In the past few years it has become easy to think of Congress as a place where ideas go to die. They just seem incapable of passing laws that cry out for passage because of partisan gridlock. Yet, in the midst of their seeming inability to do anything, they passed a law in 2010 that makes complete sense and has the ability to change the game in collecting from taxpayers convicted of tax crimes. Les and I have talked about writing on the amendment to IRC 6201(c)(4) in the Firearms Excise Tax Improvement Act of 2010 since we started the blog. I will take a crack at it here. He has recently updated Chapter 10 of Saltzman to include a detailed discussion of the changes resulting from restitution based assessments. I am sure we will write more because the impact of the law has already produced a number of interesting cases.
Historical Pattern of Collection in Criminal Cases
The basic idea behind the change to IRC 6201(c)(4) concerns assessment at an earlier stage. Because the IRS stops civil action when it pursues a criminal case, a typical criminal case presents the absolute perfect model for collection failure. An IRS Special Agent will investigate a suspected tax criminal for months or years while the IRS revenue agents and revenue officers stand on the sidelines. During this time the criminal investigation generally does an excellent job of destroying the taxpayer’s economic reputation and simultaneously drains the taxpayer of most or all of their liquid assets to pay for the defense against the criminal charges. After several months, or years, the indictment of the taxpayer finally occurs. The taxpayer pleads guilty or has a trial, the post-conviction actions occur and finally, after all of this the revenue agent would come in to begin the civil audit so that the IRS could assess the additional tax resulting from the criminal investigation. The taxpayer, who by the point is often incarcerated, has little interest in signing a consent form agreeing to the assessment, usually drags out the audit and often would go to Tax Court which further delays the assessment. At some point now several years after the criminal investigation began, the IRS would finally make the assessment and the revenue officer would begin the impossible task of collecting from a taxpayer who is either still in prison or recently released therefrom, who has no job – or a poor job, and has no assets.
How Restitution Based Assessment Changes the Historical Timeline
IRC 6201(c)(4) seeks to change this timeline. Whether moving the collection point earlier in the process but still post criminal investigation and conviction will make a real difference in collection still remains to be seen. If nothing else, the change can allow the IRS to eliminate spending the revenue agent’s time on this case freeing up the revenue agent to audit one of the 2 or 3 people in the United States still unlucky enough to actually get audited. The assessment resulting under IRC 6201(c)(4) comes from the amount of tax the court in the criminal case orders the taxpayer to pay to the United States as restitution. That assessment does not stop the IRS from auditing the taxpayer to establish that the taxpayer owes more tax than the criminal court ordered as restitution but it does give the IRS the opportunity to set a baseline on the assessment it can make and to make the assessment much earlier than before – especially in cases in which the taxpayer availed themselves of the Tax Court as a pre-assessment forum.
Challenges Facing the IRS in Collecting Even the Restitution Based Assessment
Challenges still exist in collecting from taxpayers who have gone through the criminal process and significant resource issues also exist. The challenges and resource issues exist both in exam and collection. One of the challenges these cases is the much higher likelihood in these cases of the transfer of assets to third parties to defeat collection. The ability to make a much earlier assessment and involve a revenue officer at a much earlier stage can make a real difference if the taxpayer has engaged in transfers of property in an attempt to defeat the collection of the tax. Given that the individuals in this group have already engaged in some criminal tax behavior, the existence of transfers from this group seems much more likely than in the general population.
In a criminal case the IRS uses significant resources to obtain a conviction. It knows at the outset that it may not recover an amount from the investigated taxpayer equal to the cost of the investigation. To get to the finish line successfully, it may spend hundreds or occasionally thousands of hours of the special agent’s time. Sometimes criminal cases also involve a significant time commitment of a cooperating revenue agent. In all events, the case uses a great deal of the precious few resources the IRS has available. The time spent on the criminal case may well represent an appropriate expenditure of resources if the conviction convinces others in the community to pay their taxes. That theory of deterrence drives the decision to devote the resources to these cases and to hold off collection until after the criminal case.
Having expended so many resources, the IRS exhibits much reluctance to walk away from these taxpayers even where its actions have rendered them incapable of paying the resulting taxes. The failure to pursue these individuals vigorously to collect the tax might reflect poorly on the IRS since convicted tax criminals represent “the worst” taxpayers and those most deserving of the full complement of collection powers granted to the IRS. Yet, using those powers on these individuals often proves a waste of time since many of them have little or nothing left with which to pay the taxes.
With the ability to assess the amount of the restitution order, the IRS could decide not to spend revenue agent time assessing additional taxes it will never collect. It could also decide not to spend significant revenue officer time chasing after a taxpayer who is in jail or just out of jail looking for their assets. With the new power to assess, it would seem logical for the IRS to convene a team of its employees at the end of the criminal case to make a decision, in conjunction with the probation officer, whether this taxpayer is worth any further expenditure of resources or whether the existence of the assessment, the subsequent notice of federal tax lien and the payment on the probation order represents the best the IRS is likely to do in that case. If so, the IRS could stand down further use of its resources awaiting a review of the case several years in the future.
