In the case of Creel v. Commissioner, 419 F.3d 1135 (11th Cir. 2005), the IRS attempted to collect additional taxes, penalties, and interest from a taxpayer even after his criminal restitution obligation for the very same tax had been paid and satisfied.
The district court had ordered the taxpayer to make restitution to the IRS as a condition of probation, which included any applicable penalties and interest. The U.S. attorney later issued a satisfaction of judgment and release of lien, stating that the debt was “paid in full.”
Despite this, the IRS attempted to collect additional tax liabilities, which led to a legal battle that ultimately ended with the U.S. Tax Court ruling in favor of the taxpayer. This case highlights the issue of confusion and economic hardship faced by taxpayers when subjected to the tax collection procedures of two different agencies.
Suffice it to say that the IRS did not like the outcome of the case. According to the IRS’ tax attorneys, 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.
Facts & Procedural History
The taxpayer in Creel failed to file federal income tax returns for the years 1985-1991. He was prosecuted by the Department of Justice for willfully failing to file returns for 1987 and 1988.
As part of a plea agreement, Creel agreed to file returns for the years 1985-1991 and make full restitution of the amount of loss resulting from his failure to file returns for the years 1986-1991.
The district court ordered Creel to make restitution to the IRS for the years 1986-1991 in the amount of $83,830 plus any applicable penalties and interest. Creel made monthly restitution payments and the U.S. Attorney filed a Satisfaction of Judgment stating that the debt was “paid in full.”
The IRS later claimed that Creel owed additional taxes, penalties, and interest for 1985 and 1987-1991, and applied the restitution payments to satisfy part of his tax liability. The IRS sent Creel a notice of intent to levy and a notice of a right to a collection-due-process hearing.
Creel requested a hearing and argued that his alleged civil tax liabilities for the years 1986-1991 had been satisfied by virtue of his payment of $83,830, but the Appeals Officer disagreed and sustained the Commissioner’s proposal to collect the unpaid “applicable penalties and interest.”
At the trial, Creel testified that his payment of $83,830 satisfied all of his tax liabilities for the subject years. The Tax Court found that Creel’s payment of $83,830 and the U.S. Attorney’s issuance of a satisfaction of judgment and release of lien settled the alleged civil tax liabilities. The Tax Court sustained the proposed levy for the 1985 tax year because that year was not included in the restitution order. The court also held that the Appeals Office did not abuse its discretion in rejecting Creel’s proposal to make monthly payments of $250. The IRS appealed the Tax Court’s decision.
Double Payment: Restitution of Tax and Tax
The issue in Creel is whether the IRS can pursue additional civil tax liabilities against an individual after their criminal restitution obligation has been satisfied.
The IRS conceded that the taxpayer’s criminal restitution obligation was satisfied, but argues that this has no bearing on the IRS’s ability to pursue him for additional civil tax liabilities. The general rule is that the government can recover criminal penalties in a criminal prosecution and can recover additional civil penalties in a civil proceeding.
That may be the general rule, but the court’s restitution order can vary this. The language of the restitution judgment and the actions of the U.S. attorney in this case did just that.
As a condition of probation, the district court ordered Creel to pay restitution to the IRS. The plea agreement mandated that “the Court shall impose a condition requiring restitution in the amount of $83,830 to the Internal Revenue Service, in addition to any interest and penalties which may be imposed by the Internal Revenue Service.” The judgment in the criminal case set the amount of restitution at “$83,830 plus any applicable penalties and interest.” Therefore, as the Tax Court found, the restitution amount specifically included the civil penalties that the IRS was now seeking to recover.
Creel made his monthly restitution payments totaling $83,830. The U.S. Attorney issued a satisfaction of judgment and a cancellation and release of lien, stating that the debt secured was paid in full and fully released, satisfied, discharged, and canceled. Creel testified that he understood his payment of $83,830 constituted a full payment of his tax liabilities and that he understood the release issued by the U.S. attorney discharged all that he owed. The Tax Court found that Creel’s civil tax liabilities were settled by virtue of the $83,830 payment and the actions of the U.S. attorney, and that the government discharged Creel’s civil tax liabilities as part of the criminal case.
The IRS’s Approach to Restitution
The IRS argued that the U.S. Tax Court erred in applying certain legal principles, including that the U.S. attorney had the authority to compromise Creel’s civil tax liabilities.
The court did not agree. The U.S. attorney had the authority to settle Creel’s criminal restitution obligation, and because the restitution obligation was drafted such that Creel’s civil tax liabilities were inextricably intertwined with his criminal tax liabilities, which together formed a condition of his probation, the U.S. attorney acted within the scope of his authority.
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.”
The issue of whether taxpayers should be subject to the tax collection procedures of two different agencies, when criminal restitution includes tax and interest, raises concerns of confusion and economic hardship for taxpayers. To avoid such situations, the law should allow the addition of civil penalties to restitution orders for tax crimes, thereby precluding the IRS Collections function from pursuing additional tax collections beyond the restitution payments. Alternatively, the government should not be entitled to restitution payments for tax crimes, allowing taxpayers to make payments solely to the IRS Collections function. By implementing such changes, the tax collection process would become less burdensome and more streamlined for taxpayers.