Restitution does not support the imposition of interest and additions to tax

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Tax Court held that the IRS was not authorized under Sec. 6201(a)(4) to add underpayment interest under Sec. 6601(a) or additions to tax under Sec. 6651(a)(3) to restitution that the taxpayers were ordered to pay as part of their sentence for criminal tax violations.


Samuel and Zipora Klein were not model taxpayers, and they were charged with and pleaded guilty to a violation of Sec. 7206(1) for willfully making and subscribing to a false federal tax return in 2006, with Zipora garnering 27 months in prison followed by a year of supervised release and Samuel getting 63 months in prison and three years of supervised release.

In his plea agreement, Samuel admitted that he and Zipora had underreported their income in the years 2003-2006. The government, wanting the tax on the underreported income, reconstructed their income for that period and calculated a federal tax loss of $562,179. The district court accepted the government's calculations and, in addition to their prison sentences, ordered the Kleins to pay the IRS restitution in that amount. Under Sec. 6201(a)(4), the IRS assessed not only the $562,179 in restitution against the Kleins, but also underpayment interest under Sec. 6601(a) and additions to tax for failure to pay under Sec. 6651(a)(3).

The Kleins thought the restitution amount was larger than it should have been and protested the determination. In June 2012, the couple paid $106,578 to the IRS, which was the amount they claimed they owed for 2003-2006 if all their allowable deductions were taken into account. The district court did not agree with the Kleins and left the restitution order in place. After Zipora was released from prison on supervised release, the government asked the district court to have her supervised release revoked for failure to comply with the restitution order. To avoid having to return to prison, Zipora paid the remaining $455,601 owed under the order in August 2014.

The IRS, however, still wanted to collect the interest and additions to tax it had assessed on the restitution amount, and filed a notice of federal tax lien (NTFL) against both Samuel and Zipora. After a Collection Due Process hearing, the IRS sustained the NTFLs. Samuel and Zipora both petitioned the Tax Court, challenging the IRS's determination.

Sec. 6201(a)(4)(A)

The IRS is given the power to assess restitution payments arising from criminal proceedings under Sec. 6201(a)(4)(A). The section states:

The Secretary shall assess and collect the amount of restitution under an order pursuant to section 3556 of title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.

The Kleins and the IRS agreed that the restitution payment was under an order pursuant to Section 3556 of Title 18.

The Tax Court's decision

The Tax Court held that the IRS could not assess and collect interest under Sec. 6601(a) and additions to tax for failure to pay under Sec. 6651(a)(3) on restitution amounts assessed under Sec. 6201(a)(4). Based on the statutory text, the court found that Sec. 6201(a)(4) only allowed the IRS to assess and collect restitution as if it were a tax and did not make the assessed restitution amount a tax that would support an imposition of interest and additions to tax.

The statutory text: Sec 6601(a) imposes interest if a taxpayer does not pay tax timely. Likewise, Sec. 6651(a)(3) imposes an addition to tax where a taxpayer fails to timely pay any tax required to be shown on a return that is not shown on a return. Thus, the question before the court was whether a restitution payment under Sec. 6201(a)(4) was a tax that could support the imposition of interest or an addition to tax. To answer this question the court analyzed the statutory text, focusing on its use of the subjunctive mood in the clause in Sec. 6201(a)(4)(A): "in the same manner as if such amount were such tax."

The court explained that subjunctive mood clauses typically are used to express a counterfactual hypothesis. The court gave as an example a hypothetical statute providing that certain persons shall be treated "in the same manner as if they were citizens." In such a statute, according to the court, Congress would necessarily presume that such persons were not in fact citizens, providing merely that they should be accorded the treatment that citizens receive.

The court found that Sec. 6201(a)(4) is "read most naturally as expressing such a counterfactual hypothesis" allowing criminal restitution to be treated like a tax for assessment purposes, and that the statute did not turn restitution into a tax. The court stated that Congress did this "for the limited purpose of enabling the IRS to assess that amount, thus creating an account receivable on the taxpayer's transcript against which the restitution payment can be credited." Therefore, because restitution is not a tax, under the language in Secs. 6601(a) and 6651(a)(3), restitution cannot support the imposition of interest or additions to tax.

In its arguments to the court, the IRS claimed that the legislative history supported its interpretation of Sec. 6201(a)(4), citing a House member's statement in a floor speech that supported the IRS's position. The court, however, noted that it was settled that the remarks of a legislator are not controlling in analyzing legislative history, and that when statutory language is in conflict with statements made in a floor speech, the statutory language will control. Further, after reviewing the actual relevant legislative history, the court determined that Congress had not intended the "sea change" of subjecting restitution payments to the entire civil tax collection apparatus, including interest, additions to tax, and penalties.

Finally, the court addressed the differences between a tax loss, on which a court bases an award of restitution to the government, and a civil tax liability. The court explained that a court bases a restitution obligation on a simplified estimate of the government's tax loss and typically does not take into account tax items, such as previously unclaimed deductions, that may be critical in determining the taxpayer's actual civil liability. Because of the differences in how the two amounts are calculated, the court stated that the tax loss amount "is unlikely to bear more than a passing resemblance to the defendant's civil liability under the Code." The court found that differences in the determination of the two amounts showed that it would be fundamentally wrong to equate the restitution amount with a tax that is required to support the imposition of interest or additions to tax.


The court also observed that its decision did not prevent the IRS from actually imposing interest and additions to tax on the Kleins' 2003-2006 tax years. The correct way to do this was to open an examination of the Kleins' returns for those years and impose the interest and additions to tax on whatever it found their tax liabilities for those years to be, rather than by reference to their restitution amount.

Klein, 149 T.C. No 15 (2017)

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