IRS Not Limited in Collecting Restitution Assessments

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Tax Litigation When The Administrative Process Failed
Tax Litigation When The Administrative Process Failed
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The IRS is authorized to assess criminal restitution for certain tax crimes. This process allows the IRS to collect the criminal restitution as if it was a tax. The law authorizing these collections is relatively new and evolving. The recent Carpenter v. United States, 152 T.C. 12, case highlights why it is important for those being accused of tax crimes to pay attention to the language dealing with restitution that is included in their plea agreements.

Facts & Procedural History

In 2014, Carpenter pleaded guilty to filing false tax returns for 2005 and 2006. Carpenter was sentenced to 27 months in prison, followed by one year of supervised release.

He was also ordered to pay ~$508,000 restitution for the tax loss to the government. The court order said that the restitution was due immediately and that Carpenter has to pay $100 per month beginning 60 days after his release from imprisonment. The court imposed $200 in criminal restitution penalties and waived interest thereon.

Carpenter was released from prison and completed his term of probation. He still owed over $500,000 of restitution at the time.

The U.S. Department of Justice took steps to satisfy the balance by levying on Carpenter’s Social Security payments as if it was an unpaid tax debt. In 2016, a decade after the 2005 and 2006 tax years at issue, the the IRS made restitution-based assessments for the restitution. The IRS immediately began efforts to collect the restitution. This included a lien filing for $759,380–which added penalties and interest to the unpaid restitution.

Carpenter filed a collection due process hearing request with the IRS arguing that he was unable to pay the balance of his liabilities and that he would like to discuss collection alternatives. He included a statement that his only source of income was Social Security disability benefits and that his expenses exceeded his income because of making restitution payments and supporting three dependents. Carpenter abandoned these arguments during the CDP hearing and instead argued that the IRS did not have the ability to collect restitution as no notice of deficiency was issued first.

Restitution Based Assessments

Congress specifically authorized the IRS to assess and then collect criminal restitution as if it was a tax. This allows the U.S. Department of Justice, the U.S. Probation Office, and the IRS to collect the restitution.

There is no prohibition from each collecting at the same time. But any payment collected by one agency is to be credited to the others. As a practical matter, these credits are often not made timely or accurately. The IRS has a special group that handles restitution assessments. This group is tasked with applying payments.

Restitution assessment collections are handled by the IRS’s revenue officers. Appeals from these collection actions go to the IRS’s appeals officers. Both the revenue officers and appeals officers generally take the position that they have no say over or ability to compromise or settle restitution assessments. And even the court cannot change the restitution judgment once entered. This means that those with restitution assessments have little to no procedural protections from the IRS’s collection activities.

The Sentencing Court and It Order

The answer for restitution assessments is found in the court order that set the restitution.

In this case, the order required monthly payments and set a payment amount. It did not say that the payment amount was the maximum the amount the government could collect each month. The order did say that the restitution was due immediately.

According to the court, the absence of a maximum monthly amount and statement that the restitution was due immediately, allowed the IRS to collect more than just the monthly amount.

Had Carpenter pushed for different language in the sentencing order, he may have prevented the IRS from being able to collect from his Social Security income. This could have also been included in the modification made at the time of his release from probation.

The Policies for Restitution Assessments

It is understandable why Carpenter did not push for these changes. At the time of sentencing, he no doubt was focused on securing his freedom. The same can be said of getting released from probation. Carpenter was not in a strong bargaining position and not focused on finances at the time.

There are some fundamental policy issues that should be considered in these cases. While tax crimes are serious offenses, the offenders are typically released back into the community. The sentences are usually relatively short in duration. Imposing steep criminal restitution that cannot be abated or removed given the administrative remedies available to other non-criminal tax debts, can set a bar that most offenders will never be able to satisfy.

The financial consequences–which might not have even been contemplated by the offender at the time they entered into a plea agreement–may be more severe and limiting than the term of imprisonment or probation. This is particularly true if the IRS is allowed to collect restitution assessments and has no ability to compromise the debts as it routinely does with other debts.

The process for selecting and prosecuting tax crimes is arbitrary at best. Restitution assessments make a clear distinction between those who are fortunate enough to not be pursued criminally even though a tax crime was committed and those few who are pursued and convicted.

Could the sentencing courts not merely allow the IRS to make a normal tax assessment in tax crime cases, rather than a criminal restitution assessment? That would afford those convicted of tax crimes to have the same rights as those who are not convicted but who also have unpaid taxes–some of whom have also committed tax crimes.

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