the amount ordered as restitution, regardless of whether the civil tax liability is determined to be less. See section 6201(a)(4)(A). Because the Service cannot collect twice for the same tax period, the first $50,000 collected to satisfy the restitution-based assessment of $100,000 must also be applied to the civil tax liability of $50,000. See United States v. Helmsley, 941 F.2d 71, 102 (2d Cir. 1991).
Although the Service may apply NOL carrybacks and other deductions in such a manner that may ultimately result in a civil tax liability less than the amount ordered as restitution for the same period, the Service must collect the entire amount of restitution ordered and assessed under section 6201(a)(4)(A). The Service is without authority to compromise the federal district court's order of restitution. Cf., e.g., United States v. Savoie, 985 F.2d 612, 619 (1st Cir. 1993) (victim's civil settlement with defendant does not prevent court from ordering full restitution); United States v. Sheinbaum, 136 F.3d 443, 448 (5th Cir. 1998) (same); United States v. Hairston, 888 F.2d 1349, 1355 (11th Cir. 1989) (same); F.D.I.C. v. Dover, 453 F.3d 710, 717 (6th Cir. 2006) (victim's post-sentencing settlement with defendant does not alter restitution order).
Section 6201(a)(4) is consistent with the Service's lack of authority to compromise or otherwise adjust a district court's restitution order. Under section 6201(a)(4)(A), the Service "shall assess and collect the amount of restitution" ordered by the district court. (Emphasis added.) "Shall" in the statute is a mandatory term denoting a lack of discretion on the part of the Service. See Nat'l Ass'n of Home Builders v. Defenders of Wildlife, 551 U.S. 644, 661 (2007) ("the statutory language [shall] is mandatory and the . . . [agency] does not have the discretion"); Lopez v. Davis, 531 U.S. 230, 231 (2001) (noting "Congress' use of a mandatory 'shall' . . . to impose discretionless obligations"); Jefferson v. United States, 546 F.3d 477, 484 (7th Cir. 2008) ("The language of [I.R.C. § ] 904(b)(2) is written using the mandatory term 'shall' . . . which means that the promulgation of these materials was not optional."). Accordingly, the Service must assess and collect the amount of ordered restitution under section 6201(a)(4)(A) regardless of whether the civil tax liability is determined to be less than the restitution amount.\
The Service may not, however, collect both restitution for a certain tax period and the taxpayer's full civil tax liability for the same period, as this would be impermissible double collection. See 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 be applied to satisfy the civil tax liability for the same tax periodJAT Comment: I am troubled by that conclusion. How can it be that restitution for a tax loss to the Government can exceed the amount of the tax that was actually lost? I understand the mechanical steps that lead to the conclusion, but I just don't think that is right or fair answer. And it does not just apply to carryovers. There might be uncertainties in the Court's calculations of the restitution for the year. As I noted in my prior blog, the Government and the Court should take special care to award restitution in the minimum amount of the tax that could be involved. Of course, unanticipated carryovers are probably the exception to my comment, but the truth is that, given the lead time for criminal tax cases, counsel and the Government (including the IRS) should work together to get the right number, including the effect of the carryovers. The carryovers will not affect the tax loss (the principal driver for sentencing), but there is no reason that the restitution cannot be less than the tax loss.
In the course of preparing this summary of the PMTA's conclusion.I came across some other IRS guidance that those wishing to drill down on this subject should consider. First, there is CC-2013-012 (7/31/13), here, which contains some of the same language and analysis in the PMTA. This CC is titled: "Deficiency and Litigation Issues Concerning Tax Periods For Which Criminal Restitution Has Been Ordered." This CC modifies an earlier, more extensive discussion of Section 6201(a)(4)(A) in CC-2011-018 (8/26/11), here, which is titled: "The Assessment and Collection of Criminal Restitution." I highly recommend CC-2011-018 for its extensive discussion of the issues. Some key consequences noted in the CC are:
1. The restitution is fixed unless revised by the Court. Hence the IRS cannot enter an OIC. See Q&A 18. If the IRS assesses tax, penalties and interest in addition to the restitution and interest thereon, the IRS can compromise the excess. Id.
2. CDP procedures apply to the collection of restitution based assessments. Q&A 19.
3. If the restitution order has an installment payment plan, the IRS may nevertheless use its collection authority and processes under the Code to collect the assessment. Q&A 20.
Prior blog entries on Section 6201(a)(4)(A) are:
- What Can Be Done If Tax Restitution Exceeds the Tax Due (Federal Tax Crimes Blog 9/2/13), here.
- Tax Restitution and Doubt As to Amount (Federal Tax Crimes Blog 7/10/13), here.
- New Statute for Civil Effect of Restitution in Tax Cases (Federal Tax Crimes Blog 2/11/11), here.
How will restitution be assessed when a defendant/taxpayer filed a joint return with his or her spouse who is not a defendant (and therefore not subject to a restitution order)? Will the spouse be liable for the restitution-based assessment, or will the spouse receive a notice of deficiency? If the spouse successfully challenges the merits of the proposed adjustments, will the Service reduce the defendant/taxpayer's restitution-based assessment accordingly? Can the spouse call the defendant/taxpayer as a witness in the audit, administrative appeal and/or court to challenge the amount of the restitution-based assessment, despite the inability to challenge under section 6201(a)(4)(C)?
Does the Service intend to forego civil audits in most cases where the court orders restitution and the Service makes a restitution-based assessment?
If the Service audits a defendant and finds the actual tax due is less than the restitution order, what steps will the Service take to reduce the restitution-based assessment? A Chief Counsel Notice suggests that the Service will contact the Tax Division to seek a reduced order of restitution, but does not explain how this will be accomplished after the order becomes final.
If a defendant paid the restitution and then, after the restitution-based assessment, the Service determines that the tax due is less than the restitution assessed, how will the Service reduce the assessment under section 6404? (Under section 6404, the Secretary is authorized to abate the "unpaid" portion of an assessment which is excessive in amount or erroneously assessed.)
If the Service does not audit after the criminal proceedings, how does a defendant challenge the amount of the restitution-based assessment if the amount exceeds the tax due, where section 6201(a)(4)(C) prevents any challenge?
The Service is refusing to consider an offer-in-compromise with respect to a restitution-based assessment.4 What if the taxpayer truly cannot pay? What are the taxpayer's options?
Will the Service reduce a restitution-based assessment when a valid net operating loss carryback or carryforward eliminates the liability? If so, how does a taxpayer obtain this relief?
Where a defendant/taxpayer pays restitution prior to sentencing, will the Service post the restitution as of the date of payment? Or will it assert that the payment is not effective until after the restitution-based assessment is made?