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TIGTA Report on Restitution


Last week I wrote about a recent Tax Court order regarding restitution.  In that case, the taxpayer fully paid the tax included in the restitution order.  At issue in the case were penalties the IRS proposed against the taxpayers.  I pointed out at the conclusion of that post the significant benefit to the IRS of the ability to assess based on the restitution order because without that ability the IRS might have needed to wait years, until the conclusion of the Tax Court case, before it could assess and begin collection on the underlying tax liability.

A TIGTA report issued on June 7, 2021 suggests that the IRS fumbles the opportunity to make restitution based assessments in a number of criminal cases and that it makes the assessments much slower than the target dates for doing so.  In its response to the TIGTA report, the IRS basically said it agreed with the TIGTA findings and would work to improve the process.  In addition to the findings that the IRS failed to make some restitution assessments and made other assessments much slower than expected, TIGTA also found that the IRS was making assessments of interest and penalties through the restitution assessment process even though it should not.  In short, the report shows the IRS fumbling a very advantageous assessment process Congress handed to it in 2010.

At the outset TIGTA gave some figures on the total amount of restitution ordered and collected.  It also noted that not every restitution order gives the IRS the right to assess:

From FYs 2016 to 2020, the courts ordered defendants to pay over $2.7 billion in criminal restitution to the IRS. During that same period, a total of $844 million in restitution was paid to the IRS, only 31 percent of the amount ordered. Figure 2 lists the amounts of restitution ordered and paid from FYs 2016 to 2020.

Figure 2: Amount of Restitution Ordered and Paid (FYs 2016–2020)
Fiscal Years Restitution Ordered Restitution Paid18 % of Restitution Paid
2016 $603,400,000 $322,903,345 54%
2017 $808,400,000 $98,561,949 12%
2018 $444,800,000 $149,900,661 34%
2019 $536,800,000 $121,591,601 23%
2020 $328,800,000 $151,436,043 46%
Total $2,722,200,000 $844,393,598 31%
Source: Information Provided by CI and the SB/SE Division.

The low percentage of restitution paid to the IRS in recent years may not be indicative of the effectiveness of the law change providing for the assessment of restitution. As we previously described, the IRS only has the authority to assess the restitution ordered by the courts if the criminal offense was for a tax-related crime. Since the law change in Calendar Year (CY) 2010, CI devoted significant resources investigating cases for which the IRS did not have the authority to assess any restitution ordered. For instance, the IRS was unable to assess any restitution ordered if defendants were sentenced for crimes involving identity theft because the restitution is attributable to fictitious tax returns. During FYs 2013 through 2017, CI initiated over 4,000 investigations involving identity theft.

TIGTA then analyzed the cases in which the IRS made a restitution based assessment and those where it did not.  It found that the IRS collected almost 50% of the tax when it made a restitution based assessment and a very low percentage when it did not (or could not) make a restitution based assessment.  Based on this data, it seems that the IRS should seek even more expanded authority to make restitution based assessments, assuming it could show Congress that it would appropriately use the power granted to it.  Following the passage of the law allowing restitution based assessments, the IRS developed procedures for identifying the appropriate cases and processing the request for assessment from CI to SBSE.  As mentioned above, the IRS has done a weak job of following the procedures it established:

According to the IRM, CI is required to close its case and notify the civil functions of the amount of restitution ordered no later than 30 calendar days after final adjudication by a court. CI notifies the applicable functions within the SB/SE and W&I Divisions of the amount of restitution ordered by completing Form 13308, Criminal Investigation Closing Report, and Form 14104, Notification of Court Ordered Criminal Restitution Payable to the IRS, (hereafter we will refer to these as “closing documents”) and attaching the Judgment and Commitment Order (J&C). The closing documents sent to the civil functions can also include the plea agreement, indictment, and Special Agent Report.

We conducted testing to determine if the IRS properly assessed restitution when the courts sentenced and ordered 3,435 defendants to pay just over $2.5 billion in restitution to the IRS for tax-related crimes during FYs 2016 through 2019. Our analysis of CIMIS revealed that 418 of the 3,435 cases for which a total of $244 million in restitution was ordered were SIRF cases with no IRS conditions of probation or supervised release. The restitution ordered in these types of cases was not assessable. We compared the remaining 3,017 cases, for which restitution of nearly $2.3 billion was ordered, to Master File data obtained from the DCW. Our testing determined that the IRS made restitution assessments in 1,958 cases where defendants were ordered to pay nearly $1.3 billion in restitution. This left 1,059 cases for which the defendants were ordered to pay nearly $1 billion in restitution that was not assessed. Figure 4 presents the results of this testing to determine if restitution was assessed.

Figure 4: Analysis to Determine If the IRS Assessed Restitution
Restitution Assessment Category Number of Defendants Total Restitution Ordered
Restitution Assessed 1,958 $1,295,060,577
SIRF 418 $244,134,937
Not Assessed 1,059 $979,749,303
Total 3,435 $2,518,944,817
Source: Analysis of CIMIS and Individual Master File data.

