6th Circuit Holds Excessive Restitution Cannot Be Reduced thus Denying IRS Authority to Reduce Excessive Restitution-Based Assessment (5/23/23)

United States v. Asker (6th Cir. No. 21-1643 5/11/23)
(Nonpublished) (CA6 here and GS here),
the court held that where the restitution for tax loss ordered by the
sentencing court for tax crimes was allegedly higher than the actual tax due, the
district court had no authority to reduce the amount. At sentencing, there was
confusion among the players as to the actual tax loss for restitution purposes.*
In trying to determine the amount in the confusion, the court has this Q&A
with counsel:

          During
sentencing, however, the court asked what would happen if it were later determined he owed less than $2.5 million in taxes:

Court: You don’t anticipate that what is owed will be more
than 2.5?

Government: It is hard to say at this point. It is going to
depend—

Court: What if it is? Do you anticipate that 2.5 precludes
your client from paying back the rest?

Asker’s Counsel: I wouldn’t think that if it comes out—I
would not think that this Court’s restitution award would be conclusive on the
IRS. In fact, if there was some civil basis to seek additional penalties or
interests, the IRS could do that.

I suppose if it turns out the number is less, we may
probably come back and apply to the Court for some relief from the restitution
amount. Government: That is correct, Your Honor. Court: I just—my concern is
that if it turns out to be more, I think that is owed.

Asker’s Counsel: Yes, Ma’am. We don’t disagree with that.

Court: Okay.

The sentencing court assessed $2.5 million in restitution.

In due course, the IRS made a restitution-based assessment (“RBA”)
for $2.5 million. The IRS has no
authority to reduce the RBA.

After Asker’s criminal appeal affirmed the judgment, Asker
filed amended returns showing a $1.1 million aggregate tax liabilities, which the
Government did not contest because it decided not to allocate resources to an
audit of the amended returns.  

Asker then moved the district court to reduce the restitution
award which would then permit the IRS to reduce the RBA.

The sentencing  court
sat on the motion for 3 years and then denied it based on the Government’s
argument that it had no authority to grant the motion.

The Court of Appeals affirmed.

JAT Notes:

1. This shows the dangers on the parties not working diligently
to nail down good actual tax loss numbers before sentencing. Further, this
shows that sentencing courts should make sure that there are real tax loss numbers
for sentencing purposes because real unintended and significant harm can come from
the restitution. I think the court should target for restitution purposes the lowest reasonable number.

2. I quote from Michael Saltzman and Leslie Book, IRS Practice
and Procedure (Thomsen Reuters 2015), as supplemented three times a year, this
from the latest online edition:

¶ 12.06[5][a] Restitution-based Assessment

** * * *

2. How do these provisions work if the restitution
overstates the taxpayer’s true tax liability?1277.3 Let’s illustrate the
problem. Assume that the court orders restitution  of tax of $100 for year 01. Later, the Service
audits and determines that the taxpayer really owed only $50 of tax. The
Service might still assess  the $50 tax
liability and interest and assessable 
penalties. But the question is what to do about the $100 restitution
-based assessment  that is shown to be
excessive. The answer is that the Service and courts proceeding on the civil
side can do nothing because of the prohibition on contesting restitution -based
assessment. The taxpayer will have to put his defendant hat on and request the
sentencing court to reduce the restitution 
award.

   n1277.3 This can happen through the sentencing court acting
on incomplete or inaccurate information or assumptions. Thus, sometimes a
sentencing court will fail to differentiate between tax loss under S.G. 2T1.1
and the actual tax loss for restitution purposes. That appears to be what
happened in Klein v. Comm’r, 149 TC No. 15 (2017). Tax loss for Guidelines
calculations purposes is not the same as actual tax loss, which is the
calculation that must be made for restitution purposes. Thus, for example, the
tax loss may include intended loss where there is no actual tax loss and may be
computed by ignoring previously unclaimed deductions not related to the offense
of conviction. If the sentencing court doesn’t make that distinction, it will
just award the tax loss as restitution. When there is adequate communication,
the prosecutor and defense counsel should alert the court as to the problem and
do their best to get to the correct, bottom-line, real, actual tax loss to the
Service. But that did not happen in Klein and, it appears, the restitution
-based assessment  was more than the
real, actual tax loss to the Service. In the civil tax proceeding, in Klein,
the Tax Court could not fix the problem by reducing the restitution -based
assessment, but the sentencing court could do that upon motion of the
defendant, particularly where consented to or not opposed by the prosecutor.

Disclosure, I am the principal draftsman of Chapter 12 on
tax crimes and the supplements. I will have to include this case in the next supplement. While I have not done new research since I wrote the above quoted material, I had thought that other sentencing court could reduce the restitution upon a proper showing. I don’t know whether the Government’s failure to agree as to the reduced tax loss (rather than just not audit) was the issue or the proper motion to reduce had timed out. I am a bit stunned that a district court is denied authority to correct an injustice.