Compromises of Nonrestitution Assessments with Restitution Assessments Unpaid (1/24/17)

This blog entry will principally serve as a reminder to readers on the subject of tax assessments related to tax restitution awarded at sentencing in criminal cases. Readers recall that in 2010 Congress enacted several Code provisions the net effect of which is (i) to permit the IRS to assess immediately any restitution in a criminal case awarded for unpaid taxes and (ii) prohibit the person (usually a taxpayer) from contesting the amount of the tax restitution assessment.  (At the bottom of this blog entry, I list the Code Sections involved and various blog entries on the subject.)

I call readers attention to a very good article, Robert Horwitz, The Tax Court Issues a Reminder that You Cannot Compromise Criminal Tax Restitution (Tax Litigator Blog 1/15/16), here, which discusses Rebuck v. Commissioner, T.C. Memo. 2016-3, here.  Rebuck and 10 other co-defendants were convicted of tax conspiracy under 18 U.S.C. § 371, here, for promoting offshore and domestic trust packages falsely representing that the trusts permitted taxpayers to avoid paying tax.  The sentencing court imposed tax restitution of $16,339,199, jointly and severally, on the 11 convicted defendants.  The restitution amount appears to be for then outstanding unpaid taxes avoided by taxpayers purchasing the trust schemes. (I make this assumption since it would be odd to have joint and several liabilities for the defendants' own personal income taxes.)  After the restitution award, the outstanding restitution amount would be reduced as payments against those liabilities were made either by the taxpayers themselves or by the defendants.  (It may be that the IRS did not seek payment from the taxpayers, either because their statutes had closed or for other reasons.)  The IRS then assessed the tax restitution amount against Rebuck and presumably against the other co-defendants.

In 2009, the IRS assessed against Rebuck civil penalties under § 6700, in the aggregate amount of $130,000.  Rebuck and  the IRS subsequently entered an installment agreement to pay these § 6700 penalties.

Rebuck was also assessed his own income taxes for a number of years, including some of the same years involved in the tax restitution assessment (which, to remind readers, was for other persons' income tax liabilities).  Rebuck then commenced a CDP appeal with regard to his income taxes, but asked that the § 6700 penalty assessments subject to the installment agreement be considered along with his own income tax assessments in an offer in compromise based on doubt as to collectibility.   Rebuck did not ask relief in the CDP proceeding for the tax restitution assessments, apparently because relief for those assessments comes, if at all, from the sentencing court.  During the CDP process, the § 6700 penalty installment agreement was reversed for default.  The IRS rejected the offer in compromise based on the IRS's position that such offers were not available for the same years in which there is unpaid tax restitution assessments.  The IRS did suggest that, without resolving the unpaid restitution, the IRS could enter a Partial Payment Installment Agreement ("PPIA") with respect to the income tax and § 6700 penalties for $540 per month.  Rebuck declined.

The taxpayer raised two issues:

(1) whether the IRS abused its discretion in rejecting petitioner’s OIC because it did not include full payment of petitioner’s criminal tax restitution; and (2) whether the Appeals officer abused his discretion in proposing to petitioner a PPIA of $540 per month.

The only issue I address in this blog entry is the first issue.  The Court's analysis of the first issue is short, so I quote it in full (one footnote omitted):

Pursuant to the IRM, when a taxpayer seeks to compromise taxes, penalties, and interest for the same tax periods for which restitution was ordered, the offer must provide for full payment of the restitution amount. Petitioner submitted his OIC based on doubt as to collectibility for his 1996, 1998, 1999, 2000, 2001, and 2002 income tax liabilities and his section 6700 civil penalties for 1999-2003. Petitioner’s joint and several criminal restitution of $16,339,199 resulted from criminal activities during tax periods 2000, 2001, 2002, and 2003. IRM pt. 5.1.5.24.5(3) states: “[t]he IRS may consider an offer in compromise to pay the additional taxes, penalties, and interest for the same tax periods for which restitution was ordered only if the defendant has paid or will pay as part of the offer the full amount of the restitution.” Petitioner sought to compromise income tax, civil penalties, and interest for some of the same periods covered by his court-ordered restitution (i.e., 2000, 2001, 2002, and 2003). The IRM requires a taxpayer in petitioner’s position to pay--or pay as part of the OIC--the full amount of outstanding restitution, which petitioner did not do. n7 SO McCarrick conducted independent research and consulted his ATM before ultimately concluding that petitioner’s OIC must include provision for full payment of his joint and several restitution. SO McCarrick’s refusal to consider petitioner’s OIC unless it met the IRM requirement that criminal restitution be satisfied as part of an OIC does not constitute an abuse of discretion. Indeed, it appears reasonable for the Commissioner to decline an OIC made by a taxpayer who has committed a crime related to Federal tax but who fails to satisfy a restitution order by a District Court in the criminal case. Additionally, SO McCarrick provided petitioner with the opportunity to provide legal authority contrary to this interpretation of the IRM which petitioner did not do. Accordingly, we hold that SO McCarrick’s rejection of petitioner’s OIC based on the provisions of IRM pt. 5.1.5.24.5 was not arbitrary, capricious, or without sound basis in fact or law.
   n7 Iternal Revenue Manual pt. 5.1.5.24.5(4) (Aug. 3, 2009), and the example therein state that a doubt as to collectibility OIC for “nonrestitution” years cannot be considered unless it includes years for which restitution is payable to the IRS. 

