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IRS Can’t Assess Interest and Penalties on Criminal Restitution by Robert S. Horwitz

A defendant convicted of a tax crime can be ordered by the district court to pay the IRS restitution equal to the amount of the tax loss. As part of the 2010 Firearms Excise Tax Improvement Tax, Congress added sec. 6201(a)(4) to the Internal Revenue Code.  That section authorizes the IRS to “assess and collect the amount of restitution *** for failure to pay any tax***in the same manner as if such amount were such tax.”  The assessment of restitution is not subject to notice of deficiency procedures.  The IRS claims it can assess interest from the due date of the return plus failure to pay penalties on the amount of restitution without a notice of deficiency. In a case of first impression the Tax Court told the IRS “NO.”

In 2011, Samuel and Zipora Klien each pled guilty to one count of filing a false income tax return. The district court ordered them to pay restitution of $562,179 for 2003-2006.  They paid the restitution amount.  In 2012, the IRS assessed the restitution amount under IRC sec. 6201(a)(4), plus interest from the due dates of the return and failure to pay penalties.  When the taxpayers failed to pay the interest and penalties, the IRS filed a Notice of Federal Tax Lien (“NFTL”).  The taxpayers protested on the ground that the penalties and interest were not properly assessed. IRS Appeals sustained the NFTL and the taxpayers petitioned the Tax Court.

The Court focused on the meaning of “in the same manner as if such amount were such tax,” which the Court noted is in the subjunctive mood.  The Court found that 6201(a)(4) was adopted for the sole purpose of enabling the IRS to assess the restitution amount, thus creating an account receivable against which any restitution payment can be credited.  The section was not meant to make the restitution amount a “tax.”  Interest on the other hand is assessed and paid on “tax imposed by” the Internal Revenue Code.  Failure to pay penalties are imposed for failure to timely pay tax.  Since restitution is not a “tax,” assessments of restitution “do not generate” interest or penalties.

The Court refused to defer to the Internal Revenue Manual provisions that state that interest and penalties are assessed on restitution. The Court did offer some solace to the IRS: if it wanted to assess penalties and interest it could do so after the taxpayers’ correct civil tax liability was finally determined.  The case is Klein v. Commissioner, 149 TC No. 15 (Oct. 3, 2017), available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11428.

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