CDP Proceeding Moot Because Restitution Based Assessment and NFTL Withdrawn (7/30/19)

In Catlett v. Commissioner, T.C. Memo. 2019-86, here, Catlett, a return preparer, was convicted of a defraud/Klein conspiracy (27 USC § 371), multiple counts of aiding and assisting (§ 7206(2)) and one count of tax obstruction (§ 7212(a)).  He was sentenced to 210 months and order to pay restitution of $3,810,244, with restitution to "be paid [in] monthly installments of $500.00 over a period of 3 year(s) to commence when the defendant is placed on supervised release."  Catlett remains in prison and likely won't be release for some number of years.  The IRS made a restitution based assessment ("RBA") based on the sentencing court's order of restitution (and separately assessed underpayment penalty and interest).  Catlett filed a CDP proceeding when the IRS attempted to collect.

The IRS conceded that the RBA was premature because the district court order payment to commence after Catlett was placed on supervised release which had not yet occurred.  See United States v. Hassebrock, 663 F.3d 906, 924 (7th Cir. 2011) (Where "a district court can only impose restitution as a condition of supervised release, a defendant cannot be required to pay restitution until his period of supervised release begins."); United States v. Howard, 220 F.3d 645, 647 (5th Cir. 2000) ("Were restitution simply a term of supervised release or probation, it could not be due prior to the commencement of such a term." (quoting United States v. Webb, 30 F.3d 687, 690 (6th Cir. 1994))).

The IRS moved to dismiss the CDP case as moot. The Tax Court agreed and rejected Catlett's claim that, because the IRS indicated that, once he is released, the IRS will refile the RBA.

JAT comments:

1.  Because the restitution apparently related to other taxpayer's taxes, the IRS could not proceed with a regular assessment (requiring deficiency procedures) against Catlett.  If the IRS had been able to pursue a normal assessment (with deficiency procedures), it could assess the tax, penalties and interest and could even collect prior to the period specified in the court's restitution order.

2.  This aspect of the RBA seems to me to be a glitch.  Even where a defendant is permitted to defer payment of the restitution, there should be some lien to protect the creditor (here the IRS) in the interim just in case assets from which restitution can ultimately be collected appear.  Presumably, the general criminal lien will offer some protection, but even if the IRS could perfect an RBA assessment and resulting lien before supervisory release, it certainly should not be able to attempt collection on the RBA where the sentencing court deferred collection.