I have not seen evidence that the IRS has adopted an approach similar to what I suggest here. I say that because the low income taxpayer clinic I direct has a few post-tax crime conviction clients who the IRS continues to pursue with revenue officer resources. These individuals have outstanding liabilities that merit attention from a revenue officer from the perspective of the total amount owed but they have nothing to offer to satisfy the liability except the meager payments they already make on the restitution order itself.
Probation officers work with these individuals to determine the amount they can pay toward the restitution order. They base their determination on factors similar to those used by revenue officers. Having revenue officers chase after these individuals to try to collect more taxes when the probation officer has already caused them to commit the maximum possible amount (and sometimes beyond) of the income to the restitution order makes little sense to me. In this context, I read the March 4, 2014, change to IRM 5.14.4 “Interim Guidance on Establishing Installment Agreements on Restitution-Based Assessments and Related Civil Assessments.” Before commenting on the new IRM guidance, I do want to mention that some convicted individuals do continue to have significant assets either under their direct ownership or held by nominees. I think the IRS should continue to pursue those individuals to the full extent of its powers. My comments here reflect a concern that the IRS does not triage these cases at the appropriate stage to determine which individuals have assets making it worthwhile to go full out and which individuals have little or nothing left with few prospects of additional income or assets with which to pay the tax.
New Manual Provisions for Establishing Installment Agreements in Restitution Based Assessments
The new manual provisions refer to the position of Advisory Probation Liaison (APL). They may be found at 18.104.22.168.1.9 found here. The provision states:
Probation controls on taxpayers convicted of tax crimes are handled by Advisory. Probation cases with IRS-related conditions are monitored by Advisors designated as probation liaisons. The Advisory probation liaison is responsible for :
- coordinating any civil enforcement actions with Technical Services (Exam) and any revenue agent assigned to the case,
- monitoring all cases with IRS-related conditions of probation and following up on any OIs issued to the field exchanging information with CI and Technical Services (Exam) to reconcile the status and actions pending in all probation cases on a semi-annual basis
See IRM 22.214.171.124, Advisory Actions – Probation Cases, for further procedural guidelines.
The manual describes APL as a coordinator of action but does not seem to vest this advisor with the ability to make decisions on whether to work or walk away from a case. Maybe I am pessimist but I think that very few restitution based assessments will result in an installment agreement. The taxpayer resides in a prison or has recently resided there, almost always has a fairly decent sized liability since little point exists in prosecuting someone with a small liability and usually has no job or a poorly paying job. This situation does not generally cry out for an installment payment that will fully pay the liability. Add to that mix the fact that the individual will usually have the equivalent of an installment payment due to the probation officer as a restitution payment and that payment was set based on the individual’s ability to pay. To have a successful installment agreement, the IRS must find the post-conviction taxpayer who convinced the probation officer that he could not pay more toward his restitution each month but who actually has enough additional money each month to pay the IRS at a rate that will satisfy the assessment in full within 10 years.
The new manual provision requires the assignment of a revenue officer to any effort to establish an installment agreement in these cases. This provision makes sense because of the restrictions on collecting restitution based assessments. Putting the collection of these assessments into the hands of the Automated Call Sites would not work. These assessments require special handling because the IRS cannot compromise restitution based assessments. Compromising such assessments would amount to the IRS undermining the restitution order of the district court judge. So, the language of the new manual provisions carefully describes the need for installment agreements of these assessments that will fully pay the liability over the life of the assessment and not partial pay installment agreements. It does contemplate the possibility that the installment agreement might include assessed liabilities in addition to those assessed through the restitution process and that a partial pay installment agreement could work for those additional assessed liabilities.
The new manual provision requires the revenue officer to work closely with the Advisory Probation Liaison who will know the conditions of probation and who should coordinate with the Department of Justice and the personnel assigned there to work the case. If you are representing a taxpayer against whom a restitution based assessment exists, the best course of action for dealing with the IRS might involve locating and working directly with the Advisory Probation Liaison. Individual Revenue Officers may face few of these type cases and have little training on how to address them. They may the taxpayer to provide significant documentation to complete their files when the advisor may have a much better understanding of the entirety of the circumstances.
Realistic Options Facing the Taxpayer and the IRS Following Restitution Based Assessments
Where a restitution based assessment exists, the taxpayer has few realistic collection options. Offer in compromise is not available because compromising the liability amounts to the IRS undercutting the court’s restitution order. For the same reason a partial pay installment agreement will not work. Installment agreements will rarely work for the practical reasons discussed above. With the possibility of an offer or the likelihood of an installment agreement, the IRS and the taxpayer are left with currently not collectible coupled with a notice of federal tax lien. Some post-conviction taxpayers have sufficient assets to draw upon to partially or fully pay the liability. Some will have jobs that pay a good salary although even those individuals may not have anything left each month after making their restitution payments.
This manual change recognizes the legal need for special handling of restitution based assessments. It does not recognize the practical issues presented. The real collection success stories that will result from restitution based assessments will not come in the installment agreement area. They will come because of the early intervention of a revenue officer working with a Chief Counsel attorney finding hidden assets and using the federal tax lien coupled with the tools for recovering transferred assets. The IRS should focus its efforts on post-conviction taxpayers who have either transferred assets or have sufficient assets remaining which they have not voluntarily liquidated to satisfy the liability. Efforts to obtain installment agreements from this group seem like wasted efforts.