Calculate Tax Loss for Criminal Tax Cases: Why It Matters

In the realm of criminal tax cases, time is of the essence. The criminal process operates at a markedly faster pace than the civil tax assessment process, creating a situation where defendants often overlook the precise amount of the tax loss they are accused of.

While the tax-related details, including the actual amount owed, may seem trivial amidst the broader context of a criminal tax indictment, trial, and sentencing, their accurate determination carries significant weight. The ramifications of a criminal tax conviction can reverberate throughout a defendant’s life, underscoring the need for individuals facing tax crime charges to diligently calculate the exact loss from the outset. Rectifying a miscalculated tax loss after the fact is an arduous task

The recent United States v. Asker, No. 21-1643 (6th Cir. 2023) case provides an example. It involves a criminal tax defendant who was sentenced based on a $2.5 million dollar tax loss, only to find that the actual tax due was just $1.1 million. The taxpayer wanted to pay the correct amount, but had to try to convince the courts to reduce the amount to the correct amount–which it would not do.

Facts & Procedural History

The taxpayer-owned pizza stores. For seven years, he underreported his income tax and payroll liabilities for the stores. The IRS eventually caught up with him. A federal jury later convicted him of one count of conspiracy to defraud the United States, three counts of filing a false tax return, 28 counts of aiding and assisting in the filing of a false tax return, and one count of obstructing the administration of the internal revenue laws.

The parties had determined different amounts for the tax due. The taxpayer argued that the tax loss was $1.4 million; the probation office calculated a loss of $5.8 million; and the government said the loss was $7.2 million. After a day’s testimony in an evidentiary hearing, the parties told the district court that they were “prepared to stipulate to a loss amount” of $2.5 million. The district court accepted the stipulation.

In accepting this stipulation, the court and taxpayer’s attorney noted on the record that if the amount of the loss was less, the taxpayer would seek a reduction in his tax restitution order. This intention was not reflected in the court’s judgment

In 2018, the taxpayer had filed amended returns that the IRS had accepted which showed that the tax was only $1.1 million. He also filed a motion to have the court reduce the amount of the restitution. Three years later the court addressed the motion, concluding that it did not have the authority to modify the judgment.

The Interplay of Civil & Criminal Tax

The Sentencing Guidelines

For tax crimes, the tax loss plays a significant role in determining the base offense level, which is a crucial factor in calculating the recommended sentence. The United States Sentencing Guidelines (“USSG”) provide a framework that helps judges determine appropriate sentences for federal offenses.

Section 2T1.1 of the USSG specifically pertains to tax-related offenses. It establishes guidelines for calculating the base offense level based on various factors, including the amount of tax loss resulting from the offense committed by the taxpayer. The tax loss refers to the amount of money that was unlawfully evaded or defrauded from the government through the tax scheme.

Section 2T1.1 sets out factors that are considered when determining the base offense level for tax offenses. These factors typically include the amount of tax loss involved in the offense, the type of tax involved (e.g., income tax, payroll tax), the sophistication of the scheme, the number of victims, and any aggravating or mitigating circumstances. The base offense level serves as a starting point for determining the severity of the offense committed. The higher the tax loss, the higher the base offense level is likely to be, indicating a more severe offense.

Once the base offense level is determined, the sentencing guidelines provide a range of possible sentences based on that level. The judge will consider other relevant factors, such as the taxpayer’s criminal history, to determine the final sentence within that range. However, the tax loss is a crucial factor because it sets the foundation for determining the severity of the offense and plays a significant role in calculating the recommended sentence.

Tax Restitution

In addition to its impact on the taxpayer’s base offense level, the tax loss amount also plays a role in determining the restitution that the taxpayer must pay to the victims. This is governed by the Mandatory Victims Restitution Act (18 U.S.C. § 3663A), which is a federal law that requires convicted individuals to compensate their victims for any financial losses they have suffered as a result of the criminal activity.

The restitution amount is directly linked to the tax loss. In cases where individuals have been financially harmed due to the taxpayer’s tax scheme, they are considered victims of the crime. The law aims to ensure that these victims are properly compensated for their losses.

To determine the appropriate restitution amount, the court takes into account the actual financial harm suffered by the victims, which includes the tax loss caused by the taxpayer’s scheme. Therefore, it becomes crucial to accurately determine the tax loss amount in order to establish the restitution that the taxpayer is required to pay.

By considering the extent of the tax loss, the court can calculate the restitution in a manner that reasonably compensates the victims for their financial losses. The restitution may cover various aspects such as the amount of taxes evaded or defrauded, any penalties or interest incurred, and other related damages resulting from the offense.

