• Colin Doyle CFO

Tax-crime restitution: Many are called, few pay

Almost $120 billion remains outstanding for all cases

by Jeff Stimpson

Every year state and federal courts order tax criminals – often preparers – to repay a scam’s gains back to taxation authorities. Relatively few seem to pay.

Restitution was ordered in more than 75 percent of tax crimes in recent years, according to the Overview of Federal Criminal Cases for 2015, from the U.S Sentencing Commission. Yet over the last few years, the amount of federal restitution deemed uncollectible has ranged between 81 percent and 92 percent of the total amount outstanding.

“It’s safe to assume that a very small percentage of federal restitution from convicted tax preparers actually gets paid,” said Michael Gillen, director of the Tax Accounting Group at Duane Morris LLP in Philadelphia and a past president of the Greater Philadelphia Chapter of the Pennsylvania Institute of CPAs.

Millions involved

For the fiscal year ended 2016, there were 3,395 total investigations initiated by the IRS Criminal Investigation Division, including 252 abusive tax return preparer investigations initiated, with 204 indictments, resulting in 202 convictions and sentences, with a 73 percent incarceration rate, with those incarcerated serving an average of 22 months, according to Gillen.

An informal survey of recent tax fraud articles showed that tax criminals were ordered to repay a total of almost $14 million in May of this year and $10.9 million in June. April’s supposed restitution take for the authorities: $41.6 million.

Restitution amounts in individual reported cases – probably just a sample of settled cases involving restitution – ranged from $14,070 to a whopping $23,094,300 for a scam involving almost 13,000 phony returns that netted the preparer 10 years in prison.

The financial litigation unit of the Department of Justice reports that, as of March 2017, outstanding federal restitution approximates $120 billion from those convicted, though the government does not separately break out the amount of restitution owed by convicted tax preparers.

The courts and the Department of Justice have significant power and authority to collect federal restitution in non-monetary forms, according to Gillen. The FLU has authority to collect criminal monetary penalties from offenders, and to initiate any needed legal enforcement actions, such as wage garnishments and asset levies, as well as seizures and subsequent sale of property seized.

While the IRS has authority to collect on a criminal tax violation or tax-related offense and collect on a property lien for 10 years under IRC Sec. 6502, and has broad powers to seize and sell property to satisfy tax obligations, the IRS cannot take administrative enforcement action to collect court ordered restitution, although the IRS does have the responsibility for monitoring compliance if the payment of restitution to the IRS is a condition of probation.

Part of the Mandatory Victims Restitution Act changed the manner in which restitution liens are enforced, most notably giving restitution liens the same status as perfected IRS liens and allowing the liens to be enforceable against property that might otherwise be exempt under state law.

“Restitution … typically is required by plea agreements and, where a defendant is convicted after trial, may be imposed by sentencing judges as a condition of supervised release,” wrote Jeremy Temkin, a partner with the New York law firm Morvillo Abramowitz Grand Iason & Anello PC, last year in " Collecting Taxes From Convicted Defendants” for the New York Law Journal.

“If I had to guess,” said Temkin, who frequently represents individuals and corporations in federal white collar criminal investigations, “I would think the amount of restitution paid in tax cases is pretty low in relation to the total amount of restitution awarded.”

Repayment chances ‘dismal’ to ‘hopeless’

Why so little payback?

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“Those convicted are expected to pay a percentage of whatever income they are able to earn, and, put simply, they have little, if any, available resources to make payments,” Gillen said.

“Incarcerated offenders and those under supervision no longer have access to whatever money they may have gained from their offenses, and sometimes the funds are lost to addiction and other problems, such as interest accumulating on personal debts, child support, back taxes and other obligations. It’s not unusual for illegal funds to have been spent on living and other expenses, making them unrecoverable,” he added. “Offenders’ net worth and income tend to be limited, making the prospects of collection dismal at best, hopeless at worst.”

Another barrier to effective collection is the disorganized and fragmented collection process of the government,” Gillen added. “Within the last year, the FLU is now able to access the Offender Payment Enhanced Report Access System, a system developed by the Judiciary, making the process of monitoring and collecting unpaid criminal debts more efficient.”

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