In Ervin v. Commissioner, T.C. Memo. 2021-75, TC here see fn * at end of blog, the Court (Judge Lauber) nicely sets up the issues and holdings in the opening paragraphs (footnote omitted):
Petitioner 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. After petitioner was remanded to custody, the Internal Revenue Service (IRS or respondent) completed a civil examination [*2] of his 2002-2007 tax years. In 2014 it sent him notices of deficiency determining deficiencies for those years based on the tax loss figures used in the sentencing. The IRS also determined additions to tax under sections 6651(a)(1), 6651(a)(2), 6651(f), and 6654.1 Petitioner timely petitioned this Court in January 2015 and (about a year later) fully satisfied his restitution obligation.
Respondent has moved for summary judgment. Petitioner does not dispute the deficiencies. But because he has fully paid the deficiencies by virtue of his restitution payments, which were credited against his tax liabilities, he insists that he should not be liable for any additions to tax. Because the additions to tax accrued before the restitution was ordered or paid, we find that petitioner is liable for these amounts, subject to certain concessions by respondent. We will therefore grant respondent’s motion for summary judgment to the extent set forth in this opinion.
Something in the opinion caught my eye, so I thought I would post without definitive discussion but as an alert for persons interested in the arcania of restitution based assessments (“RBA”) under § 6201(a)(4)(A). The Court says (p. 12 n. 3) cryptically):
n2 If petitioner’s restitution payments exceed the deficiencies we have determined for 2002-2007, those payments may be available for credit against other unpaid tax liabilities he may have, including the additions to tax discussed in the text.
I will try to illustrate what I think the Court is saying by an example. Assume that the district court at sentencing determines restitution at $100,000 and the IRS assesses that amount without further ado under § 6201(a)(4)(A). Restitution is not the same as a deficiency as defined in § 6211(a)(1). It may be the same, but since the two are defined differently it may not be the same. Although they are defined differently, I think they are supposed to be roughly if not exactly the same. But critically it may turn out that the restitution and RBA were excessive. For example, if the IRS thereafter audits and determines, say, that there is $10,000 more deficiency than the restitution amount, the IRS can assess subject to the usual pre-assessment requirements such as notice of deficiency. That’s fine. That is permitted under the statute. Let’s say, then, that the taxpayer petitions the Tax Court to redetermine the $10,000 deficiency determined by the IRS and in the course of determining the deficiency, the IRS determines that the taxpayer’s correct liability for the year was $50,000 rather than the $100,000 restitution determined by the sentencing court and resulting RBA assessment of $100,000. Ooops, the restitution was too high.
How does an excessive restitution and resulting excessive RBA assessment get fixed? In the footnote quoted above, as I read it, the IRS can unilaterally provide a work around to make the pot right by crediting the resulting overpayments of restitution RBA against other unpaid tax liabilities. That certainly is a feel good notion. My understanding, however, was that the only way to fix an excessive RBA was to have the sentencing court reduce the restitution amount if there was even a way to get that done. I would appreciate hearing from others about this.
I just alert others who may have some variations of this issue to keep in mind.