I have three concerns about the IRM rule cryptically blessed by the Court.

First, I am not sure as to the rational for the IRM rule prohibiting settlement of the portion of the non-resititution portion of the assessment even if the same years and taxes were involved.  Example, court awards tax restitution of $100 related to the taxpayer's own income tax for year 01 and the IRS assesses that amount for that year.  The IRS later assesses (either after audit or by the taxpayer filing a delinquent or amended return) an additional $100 for year 01, so that the taxpayer owes $200 for year 01.  I don't know the rationale for refusing to consider an offer in compromise for doubt as to collectibility as to the additional $100 assessment simply because the tax restitution assessment is not satisfied.

Second, and assuming there is a rationale when the same years and same type tax assessments are involved, it is not clear to me why it would apply in the Rebuck situation where the tax restitution was not for Rebuck's taxes.  What I don't know is whether there is some underlying administrative reason that supports the rule.  For example, what I don't know is how the IRS codes assessments made against someone who is not liable for the tax except as a restitution payment.

Third, and in any event, if there is no reason other than that is the rule the IRS adopted in the IRM, why would that rule control the outcome of a CDP proceeding?  It seems that the Court simply held in the cryptic paragraph above that the IRM states the rule and that is the end of the inquiry.  I would think that one of the purposes of the CDP proceeding is to have a review of arbitrary rules and provide relief to the taxpayer from arbitrary rules.

I would appreciate hearing from readers on any of these concerns.

Code sections involved (cut and paste from the earlist blog entry below.

1. The IRS "shall assess and collect" restitution for unpaid tax ordered by the court. § 6201(a)(4)(A).
2. The assessment and collection shall occur after the finality of the criminal case. § 6201(a)(4)(B).
3. The defendant may not challenge civilly the existence and amount of the tax liability. § 6201(a)(4)(C).
4. The assessment is made without the requirement that a predicate notice of deficiency issue and there is no prohibition on assessment. § 6213(b)(5).

Prior blog entries on the new rules for tax assessments related to tax restitution (remember that some of the discussion, particularly in the earlier blog entries may have been addressed and clarified or corrected in later blog entries.

• Conference Comments on Restitution Based Assessment for Taxes (Federal Tax Crimes Blog 12/18/16), here.
• The Rub Between Restitution Assessed as a Tax and a Deficiency (Federal Tax Crimes Blog 12/18/14), here.
• 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.
• Restitution in Tax Cases (Federal Tax Crimes Blog 9/22/12), here.
• TIGTA Report on IRS Processing of Restitution (Federal Tax Crimes Blog 2/4/12), here.
• New Statute for Civil Effect of Restitution in Tax Cases (Federal Tax Crimes Blog 2/11/11), here.

Addressing some of the administrative aspects, the following IRM provision does talk about identifying the taxpayers' and liabilities involved in the restitution imposed on a return preparer.  The indication is that the amounts assessed against the return preparer are not necessarily assessed against the taxpayers involved.  That still does not addressed how the assessments are coded on the IRS's records which perhaps have some special category for tax restitution assessments for taxes the convicted defendant was not otherwise liable.

IRM 25.26.1.3.1  (03-24-2014)
Criminal Investigation 

3. For all return preparer project (RPP) cases, the amount of restitution is ordinarily based upon the erroneous tax refunds claimed by the clients of the return preparer. The amount of restitution may be calculated by using a specific group of clients and/or an additional amount computed by extrapolating the pattern of erroneous tax refunds to the total population of the preparer's clients. Therefore, in all RPP cases, the special agent must attach a list of all clients whose tax liability was used to determine the amount of restitution ordered by the court. The clients must be identified by name and social security number. The clients’ liability for each year must be shown separately. The amount of restitution that is based upon the erroneous refunds claimed by the clients is not necessarily assessed on the individual tax returns of the return preparer for each of the respective years.