The IRS was not authorized under Code Sec. 6201(a)(4) to add underpayment interest or failure-to-pay penalties to a criminal restitution award. In addition, the IRS was not allowed to assess or collect underpayment interest or additions to tax without first determining the taxpayers’ civil tax liabilities.
The taxpayers, a married couple, pleaded guilty to filing a false return. As part of their plea, they agreed to make full restitution for the losses caused by their four years of underreporting income. The taxpayers paid the full amount of restitution ordered along with all of the Title 18 statutory additions. Later, the IRS assessed not only the restitution they had been ordered to pay, but also underpayment interest and additions to tax for failure to pay an amount shown on a return. The IRS never conducted a civil audit of the couple or sent a deficiency notice.
The IRS argued that under Code Sec. 6201(a)(4) it was authorized to assess and collect restitution as if such amount were a tax. Therefore, it was entitled to assess and collect interest and additions to tax on the restitution amount.
Assessment Not Authorized
However, Code Sec. 6201(a)(4) simply means that restitution is a tax for the limited purpose of enabling the IRS to assess that amount. Once assessed, an account receivable is created on the taxpayer’s transcript against which the restitution payment can be credited.
Moreover, under Code Sec. 6601(a) interest accrues on any tax imposed by Title 26 that is not timely paid. Meanwhile, Code Sec. 6651(a)(3) imposes an addition to tax in the case of failure to timely pay any tax required to be shown on a return. Clearly, restitution is not a tax imposed by Title 26. Nor is it a tax required to be shown on a return. Rather, restitution is an amount assessed as if it were a tax. Consequently, restitution assessments do not generate interest or additions to tax.
Further, while the IRS argued that Code Sec. 6201(a)(4) subjected restitution payments to the entire civil tax collection apparatus, nothing in the legislative history supported its contention. According to the Joint Committee on Taxation, the intended effect of Code Sec. 6201(a)(4) was limited to improving the IRS’s bookkeeping for restitution awards.
Tax Loss Calculation
Further, a tax-loss calculation is unlikely to bear more than a passing resemblance to a taxpayer’s actual civil liability under the Code. The sentencing guidelines employ simplified calculations of tax loss in order to avoid complex disputes over late-blooming adjustments and deductions the taxpayer could have taken. Thus, restitution cannot be equated to a tax imposed by Title 26.
Finally, if the IRS wished to collect interest and additions to tax, it can commence a civil examination of the taxpayers’ amended returns. Upon final determination of their civil tax liabilities, interest will arise automatically and additions to tax may be imposed if appropriate. However, they would be computed by reference to whatever the actual tax liabilities were determined to be, not by reference to the restitution amount.
Z. Klein, 149 TC —, No. 15, Dec. 61,035