Assume a criminal tax crime sentencing where the judge is authorized by plea agreement to order tax restitution of $100,000. At least in theory, that ought to be the criminal tax number provable by a preponderance of the evidence. (Sometimes called in other settings, the tax deficiency, tax due and owing and tax evaded; in a criminal sentencing it might often be the same as the tax loss driving the guidelines calculations, but may not be the same.) Assume further that the real civil tax liability for the years of conviction and thus years of restitution is $200,000. The extra $100,000 is the amount which the Government did not prove was tax evaded and thus could / should not be in the order of restitution. (OK, I know that in plea agreements the Government might negotiate for higher tax restitution than it might otherwise be able to prove at sentencing, but stick with me on this.)Under the old procedure, the sentencing court would order restitution. The IRS would then issue a notice of deficiency for $200,000. That is the deficiency amount, although $100,000 of that aggregate deficiency is the same liability as for restitution. Since the IRS must proceed for the entire amount by notice of deficiency, the prohibitions in assessment for the entire amount apply and, until the IRS assesses after those prohibitions expire or are waived by the taxpayer, the IRS cannot use the IRS collection tools. Of course, the taxpayer does have an order of restitution, so the Government can use restitution collection tools -- not as efficient as IRS collection tools.
The new legislation (see blog entries below) permit the IRS to assess the amount of the tax restitution immediately without the necessity of a notice of deficiency and the delays attendant to the prohibition on assessment in Section 6213.
So, assume these new procedures apply to this example. The IRS can immediately assess $100,000. That means that the unassessed liability (the civil liability remaining after consideration of the assessed restitution) is $100,000. The IRS still has to go through its deficiency notice procedures. But, the issue in Muncy is what the amount is that the IRS should assert in the deficiency notice. Keep in mind that, as compelled by the new statutory procedure, the IRS has already assessed the $100,000 representing the tax restitution. Hence, from a liability standpoint, the only amount unassessed is the remaining $100,000 (the civil liability unassessed).
In Muncy, after going through various statutory interpretation contortions, the Tax Court held (as I understand it), that the deficiency is still $200,000 (including the $100,000 already assessed under the new procedures). So, once the Tax Court approves that deficiency amount, the IRS will assess the entire $200,000 which will be in addition to the $100,000 assessed under the new procedures. So the aggregate assessed liability is $300,000 when, in fact, the real liability is $200,000. (I suppose that the IRS could credit the amount already assessed and have a new assessment of $100,000 which is $100,000 less than the deficiency determined by the Tax Court.
I think the Tax Court assumes that, as payments are made, the IRS will eventually true up the assessed amount to the real liability of $200,000.
That seems to me to present some new interpretation issues that a court will have to address in the future. Certainly, we know that the taxpayer is never permitted to contest the $100,000 tax evaded ordered for restitution and assessed immediately. And, when the Tax Court determines a deficiency of $200,000 and the IRS assesses that amount, the IRS's books of assessment will show $300,000 due. How exactly does that get trued up?
Obviously, some procedures and probably interpretive regulations having the effect of law under Chevron would be helpful. When they do come, it seems to me that the better interpretation would be that the deficiency would include only the amount of the aggregate civil liability in excess of the restitution assessed immediately. Or, I suppose, it would permit the IRS, upon assessment of the deficiency determined by the Tax Court, to eliminate duplicative assessments.
For prior blogs, see (in reverse chronological order):
- The New Provision for Tax Restitution and Ex Post Facto (Federal Tax Crimes Blog 1/20/14), here.
- Can Restitution Be Reduced by Payments on the Tax Liability Subject to Restitution? (Federal Tax Crimes Blog 10/26/13), here.
- More on the Relationship Between Tax Liability and Tax Restitution Assessed as a Tax (Federal Tax Crimes Blog 10/25/13), here.
- 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.