New Statute for Civil Effect of Restitution in Tax Cases (2/11/11)

Tax crimes afficionados know that restitution is not available for a Title 26 tax crime of conviction but is available if the crime of conviction, although related to tax, is under Title 18 (often the Klein conspiracy or even a conspiracy to commit a tax offense). The exceptions for Title 26 crimes of conviction permit restitution: (i) if the defendant agrees to restitution in a plea agreement; or (ii) if the court imposes restitution as a condition of some benefit given the defendant (e.g., probation). Even when permitted, restitution has been just an order of the court which is not self-executing and requires some collection efforts by the Government unless the defendant pays voluntarily which most defendants will pay before sentencing if they can in order to get the extra juice in for the judge's sentencing discretion.

Tax crimes afficionados also know that the reason restitution is not generally available for tax crimes under Title 26 is that the IRS has elaborate civil mechanisms to collect taxes, which is after all (at least in the criminal amount) the basis for restitution in criminal tax cases (whether under Title 26 or Title 18). From a civil perspective, most taxes involved in tax crimes are subject to the notice of deficiency requirement, permitting a taxpayer to contest in the Tax Court before the IRS actually assesses the tax and can deploy its collection mechanisms. Since the notice of deficiency is generally issued after the criminal tax case is finally closed, the notice of deficiency and Tax Court procedures with the prohibition on assessment often meant that the taxes reflected in the order of restitution were not assessed for years and the collection mechanisms in the Code were postponed for years.

Congress recently enacted a statute to make collection restitution for unpaid tax more efficient. Section 3(a) of P.L. 111-237, effective for restitution orders entered after August 16, 2010, amends Title 26 as follows (§ references are to Title 26 as amended):

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).

Caveat: if readers look up these sections, be sure that the source has incorporated them. Otherwise, go to the statute, linked above, which is easy to follow as to the amendments.

In CCA-111811-10, which appears on the IRS web site but appears to be an outline for a presentation by an unidentified person rather than an official pronouncement of the IRS, the author interprets the statute as follows:

1. "[T]he assessed amount is limited to losses attributable to Title 26 violations and does not include Title 18, tax-related charges." JAT note: I am not sure the statutory language compels that limitation. If, for example, the defendant were convicted only of a Klein conspiracy under Title 18 relating to his own taxes, the language of the statute as I read it does not compel the conclusion that the procedures are not available. Moreover, if this limitation is respected and since restitution is not generally available for Title 26 crimes of conviction, the only restitution subject to these special procedures is contractual restitution in the plea agreement related to a guilty plea for a Title 26 crime or restitution ordered as a condition for a benefit in a case related to a Title 26 crime of conviction. The Government may limit its plea options in order to take advantage of these procedures by forcing the defendant into a Title 26 plea. For example, in the criminal cases related to the Government's offshore financial account initiatives, I understand that the defendants were usually offered a plea to either a § 7206(1) count or an FBAR count. If the defendant pled to the § 7206(1) count and agreed to tax restitution (or it was imposed as a condition of the typically light sentences), the procedures could apply (depending upon effective date). If the defendant pled to the FBAR count, the procedures could not apply even if the taxpayer agreed to the tax restitution in the plea agreement. Finally, I note that the IRS later in the document says "Restitution limited to Title 26 taxes," which of course is true in this context, but the point made in the text quoted at the beginning of this paragraph is that tax restitution related to Title 18 offenses of conviction is not covered. But, like I say, I am not sure that the text of the statute compels the limitation of the new procedures to Title 26 offenses of conviction.

2. The amounts provided in the restitution agreement or order should be more precise as to amounts and years involved so as to coordinate with the IRS's assessment procedures.

3. "It would appear that the Act does not prevent the IRS from assessing a civil tax in excess of the restitution amount under the normal assessment procedures." This seems like the right answer and the text does not preclude it. For those excess amounts, the IRS will have to follow the notice of deficiency procedures, if applicable. And, presumably, although the Tax Court in a deficiency proceeding has authority to determine the correct tax liability for each year in issue, the preclusive effect of the restitution order subject to these procedures will mean that the Tax Court cannot enter an order impose tax less than the restitution order even if the Tax Court determines that the tax actually was less.

