On June 23, 2021, the Tax Court issued a Memorandum Opinion in the case of Ervin v. Commissioner (T.C. Memo. 2021-75). The primary issue presented in Ervin v. Commissioner was whether the petitioner’s criminal restitution payments satisfied his income tax liability.

Background to Ervin v. Commissioner

This may be a rather vast generalization, but most folks named Monty are not the most trustworthy.  Monty Ervin is one such Monty.  Monty failed to file Federal income tax returns for 2000-2009 and was convicted of tax crimes for 2004-2006. In June 2012 he was sentenced to imprisonment and ordered to pay restitution of $1,436,508, the amount of the Government’s estimated tax loss.

Monty, it seems, not only failed to pay taxes, but he tried really, really hard to do so. Monty’s alleged overt acts included purchasing and selling property in the names of nominees and trusts, creating false warranty deeds to facilitate the transfer of such property, and engaging in “structuring transactions” (making bank deposits in amounts slightly below $10,000) to avoid financial reporting requirements. The IRS prepared substitutes for returns, and issued notices of deficiency, including a fraudulent failure to file penalty.

Restitution in General

We have discussed restitution in a few articles, including The Deductibility of Restitution, and the Non-Deductibility of Fines and Penalties.  We will look at it again now, briefly.

IRC § 6201(a)(4)(A) provides that the IRS must assess and collect the amount of restitution ordered by a sentencing court for failure to pay any tax imposed under this title in the same manner as if such amount were such tax. The IRS may not make such an assessment until the defendant has exhausted all appeals and the restitution order has become final. See IRC § 6201(a)(4)(B). The restrictions on assessment imposed by section 6213 do not apply to restitution-based assessments. See IRC § 6213(b)(5). The IRS, therefore, is not required to send the taxpayer a notice of deficiency before making an assessment of this kind.

In Klein v. Commissioner, 149 T.C. 341, 362 (2017), the Tax Court held that additions to tax do not arise on amounts assessed under IRC § 6201(a)(4). That is because a defendant’s restitution obligation is not a civil tax liability, id. at 361, or a tax required to be shown on a return, ibid. (quoting section 6651(a)(3)). Rather, restitution is assessed “in the same manner as if such amount were such tax.” IRC § 6201(a)(4)(A). However, the Tax Court explained that the IRS was not thereby disabled from collecting such sums. The Tax Court also held that if the IRS wanted to collect additions to tax, it is free to commence a civil examination of the taxpayer’s returns at any time. Klein, 149 T.C. at 362. This is precisely what the IRS did in Ervin.

Deficiencies & Penalties

Any amount paid as restitution for taxes owed must be deducted from any judgment entered for unpaid taxes. United States v. Helmsley, 941 F.2d 71, 102 (2d Cir. 1991). Because the deficiencies have been fully paid via restitution, the IRS cannot collect the deficiencies again. Determination of the deficiencies in these circumstances is chiefly relevant for purposes of determining applicable penalties.  The IRS could, however, assert, assess, and collect the penalties against Monty, as these had not been satisfied by his restitution payments.

(T.C. Memo. 2021-75) Ervin v. Commissioner

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