Restitution Based Assessment--Some Issues of Interest (8/3/19; 8/7/19)

Readers of this blog will likely be interested in a recent post on Procedurally Taxing Blog:  Keith Fogg, Interest and Penalties on Restitution-Based Assessments (Procedurally Taxing Blog 7/31/19).  Highly recommended.  The context is the relationship between restitution as ordered by the court in a criminal case and the restitution based assessment that the IRS is mandated to make, particularly as related to interest on the restitution.

After some emailing with Keith, I thought I would add some related material and comments that readers of this blog might find interesting or useful.

1.  The amount of the restitution can include an interest factor from the date of the loss through the date of the restitution order by judgment in the criminal case.  The DOJ Criminal Tax Manual thus says:  "Prosecutors should seek prejudgment Title 26 interest in restitution in order to fully compensate the IRS."  DOJ CTM 44.00 RESTITUTION IN CRIMINAL TAX CASES (last edited January 2019), here.

The U.S. Attorneys Manual (now called Justice Manual after renaming in 2018) had a template in the Tax Resource Manual that would include interest under 6601 and/or 6621 in the restitution order as of the date of sentencing.

• https://www.justice.gov/archives/usam/tax-resource-manual-20-optional-restitution-paragraphs
• https://www.justice.gov/archives/usam/tax-resource-manual-21-proposed-restitution-order

The Tax Resource Manual seems to have dropped off the current Manual (called the Justice Manual), although the prior Tax Resource Manual is still available per the links above.  (Perhaps it will be added back later.)  So, diligent US Attorneys should be aware of it.  And, of course, DOJ Tax CES attorneys should be aware of the CTM provision.  And, since the IRS makes the calculations, the IRS agents should be aware of as well.  (By contrast, interest is not included on tax loss for Sentencing Guidelines purposes except in the case of evasion of payment, when interest was included in the amount the defendant sought to evade.)

My understanding, though, is that courts sometimes (perhaps even often) do not include interest in restitution.  (See discussion of recent case in paragraph 3 below.)

2.  I have just updated the text and a footnote in the working draft of my Federal Tax Procedure Book (will be published on SSRN by mid-August 2019) dealing with some of the nuance.  Here is a cut and paste of the text and the key text amd footnote:

Section 6213(b) contains certain exceptions to the § 6213(a)’s prohibition on assessment without first issuing a notice of deficiency.  The principal ones you will encounter are: (1) “mathematical or clerical errors” on the return may be assessed despite the prohibition; (2) deficiencies where the taxpayer has signed a written waiver of the prohibition authorized by § 6213(d) (the ones commonly encountered in an income tax setting are Forms 870 and 4549); (3) improper carrybacks that have previously resulted in refunds may be assessed despite the prohibition; (4) amounts paid as a tax may be assessed despite the prohibition; and (5) restitution for tax in a criminal tax case which may be assessed despite the  prohibition (“restitution based assessment, or “RBA”). fn
fn §§ 6201(a)(4) & 6213(b)(5).  Certain points: First, normally, tax restitution is not available for Title 26 offenses.  However, courts may impose tax restitution for Title 18 convictions, such as the ubiquitous Klein / defraud conspiracy under 18 U.S.C. 371(a), In tax cases, in pleading guilty to a Title 26 offense, a defendant often agrees to “contractual” restitution in the plea agreement that the sentencing court then incorporates as a restitution order in the criminal judgment.  Or, in imposing sentence for Title 26 offenses, a court may impose restitution as a condition for some benefit (such as supervised release for some period rather than incarceration).  Second, The net effect of these statutory changes to the Code is that the IRS can immediately assess the tax restitution as if it were a tax (the assessment acronymed RBA) and deploy the IRS collection tools for tax assessments.  A predicate notice of deficiency is not required.  Third, the restitution imposed upon a defendant need not be the defendant’s tax; the restitution is treated as a tax and thus assessable as RBA.  Bontrager v. Commissioner, 151 T.C. ___, No. 12 (2018).  Fourth, a key part of the new statutory scheme is that the taxpayer may not contest the RBA in civil proceedings, § 6201(a)(4)(C).    Administratively, the RBA is not a tax assessment but is assessed and collected by IRS collection tools as if it were a tax.  This gets a little esoteric, but this means that
• If the IRS believes that more tax, penalties or interest is due than is incorporated in the restitution order and resulting RBA, the IRS must make a regular tax assessment of the underlying tax liability (including the restitution based assessment amount) through the notice of deficiency procedure.  See Klein v. Commissioner, 149 T.C. ___, No. 15 (2017) (holding that, where the tax restitution order does not include interest from the due date (i.e., the tax without interest is the restitution amount), the IRS may not automatically assess interest for that period based on the RBA but must instead proceed by notice of deficiency including the RBA amount as a deficiency and then assess interest when the deficiency assessment is made); see also Muncy v. Commissioner, T.C. Memo. 2017-83, aff’d on other grounds, 890 F.3d 724 (8th Cir. 2018).  If the IRS does proceed by deficiency assessment, the RBA and the regular tax assessment will include the same amounts and the aggregate of the two assessments will be duplicative to that extent.  Both assessment amounts are still only one tax liability and the taxpayer must be given appropriate credits against both assessments as the taxpayer pays so that the taxpayer pays the liability only once.  For further discussion of these issues see CCN 2019-004 (6/27/19), discussed in Keith Fogg, Interest and Penalties on Restitution-Based Assessments (Procedurally Taxing Blog 7/31/19).
• If the RBA amount exceeds the actual tax liability, the taxpayer will be unable to get any relief in civil tax proceedings but must request relief from the sentencing court to reduce the amount of the restitution order which will then permit the IRS to reduce the amount of the RBA.  There is a lot of nuance here, so I direct readers to my blog entry at Tax Court Holds that Restitution Assessments under § 6201(a)(4) Do Not Permit Tax Interest and Additions (Federal Tax Crimes Blog 10/8/17)[here].

3. After discussing this with Keith, I picked up the following case: Samp v. United States, 2019 U.S. Dist. LEXIS 126521 (E.D. Mich. 7/30/19), here.  Key points of the case:

• Based on the concept of relevant conduct, the Sentencing Guidelines tax loss included loss for the acquittal years (2010 and 2011).  This is entirely proper where, as here, the court could conclude by a preponderance of the evidence that a crime was committed for the relevant conduct years.
• The tax loss may have included interest (but since easily within the SG spread, it probably made no difference for sentencing purposes).  I don't think, however, that interest from the payment due date is includable in the tax loss except in evasion of payment cases where the defendant sought to criminally evade payment of the interest as well as the tax.
• The restitution amount excluded interest and penalties.  This is, of course, the key point since the restitution amount could include interest from the payment due date, but I don't think it could have included penalties.
• Samp does question the restitution amount for which he filed amended returns that, although the IRS accepted, had not acted on.  The court thinks that, because the IRS has not acted on the amended returns, the court's consideration of revision of the restitution amount would be premature.  I think that, if the IRS can more  or less agree that the restitution amount is too high, upon motion of the defendant presumably not opposed by the Government, the court would likely be willing to adjust the amount of the restitution order and the IRS could adjust the RBA accordingly.  (I have not looked at the issue is timing on the request to adjust the order.)

4.  Interest from the due date of the restitution order would accrue on the restitution order under 18 U.S.C. § 3612 unless otherwise ordered by the court and that interest is not assessable under § 6201(a)(4).  CC-2019-004 (6/27/19).  Interest under § 6601 will not accrue on the RBA from the date of assessment forward.  See Klein v. Commissioner, 149 T.C. ___ No. 15 (2017); and CC-2019-004 (6/27/19).  In sum, the RBA will be the restitution ordered by the sentencing court, without any additions.  If the IRS wants additions for interest or penalties not included in the RBA, the IRS will have to go through the normal assessment procedures, which would include a predicate notice of deficiency in cases requiring a notice before assessment.  [Note to readers who may have read this blog entry prior to 8/7/19, I have substantially revised this paragraph.]