One of my readers, Steven Harris, alerted me to some of the subtleties and noted in a letter in Tax Notes supplementing an earlier article (Steven M. Harris, Author Expands on Argument From Collateral Estoppel Article, 130 Tax Notes 717 (Feb. 7, 2011)):

The landscape for plea agreements and sentencing hearings is now a changed paradigm. Counsel may be less disposed to stipulate to a restitution amount, and more inclined to vigorously contest tax loss determination in the sentencing hearing, regardless of any perceived effect on potential sentence. One possible acute result of this new provision (if it applies to other than "failure to pay" offenses) can be seen following a false return (section 7206(1)) conviction. If restitution was ordered based on agreement or a court's tax loss determination, that amount would appear to be assessable and final under the code, notwithstanding a later Tax Court deficiency proceeding that determines no fraud and thus no liability for any tax. If the provision applies to all criminal convictions related to taxes, restitution orders in tax related conspiracy (18 U.S.C. 371) cases will raise even more complicated practice considerations in negotiating plea agreements and strategy for sentencing hearings. In a guilty plea case, the simplest solution would seem to be a stipulation that no restitution should be imposed and the final tax determination be left for the civil proceeding, regardless of any tax loss amount determined for sentencing purposes.

With regard to his last point, at least in my district, prosecutors claim is that restitution will be required for a plea agreement in tax cases. I suspect that that is a general rule, with exceptions. But, if the prosecutor is going to insist on contractual restitution in the plea agreement, maybe he or she will be less rigid about the amount since it is now preclusive civilly. And, if he or she is less rigid, that might have a defendant beneficial effect on the offense level under the Tax Table.  But, if the prosecutor is rigid, perhaps the prosecutor will agree to a Title 18 offense of conviction rather than a Title 26 plea.  The downside to that may be that the Title 18 offense is likely to be a 5 year count rather than a 3 year count (as in the case of § 7206(1) (tax perjury) or 7212(a) (tax obstruction).

Finally, for those wanting some background to the proposal that led to the statute, I direct them to the IRS publication linked above.

Updated 2/12/11:  to clarify that the indicated document from the IRS website appears to be an internal IRS document related to a presentation rather than an formal publication of the IRS.

Update 7/20/13:  In SBSE-05-0713-0044 (7/10/13), here, the author notes:

Background 

Following the conviction of a defendant for a Federal criminal tax violation or tax-related offense, the court may order the defendant to comply with certain tax-related conditions of probation or supervised release, and/or order the payment of restitution to the IRS. The Firearms Excise Tax Improvement Act of 2010 ("the FETI Act") amended IRC § 6201(a)(4) to provide for the assessment and collection of the amount of restitution ordered in a Federal criminal case for failure to pay any tax under Title 26. The law applies to restitution orders entered after August 16, 2010. 

Impact 

Prior to enactment, the Service could not assess or take administrative action to collect an assessed or assessable amount of restitution. The FETI Act provides that the assessed amount of restitution can be collected as if it were a tax. The restitution order, however, does not cease to exist, and the Department of Justice (DOJ) retains its authority to collect under Title 18. The legislation provides non-exclusive, parallel means by which the amount of restitution may be satisfied: DOJ's ability to enforce the restitution order and the Service's administrative ability to collect the assessment based upon the amount ordered as restitution. 

Criminal restitution and civil tax liability are separate and distinct. 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." Although criminal restitution and civil tax liability are distinct, the Service may not collect both for the same period because this would be impermissible double collection. Any payments made to satisfy the restitution-based assessment must also be applied by the Service to satisfy the related civil tax liability for the same tax period. Such application of payments is made possible due to a mirror assessment of restitution order and ultimate civil liability for the same period.

Note that the above discussion does not seem to limit the restitution to Title 26 count of conviction restitution.