The IRS often does not act to collect unpaid taxes. When it does, it usually does so after several years have passed since the tax was due. Even though interest rates remain at historically low levels, it is not unheard of for the interest incurred on unpaid taxes to be more than the original tax liability. This is why it is important that taxpayers address interest when resolving unpaid taxes. The United States v. Rabkin, No. 12-CR-515 (E.D.N.Y), case provides an example.

Facts & Procedural History

In Rabkin the taxpayer accepted a plea agreement for tax evasion. The plea agreement required that Rabkin pay restitution to the government for unpaid taxes. The restitution was equal to the amount of Rabkin’s unpaid taxes. The criminal judgment waived the requirement that Rabkin pay interest on the restitution. The IRS then assessed interest on the underlying tax liability. The issue before the court was whether the IRS could assess interest, even though the judgement said that interest was waived on the restitution payments.

Interest runs on unpaid criminal restitution orders and on unpaid civil tax liabilities. This is set out in two different statutes. As the court noted in Rabkin, interest waived under one of these statutes generally does not waive interest under the other statute. The court also noted the judicial exception to this rule. This exception comes into play when the civil liability is “inextricably intertwined” with the criminal liability. Criminal and civil liabilities are intertwined if the plea agreement or judgement addresses both liabilities.

Mr. Rabkin’s plea agreement and the court’s judgment did not address his civil tax liability. The plea agreement even stated that the “agreement does not bind any federal, state, or local prosecuting authority other than the [United States Attorney’s Office for the Eastern District of New York and the United States Department of Justice Tax Division (collectively “the Office”)], and does not prohibit the Office from initiating or prosecuting any civil or administrative proceedings directly or indirectly involving the defendant.” The court concluded that the IRS was allowed to charge interest given these facts.

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