TIGTA Report on Criminal Restitution Assessment Procedures (6/17/21)

TIGTA has issued a report titled Criminal Restitution Assessment Procedures Need Improvement (TIGTA Report No. 2021-30-033 6/7/21), here.  For those interested in criminal restitution for taxes, this is excellent reading, discussing both the law related to the restitution procedures for taxes and the IRS’s procedural implementation.

The Report Highlights are:

Why TIGTA Did This Audit 

The Firearms Excise Tax Improvement Act of 2010 authorized the IRS to assess criminal restitution ordered after August 16, 2010, so that the IRS could collect the amount as if it were a tax. Prior to this change in the law, the IRS accepted payments of restitution but could not assess the amount of restitution ordered or use its administrative collection tools to collect the restitution. Only the Department of Justice could collect the amount of restitution.

This audit was initiated to determine if defendants convicted of tax-related crimes are held responsible for the payments of the associated taxes. 

Impact on Taxpayers 

The ultimate goal of every criminal prosecution is not merely to obtain a conviction but also to obtain a sentence sufficient to discourage similar criminal violations by other taxpayers. It is important that the IRS have effective procedures to ensure that the defendants are held responsible for their crimes and the maximum amount of criminal restitution is collected. 

What TIGTA Found

During Fiscal Years 2016 through 2020, defendants were ordered to pay over $2.7 billion in criminal restitution to the IRS but paid only $844 million, or 31 percent during that same period. TIGTA found that in cases for which the IRS had the authority to assess the restitution ordered, a higher percentage of restitution was paid. Improvements can be made to ensure that the restitution ordered is properly assessed. IRS Criminal Investigation (CI) did not always send closing documents to the Small Business/Self-Employed Division for the assessment of restitution, and the Division incorrectly assessed interest and penalties on some restitution-based assessments.

TIGTA also found that a lack of resources within CI and the Small Business/Self-Employed Division contributed to the IRS not being able to adequately monitor defendants’ compliance with the conditions of probation or supervised release. TIGTA found that internal controls could be improved to prevent the IRS from issuing erroneous refunds for restitution payments. Lastly, TIGTA identified numerous errors in the CI Management Information System related to defendants who were sentenced for tax-related crimes and ordered to pay restitution.

What TIGTA Recommended

TIGTA recommended that the IRS: 1) develop procedures to ensure that CI timely sends restitution closing investigative documents to the Technical Services Unit; 2) review existing controls to ensure that restitution assessments are made in a timely manner; 3) establish monitoring procedures to provide reasonable assurance that all interest and penalties incorrectly assessed are removed; and 4) ensure that review of CI Management Information System information related to restitution and the monitoring of probation and supervised release are included in existing quality reviews mechanisms.

IRS management agreed with all four recommendations and has already implemented corrective actions to ensure that CI timely sends closing investigative documents to the SB/SE Division Technical Services Unit for restitution assessment, and that CI Management Information System information related to restitution and the monitoring of probation and supervised release is accurate.

A lot of detail in the report.  Highly recommended.

Some excerpts:

The amount of restitution ordered payable to the IRS offers two different methods of collection, but the IRS cannot collect the amount twice.

• The first method is the “restitution judgment,” which the U.S. Department of Justice (DOJ) Financial Litigation Unit (FLU) is responsible for collecting. According to DOJ procedures, the FLU will pursue various means to collect restitution, as the judgment and its resources permit, on behalf of identified victims for a period of 20 years from the filing date of the judgment or until the death of the defendant.n9
   n9 The U.S. Attorney’s Office, Northern District of Georgia, Understanding Restitution (www.justice.gov/usao-ndga).

• The second method is the “restitution-based assessment” (RBA), which the IRS will assess and collect in the same manner as if it was a tax. n10 The IRS has a 10-year period to collect the assessed tax unless the courts ordered the restitution only as a condition of probation or supervised release.n11
   n10 IRM 25.26.1.2 (March 24, 2014).
   n11 Restitution ordered solely as a condition of probation or supervised release is collectible only during the period of probation or supervision. It is not collectible either before or after the term of probation or supervised release. United States v. Westbrooks, 858 F. 3d 317, 328 (5th Cir. 2017).

The Firearms Excise Tax Improvement Act does not allow the IRS to assess restitution in every instance. The IRS can only legally assess the restitution if the criminal offense is for tax purposes (e.g., Title 26 cases stemming from an underreporting of income, an inflated credit or expense, or an alleged overpayment of tax that results in a false refund). In these instances, the restitution may be assessed as if it were a tax. n12 When the IRS cannot assess the restitution, it does not have the authority, under Title 18 or Title 26, to administratively collect on a restitution order because it is not a tax. n13
   n12 IRS, Chief Counsel Notice 2011-018, The Assessment and Collection of Restitution (August 26, 2011) (See response to Question No. 2).
   n13 In these instances, the DOJ FLU is responsible for collecting the restitution. 

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Criminal Restitution Was More Likely to Be Paid When the IRS Assessed the Restitution Ordered

Among the reasons for the Firearms Excise Tax Improvement Act was that the assessment of criminal restitution would allow the IRS to use existing enforcement techniques to collect restitution. n16 The law change allows the IRS to assess the amount of restitution ordered by the courts and use its administrative collection tools, including the filing of Notices of Federal Tax Lien and levying assets. Prior to the Act, the IRS accepted payments of restitution but lacked the legal authority to assess the amount of restitution ordered. The IRS could use the examination process to determine the defendant’s tax liability for the same period to which the restitution related, which could be years after sentencing or when a defendant agreed to the liability. n17 
   n16 Restitution in Criminal Tax Cases – A Report and Recommendations Prepared by an IRS-Department of Justice Working Group (April 1, 2004).
   n17 For instance, the defendant could have consented to the tax liability using Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.