We selected a statistical sample of 140 of the 1,059 unassessed restitution cases and reviewed the associated Form 14104 to determine if CI indicated that the restitution was assessable. Our analysis identified 33 cases for which CI determined that restitution of more than $21.6 million was assessable. For the other 107 cases, among the more prevalent reasons the IRS did not assess the restitution was that CI determined that the restitution was not assessable (94 cases) or the case was currently under appeal (seven cases). We provided information for 33 cases to the SB/SE Division, and it responded that:

– In 19 cases, the restitution of just over $9 million was not assessed because the Technical Services Unit indicated that it did not receive the closing documents from CI. In 12 instances, CI acknowledged that the closing documents were never sent or were not sent timely. In seven instances, CI asserted that the documents were sent. The Technical Services Unit had to request the pertinent information from CI.

– In seven cases, restitution assessments of more than $10.2 million were delayed because of COVID-19. The Technical Services Unit eventually assessed the restitution in all seven cases by December 2020.

– In seven cases, restitution of almost $2.4 million was not assessable. This included * * * 1* * * for which the restitution was ordered solely as a condition of supervised release or probation. In these instances, the Technical Services Unit indicated that it would assess the restitution when the defendant is released from prison.

When we projected the results to the population, we estimate that restitution of $69 million was not assessed in 144 cases because CI did not send the closing documents or the documents could not be located. When forecast over five years, we estimate that a total of $345 million in restitution was not assessed in 720 cases.

By failing to follow its own procedures in CI in making the referral of the case for the restitution based assessment, the IRS appears to be leaving money on the table from individuals it has identified as tax cheats.  These individuals are likely to pay the tax if it keeps them from further time in prison but could become very difficult to pursue thereafter.  Fumbling the handoff from CI back to SBSE for assessment and collection seems most unfortunate after it has spent so many hours developing the criminal case and when the percentage of collection of restitution based assessments is relatively high.

In cases where CI made the handoff to SBSE, problems persisted because SBSE could not make the assessment in a timely fashion.  Speed can matter here because the assets of this group will diminish quickly.

Once CI prepared the closing documents, it took the Technical Services Unit an average of 198 calendar days to assess the restitution. Technical Services Unit personnel told us they face barriers in their efforts to timely assess restitution, including receiving incomplete or late packages from CI and the process of posting the actual assessments, which must pass through other Campus functions to be established. They indicated that they established a process to track restitution assessments to evaluate timeliness, but they agreed with the need to conduct periodic reviews. Figure 5 contains a breakdown of the number of days it took to assess the restitution.

Figure 5: Analysis of Days to Assess Restitution for the 68 Sample Cases
Restitution Assessment Category Expected Days to Complete51 Average Days to Complete
From the Date of Final Adjudication by a Court Until the Date CI Forwarded the Closing Package to the Technical Services Unit 30 57
From the Date CI Forwarded the Closing Package Until the Date the Technical Services Unit Assessed Restitution 75 198
Total Days From the Date the Court Filed the J&C Until the Date the Technical Services Unit Assessed Restitution 105 255
     

In addition to these problems, TIGTA found that the IRS was not following the Tax Court decision in Klein v. Commissioner, 149 T.C. No. 15 (2017), which held that the IRS may not assess and collect interest and penalties on restitution ordered for a criminal conviction for failure to pay tax.  TIGTA notes the IRS actions after Klein provide another example of the IRS not protecting taxpayer rights reminiscent of its actions after losing the Rand case.  Rather than proactively abating the interest and penalty it knew was wrong, Chief Counsel’s office advised the IRS to wait and only make the abatement if a taxpayer brought up the issue. Despite this advice, the IRS did decide to identify and abate interest and penalties but so far has done so in only 31 of 676 cases TIGTA identified.  So, if you have a client in this situation, you may need to be proactive to get the penalty removed.

The final part of the report shows that the IRS was not following up on taxpayers meeting the conditions of probation and reporting violations to the probation officer.  This type of monitoring can be critical to success in collection.  From the description it appears that the handoff between CI and SBSE creates some of this problem.  While TIGTA did not make a formal recommendation on this point because it knows that IRS resources are strained, it stated:

The inability to properly monitor the conditions of probation or supervised release could be a contributing factor for why U.S. courts rarely revoked the probation or supervised release for defendants sentenced for tax-related crimes. The courts revoked probation in only 12 of the over 9,000 CI criminal investigations for which a defendant was sentenced for tax-related crimes during FYs 2016 through 2019. Courts will generally not revoke probation unless the failure to comply was willful. Because this can be hard to prove, this remedy is not widely invoked. One Special Agent in Charge we contacted also indicated that the resources of the USAOs are also limited, and * * * 1 * * *.

All in all, the report provides a picture of a program with much promise that is not meeting its potential.  The IRS has had a decade to work out these issues.  It can see from the percentage of dollars collected in cases in which a proper restitution based assessment occurs that the benefits of making this type of assessment are high.  It needs to find a way to reap the maximum benefits from this program and obtain money from the individuals it has determined represent the worst taxpayers.



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