As we have discussed before here, here and here, in 2010 Congress amended 6201(a)(4) to permit the IRS to make an immediate assessment based on an order of restitution in a criminal case. In Rozin v. Commissioner, T.C. Memo 2017-52 the Tax Court continues to instruct taxpayers on the interplay between restitution assessments and deficiency assessments. The opinion comes close to being an advisory opinion because very little separated the position of the IRS and the petitioner; however, the opinion brings clarity to the role of restitution assessments and payments.
In 2008 Mr. Rozin was convicted of two tax crimes and conspiracy with respect to his 1998 return. On October 29, 2010, he sent the IRS a payment of $387,687 based on the tax loss from his criminal actions as calculated by the U.S. Probation Department. On February 4, 2011, the federal district court entered an order of restitution in the amount of $775,294 and in July of 2011, he essentially paid the balance of the liability. His conviction was affirmed by the 6th Circuit in 2012. I do not know if anyone has studied the impact of the change in the law in 2010 on the amount the IRS collects following criminal convictions but I expect the impact is significant. The full payment in this case of such a large amount may not be solely or even partially attributable to the law change but signifies a good trend in criminal tax cases for the IRS and particularly its collection division. Because the IRS delays traditional assessment and collection until after it has finished with the criminal aspect of the case, many criminally convicted taxpayers have few resources left with which to satisfy the civil liability once the criminal case comes to an end. The revenue agents usually get a relatively simple case because the special agents provide a clear roadmap to the needed adjustments but the revenue officers often ended up with an uncollectible account that sat in their inventory gathering dust.
The Tax Court case is about whether there should be a Tax Court case. Mr. Rozin paid the tax. The IRS assessed the tax. He objects to the deficiency determined by the IRS a few years after he thought he had taken care of the tax problem. After he thinks he has paid everything, here comes the IRS examiner wanting to reopen the wound and go back over his 1998 tax year fifteen years after the end of the tax year at issue. Essentially, Mr. Rozin argues that the restitution assessment and his payment should have ended the matter and the IRS should not get to assess the taxes again. He agrees with the IRS that he underreported $392,083 in tax on his 1998 return and that because he did so fraudulently the 75% penalty of 6663 applies in the amount of $294,062.
The IRS argues that the new statute allowing it to immediately assess the restitution amount does not allow it to credit Mr. Rozin’s account until the deficiency and fraud penalty are assessed. It cites to IRC 6201(a)(4); 6213(a) and (b)(5) and to Schwartz v. Commissioner, T.C. Memo 2016-144. The IRS makes clear that once it assesses the tax through the deficiency procedures that it will apply the payment he made during the restitution process. So, Mr. Rozin knows from the outset of this case that the deficiency assessment will add nothing to the liability created by the restitution order with the possible exception of interest.
The Court carefully explains the difference between the restitution assessment and the proposed deficiency assessment. It states that:
“A deficiency must first exist before restitution remittances for taxes owed can be applied to reduce that deficiency. In other words, the restitution assessment, which is assessed ‘as if’ it were a tax, cannot offset a tax assessment until a tax assessment of the deficiency has been made. The amount of a deficiency turns not on what payments have been applied to an account, but rather on what assessments have been made with respect to that account.”
Mr. Rozin argues that the IRS made a mistake in calculating his liability in the notice of deficiency because it did not give him credit for the payments he made. The Court points out that the IRS should not give credit for these payments in the notice of deficiency, not because he will not ultimately get credit for them, but because these amounts were not “shown as tax” on his 1998 and the IRS has not made an additional civil tax assessments on that period. Even though the IRS did previously assess based on the restitution order, the previous assessment was a summary assessment and not a deficiency assessment. The restitution assessment does not create a final determination of civil liability.
“Thus, petitioner’s restitution payments are not included as ‘amounts previously assessed… as a deficiency,’ and respondent was not permitted to reduce his determination by those payments under 6211(a)(1)(B)…. Because restitution does not fit within the definition of a deficiency under section 6211, restitution payments made do not reduce or discharge a deficiency determination before the deficiency is assessed.”
The Court points out that by refusing to sign the waiver on assessment the IRS sought to have him sign in lieu of sending the notice of deficiency, Mr. Rozin prevented the IRS from doing the very thing he wants it to do. Yet, by bringing the suit Mr. Rozin allowed the Court to provide us with a further explanation of how the restitution assessment and the deficiency assess work together. If you have to lose a Tax Court case it is better to lose one in which the Court tells you that its decision to allow the IRS to assess the amounts in the notice of deficiency will be covered by your previous payment. This will not happen in every restitution case. The notice of deficiency could establish a liability far in excess of the restitution payment ordered in the criminal case. Mr. Rozin’s full payment of the restitution order is also someone out of the norm as many individuals who go through the criminal process lack sufficient resources to make full payment at the conclusion of that process. From a collection point of view the case demonstrates how the change in the law to allow the IRS to assess the restitution amount works well even if it creates duplication in the assessment process that confused Mr. Rozin.