According to the IRS’ tax attorneys, the “The court misconstrued the facts of the case.” That is the conclusion reached by the IRS Office of Chief Counsel in Chief Counsel Notice 2007-008. The case that the IRS attorney refers to is Creel v. Commissioner, 419 F.3d 1135 (2005).
The Creel Case
In the Creel case the U.S. Tax Court and Eleventh Circuit Court held that the taxpayer who paid restitution to the government for willfully failing to file tax returns as part of a criminal plea agreement satisfied his civil tax liability.
What makes the Creel case interesting is that the amount of restitution required by the criminal tax case plea agreement was not sufficient to cover the taxpayers tax liability and the plea agreement included language that specified that the taxpayer was to pay this amount of restitution “plus any applicable penalties and interest” for taxable years involved. It was this later language that gave the taxpayer the ability to argue that he believed that his civil tax liability was satisfied by paying criminal restitution.
The IRS argued that a criminal sentence including restitution for a tax crime does not preclude the IRS from pursuing the taxpayer for the full amount of tax (and penalties and interest), even after the restitution is paid. The courts disagreed.
The IRS also took the position that the U.S. Attorneys Office does not have the ability to compromise a civil tax liability – an argument that the courts did not address.
The IRS’s Reaction to Creel
As a result of the Creel decision, the U.S. Department of Justice has revised the U.S. Attorneys’ Manual to include standardized language for use by U.S. Attorneys in restitution orders and in the restitution portion of plea agreements, with the aim of not putting taxpayers in a position to argue that the restitution in their plea agreement satisfies or compromises their civil tax liability.
The Chief Counsel Notice advises IRS attorneys that “[i]n factually similar cases arising in other circuits, attorneys should argue that Creel was wrongly decided.”
Paying The Same Debt to Two Government Agencies
Should taxpayers be subject to the tax collection procedures of two different agencies, when criminal restitution includes the tax and interest? Having to make payments to both the Courts and the IRS Collections Division results in confusion and, in many cases, economic hardship for taxpayers.
The law should permit the addition of civil penalties to restitution orders, so that a restitution order for a tax crime can preclude the IRS Collections function from coming back and trying to collect additional taxes on top of the restitution payments. Or, in the alternative, tax crimes should not entitle the government to restitution payments–allowing the taxpayer to make payment only to the IRS Collections function.