Posted by: Robert Horwitz | May 9, 2016

Criminal Tax Restitution Is a Dangerous Thing by ROBERT S. HORWITZ

This blog has previously discussed various issues regarding restitution in criminal tax cases. Three recent cases illustrate why a restitution order in a criminal tax case is an extremely bad thing from the defendant’s point of view.

In Rebuck v. Commissioner, T.C. Memo 2016-3, Rebuck pled guilty along with co-defendants to conspiracy to defraud the United States under 18 USC §371 by promoting abusive trust packages that purported to allow the purchasers to legally avoid all income tax.  He was ordered to pay restitution to the IRS in the amount of $16,389,199.  The restitution judgment was joint and several with his co-defendants.  Rebuck subsequently filed a balance due income tax return for 1996 and the IRS assessed promoter penalties against him.  He entered into an installment agreement to pay the 1996 income tax and the penalties.

After entering into the installment agreement, Rebuck filed balance due income tax returns for 1998-2002. The IRS assessed the amounts shown due on those returns plus penalties and interest.  After a Collection Due Process notice was issued in August, 2012, Rebuck filed a timely protest and sought to enter into an offer in compromise.  IRS Appeals rejected the offer on the ground that Rebuck had to include in his offer full payment of the $16 million plus owed as criminal restitution.  Rebuck petitioned the Tax Court.  The Tax Court held that the IRS did not abuse its discretion in requiring Rebuck to full pay the criminal restitution:

The fundamental problem with petitioner’s OIC is that it did not address his outstanding court-ordered restitution. Petitioner’s OIC sought to compromise (1) Federal income tax liabilities for the taxable years 1996, 1998, 1999, 2000, 2001, and 2002 and (2) section 6700 civil penalties for 1999-2003.  However, petitioner’s OIC did not address his outstanding criminal restitution.  When a taxpayer owing  restitution submits an OIC to the IRS, IRM pt. requires that the offer provide for the full payment of the restitution amount. Petitioner’s OIC did not address hi outstanding criminal restitution as required by the IRM. Generally, an Appeals officer does not abuse his or he discretion in rejecting an OIC when following guidelines set forth in the IRM. Veneziano v. Commissioner, T.C. Memo 2011-160.

Although the Tax Court pointed to the IRM as the basis for why the restitution could not be compromised, by statute a criminal restitution order cannot be reduced (except in very unusual circumstances) and the Government cannot compromise it. So unlike a regular tax assessment, you cannot compromise an order to pay restitution to the IRS in a criminal tax case.

In U.S. v Del’Andrea (D. Utah 1/14/2016), the defendant pled guilty to tax evasion for both personal and corporate income tax.  She was ordered to pay restitution for both corporate and personal income tax in the amount of $136,509.50.  She paid the amount of the restitution order on the day the order was entered.  Because the corporation was protesting the IRS’s proposed assessment against it for one year, the IRS had the amount of restitution attributable to that year posted as pending.  The IRS assessed interest against the defendant on the amount of restitution from the due dates of the returns.   The defendant filed a motion with the district court to order the IRS to apply the tax attributable to the corporation to the corporate account and to hold that she is not liable for any interest other than that which would be owed from the date of the restitution order.  She also asserted that the IRS could not assess interest against her from the due dates of the return without following the deficiency procedures.  The district court ruled against the taxpayer on these issues.

As to the corporate tax, due to the protest, application of the restitution payment to the corporate account would have resulted in an automatic refund, since the account had a zero balance owed. Thus, the court held that the IRS did not violate the restitution order by not crediting the payment to the corporate account.  The court held that the IRS could assess restitution interest when it assessed the restitution under 26 USC §6401(a)(4) without needing to follow deficiency procedures as to interest:

The court concludes that the IRS has correctly assessed the restitution payments and associated interest in accordance with the procedures outlined in the Internal Revenue Code. The IRS correctly calculated interest on the restitution payments from the date that the taxes to which the restitution applied were originally due, and the IRS was not require to follow the deficiency procedures with regard to the restitution-based assessments or the interest assessments.

The defendant did prevail on one issue. The IRS had applied a refund owed the corporation to interest owed by the defendant on the theory that they were jointly and severally liable.  The court held that they were not jointly and severally liable.  Thus, the IRS could not apply a refund owed the corporation to interest on the defendant’s restitution.

Finally, in US v. Tilford (5th Circuit 1/19/2016), Mr. and Mrs. Tilford lived in a community property state.  He pled guilty to failing to file a tax return for 2006.  He was ordered to pay restitution of $453,547 in 2012.  His wife had filed for divorce.  The divorce became final in early 2014.  Shortly after the divorce became final, the United States garnished her pre-divorce wages, including accrued vacation pay, and pre-divorce contributions to her 401(k) and 403(b) plans.  Mrs. Tilford filed a motion for an order to quash the garnishment, claiming that she was entitled to innocent spouse relief under Internal Revenue Code §66(c).  Affirming the district court’s denial of the motion to quash, the Fifth Circuit held that innocent spouse provisions do not apply to criminal tax restitution.  This was so even though under §6201(a)(4)(A) the IRS is to “assess and collect … the restitution … for failure to pay any tax … in the same manner as if such amount were such tax.”

So, you cannot compromise a criminal restitution order. Even if the order does not expressly provide for pre-judgment interest, the IRS can assess interest from the due date of the return.  And the current or former spouse of the defendant cannot obtain innocent spouse relief if the Government seeks to seize the spouse’s property to satisfy the defendant’s tax liability.  On top of all this, a criminal restitution order is not dischargeable in bankruptcy.  It is the worst of all worlds for a criminal defendant against whom a tax-related restitution order is entered.

Robert S. Horwitz – For more information please contact Robert S. Horwitz – 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

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