In most cases in which a person pleads guilty to a tax-related crime in federal district court, the U.S. Attorney’s Office will require him to agree that the district court can order the payment of restitution to the IRS for the years for which he pleads guilty plus any years constituting relevant conduct. Following conviction for a tax-related crime in federal district court, the court can order restitution as a condition of probation or of supervised release. The amount of restitution will often be substantial. In addition, following the criminal case, the IRS can issue a notice of deficiency asserting additional tax liabilities for the same years, plus fraud and/or accuracy penalties and interest. The good news is that the taxpayer can do an offer in compromise of the additional taxes, penalties and interest assessed by the IRS. The Tax Court in Rebuck v. Commissioner, T.C. Memo 2016-3, reminded taxpayers of the bad news: to do so, they need to pay the full amount of restitution, which cannot be compromised.
The taxpayer in Rebuck was indicted along with a number of co-defendants of conspiring to defraud the United States by marketing foreign and domestic trusts that falsely claimed that they would help taxpayers legally avoid paying federal income tax, in violation of 18 U.S.C. §371. Rebuck was convicted of one count of conspiracy. At sentencing, the district court ordered Rebuck to pay restitution to the IRS of $16,399,199 jointly and severally with his co-defendants.
After his conviction, Rebuck filed income tax returns with the IRS for 1999, 2000, 2001 and 2002. The IRS assessed the tax shown due on the returns together with penalties and interest. Because Rebuck neither paid his tax liabilities for 1999 – 2002 nor entered into an installment agreement for those years, the IRS issued a Final Notice/Notice of Intent to Levy under IRC §6330. Rebuck’s attorney filed a timely request for a Collection Due Process (CDP) hearing. His attorney submitted an offer in compromise to the Settlement Officer assigned the CDP case. The offer encompassed Rebuck’s income tax liabilities for 1996-2002 plus promoter penalties that had been assessed against him. The Settlement Officer concluded that an OIC could only be considered if Rebuck agreed to pay the entire amount of restitution owed the IRS. Rebuck appealed the determination to the Tax Court, which held that the IRS did not abuse its discretion in rejecting the OIC.
In so holding, the Tax Court stated that under the Internal Revenue Manual, part 126.96.36.199.5, an OIC may not be considered from a taxpayer who owes criminal restitution to the IRS unless the offer proposes an amount that is no less than the full amount of restitution owed. The “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.” Previously, in Isley v. Commissioner, 141 TC 349 (2013), the Court held that under §7122 and Treas. Reg. §301.7122–1(d)(2), the IRS could not unilaterally accept an offer involving tax years that had been referred for prosecution to the Department of Justice, even where the taxpayer’s offer is submitted post-conviction.
Rubeck and Isley both involve restitution orders entered before 2010. In 2010, Congress added §6401(a)(4) to the Internal Revenue Code, which requires the IRS to assess and collect the amount of restitution ordered in a criminal case for failure to pay any tax imposed under Title 26 in the same manner as if such amount were a tax. This section allows the IRS to use its administrative collection tools to collect the amount of the restitution order issued by the federal district court.
In addition, §6201(a)(4)(C) restricted a defendant’s ability to challenge an IRS assessment of restitution ordered by a district court in a criminal case. Under §6213(b)(5), a restitution-based assessment is not subject to deficiency procedures. Additionally, under §6501(c)(11), a restitution-based assessment can be made at any time.
In Notice 2013-12, IRS Chief Counsel determined that court-ordered criminal restitution may only be modified or reduced by the district court in the limited circumstances set out in 18 U.S.C. §3664(o)(1). Thus, if the IRS determines that the amount of restitution ordered exceeds the amount of tax actually owed, the IRS cannot reduce the amount of restitution assessed. Similarly, if the taxpayer has a net operating loss in a subsequent year that would reduce the tax owed, it does not affect the taxpayer’s obligation to pay restitution in the amount ordered by the court.
Not only may a taxpayer not compromise an order to pay restitution to the IRS, restitution may not be discharged in bankruptcy, since under 11 U.S.C. §523(a)(13) a debt is not dischargeable that is “for any payment of an order of restitution issued under title 18, United States Code.” And since a criminal restitution order is part of a federal judgment, it is enforceable beyond the ten-year period during which tax assessments are normally enforceable.
If you represent a defendant in a criminal tax case, you must take steps early on to ensure that any amount of restitution ordered by the court does not exceed the amount of tax actually owed, since, once the court enters a restitution order, the amount of restitution cannot be challenged in any other proceeding, cannot be compromised, is not dischargeable in bankruptcy, and is enforceable for longer than normal tax assessments. And as the Tax Court reminds us in Rebuck, if the taxpayer owes restitution to the IRS, he cannot compromise other tax liabilities unless he agrees to pay an amount that is no less than the total amount owed as restitution.
Robert S. Horwitz – For more information please contact Robert S. Horwitz – email@example.com Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com