The rules that allow the IRS to assess and collect criminal restitution as if it is a tax due present some unique questions. In Bontrager v. Commissioner, 151 T.C. 12, the court considered whether the IRS can assess and collect a father’s tax restitution payment as tax restitution against the son.
Facts & Procedural History
The taxpayer was in the real estate business. He owned and operated a real estate investment business.
The taxpayer’s father was convicted of wire fraud, ordered to pay restitution of $687,000, and after he was released from prison the IRS assessed against him $185,346 of Federal income taxes.
The taxpayer employed his father after the father was released from prison. The father took a prominent role in the business operations.
The Federal government began investigating the business for mortgage fraud and tax crimes. During these investigations, the IRS discovered that the taxpayer’s businesses were being used to conceal the father’s income and assets, presumably to prevent the IRS from collecting restitution from the father. It did this by paying the father’s compensation to another person for the father and purchasing a car for the father’s use in the name of the business.
The Federal government then charged the taxpayer with criminal aiding and abetting for helping his father evade his IRS-assessed restitution. The taxpayer pleads guilty. At that time, the father owed $727,096, i.e., income tax of $185,346, additions to tax totaling $90,781, and statutory interest of $450,969. The district court apportioned 10 percent of the tax loss (or $72,710) to the taxpayer and ordered him to pay the IRS restitution in that amount.
In 2014, the IRS assessed the 10 percent against the taxpayer. This was for the 2010 tax period. When it was not paid timely, the IRS used its enforced collection powers to attempt to collect the restitution, which resulted in tax litigation. The question for the court was whether the IRS could assess and collect a portion of the father’s restitution against the taxpayer-son.
IRS Restitution Assessments
While the court determines the restitution amount Congress authorized the IRS to assess and collect certain tax-related restitution beginning in late 2010. The restitution has to be ordered in a tax case for failure to pay any tax imposed under the tax code. The law allows the IRS to assess and collect the restitution in the same manner as if such amount were such tax.
Unlike most other tax assessments, the IRS’s assessment is not subject to the notice of deficiency requirements and does not permit the taxpayer to have pre-payment access to the U.S. Tax Court to challenge errors in the assessment. Instead, the taxpayer has to wait for the IRS to collect and then pursue a collection due process hearing to get access to the U.S. Tax Court.
Given this law, the IRS will often assess the restitution several years after the year in which the “tax offense” had occurred. It will also impose interest on the restitution retroactively back to the date of the assessment. This allows the Federal courts and the IRS to collect on the same debt at the same time.
This case is an example of how this process works. The “tax offense” last occurred in 2010 according to the criminal trial documents. The IRS did not assess the restitution as a tax until 2014. But what is different about this case is that it is for restitution assessed in 2014 for the father’s restitution for a tax crime from 1994.
The IRS Can Assess Restitution on Restitution
The IRS’s ability to assess restitution is limited to tax offenses. This typically arises where there is a crime that produced income that the taxpayer did not report to the IRS. Thus, the taxpayer has to repay the underlying victims and the IRS for the unpaid taxes on their criminal profits.
In this case, the taxpayer argued that the IRS could not assess the restitution against him personally, as the IRS was assessing restitution due by his father against him. The statute does not seem to contemplate this, as the taxpayer did not attempt to evade the payment of his own taxes.
The court considered the criminal trial documents and noted that the taxpayer was originally charged with tax evasion and plead guilty to that charge. Because it was a tax charge, the court concluded that the father’s restitution could be assessed as restitution by the IRS for the taxpayer.