Paying Civil Taxes & Criminal Tax Restitution

A criminal tax assessment refers to the process carried out by the IRS to assess and collect the amount of court-ordered restitution in a criminal case. This assessment is conducted in the same manner as tax assessments.

The IRS is responsible for assessing and collecting the court-ordered restitution as if it were a tax. This means that the IRS treats the restitution amount as a tax liability and follows the procedures for tax assessment and collection.

Section 6213(b) states that a notice of assessment of restitution is not considered a notice of deficiency. Consequently, taxpayers are not allowed to petition the U.S. Tax Court solely based on such an assessment of restitution.

However, a criminal tax assessment can create duplicate IRS debts for the same type of tax and tax periods as an existing original return or a civil exam assessment. To address this issue, the IRS is supposed to manually calculate and cross-reference all applicable payments and credits to ensure that the full amount of the liability is collected only once.

Because the assessment process of calculating the tax and corresponding payments, penalties and interest is complex, and it applies to various types of taxes, the IRS often gets this part wrong. Taxpayers may be required to pay the same amount twice for the same tax liability.

Interest & Penalties on Restitution Assessments

The IRS is not able to assess interest and penalties on restitution assessments.

The court addressed this in the case of Klein v. Commissioner. In Klein, a taxpayer was convicted of tax evasion and was ordered to pay restitution to the IRS. The IRS assessed underpayment interest and a failure to pay penalty on the restitution amount. The taxpayer disagreed with this assessment, arguing that Section 6201(a)(4) does not allow the IRS to add underpayment interest or a failure to pay penalty to a Title 18 restitution award.

The U.S. Tax Court agreed with the taxpayer’s argument. The court held that Section 6201(a)(4) specifically grants the IRS the authority to assess underpayment interest and a failure to pay penalty only on “any tax imposed by this title.” Since restitution is not considered a tax under Title 18, the court concluded that Section 6201(a)(4) does not apply in this situation.

As a result of this decision, the IRS is no longer permitted to assess underpayment interest or a failure to pay penalty on Title 18 restitution awards without first determining the taxpayer’s civil tax liabilities. This ruling ensures that taxpayers are not subjected to additional financial burdens, such as interest and penalties, beyond the restitution amount, thereby preventing unfair punishment for their criminal convictions. It ultimately helps protect taxpayers’ rights and ensures a fair and appropriate assessment of their liabilities.

Error or Intentional Omission

This brings us back to this case. The transcript from the trial court indicated that the parties contemplated that the amount of the tax loss would be redetermined later and the restitution amount adjusted later. This did not make it into the court’s judgment, however.

The court in the current case had to decide whether the lower court was correct in determining that it could not change the amount of the restitution. The court addresses the fact pattern in the context of an error:

Clerical errors, however, are a matter of keystrokes or transposition, “of the sort that a clerk or [court reporter] might commit, mechanical in nature.” United States v. Robinson, 368 F.3d 653, 656 (6th Cir. 2004) (cleaned up). Errors arising from oversight or omission include discrepancies between the oral sentence and the written judgment. United States v. Cofield, 233 F.3d 405, 407 (6th Cir. 2000). They do not include the omission of a district court’s “unexpressed sentencing intention.” Robinson, 368 F.3d at 657. Here, one might infer from the hearing transcript that the district court intended to consider redetermining the restitution amount based on any amended returns to be filed. But that aim was neither clearly articulated nor fully developed. See United States v. Werber, 51 F.3d 342, 347 (2d Cir. 1995). Thus, its omission from the written judgment was not a “clerical error” or oversight, and Rule 36 does not authorize the amendment Asker seeks.

In legal terms, an error typically refers to a mistake or oversight made unintentionally. Intentional omissions from a judgment would generally be interpreted as deliberate actions or decisions by the court. While clerical errors are accidental and unintentional, intentional omissions signify a deliberate choice made by the court not to include certain information or provisions in the judgment.

The appeals court can correct an intentional omission if a timely appeal is filed. That did not happen here, as it was probably not clear to the taxpayer at the time that this was an intentional omission or that the court did not have the ability to make the correction later.

The trial or appeals court can correct an error even if the time period for an appeal has expired. The court did not do that here as it determined that this was an intentional omission, not an error.

The Takeaway

The criminal process moves quickly, pressuring defendants in tax cases to overlook the precise tax loss. Parties involved are often not tax experts, leading to this oversight. However, accurately determining the tax loss is crucial as a criminal tax conviction can have lasting consequences. It’s important for defendants to invest time and effort in calculating the loss upfront, as rectifying miscalculations later is challenging. Seeking help from tax or legal professionals is recommended to navigate the process and mitigate potential consequences.