Restitution in a Federal Tax Case: Can You Challenge the Amount?

If you are convicted of a federal fraud, theft, or tax crime, the judge will usually order restitution, which means paying back the victim's losses. You may not be able to avoid it, but you can often challenge the amount. In a December 21, 2018 decision, United States v. Johnson, the Seventh Circuit upheld a restitution order in a tax case, and it held that the defendant gets credit for money the government later collects from the taxpayers involved.

How restitution works in federal tax cases

In a federal tax case, restitution pays the IRS the tax it should have received. You make the payments to the court clerk, usually over time, and the Justice Department monitors collection.

Federal Criminal Restitution

The IRS can assess and collect criminal restitution as if it were a tax. But in Klein v. Commissioner, 149 T.C. 341 (2017), the U.S. Tax Court held that the IRS may not add interest or failure-to-pay penalties to restitution it assesses this way.

The original article added that, before the IRS can assess more than the restitution amount, it must first go through a civil examination of what is still owed. In that process, the taxpayer can challenge the underlying amount and raise a statute of limitations defense to collection.

What happens if you do not pay

Federal courts order restitution under 18 U.S.C. § 3556. Restitution creates a lien in favor of the United States on all your property. 18 U.S.C. § 3613(c), (f). It is generally not wiped out in bankruptcy. 18 U.S.C. § 3613(e).

The restitution issue in United States v. Johnson

Evelyn Johnson pleaded guilty to preparing false tax returns for her clients. She was sentenced to 18 months in prison and one year of supervised release.

She was ordered to pay $79,325 in restitution as a condition of her supervised release. That was the tax her clients avoided, on the counts of conviction, that the government had not yet collected from them.

On appeal, Johnson argued the government should have told the court how much more it expected to collect from her clients. She said that information was favorable evidence the government had to disclose under Brady v. Maryland, 373 U.S. 83 (1963).

The court disagreed. The presentence report showed the government had already collected large sums and was trying to collect the rest. Nothing was hidden, and Johnson could have asked for the current figure. Brady does not apply to information that is available for the asking.

The government also argued it could collect the full $79,325 from Johnson and keep whatever it collected from her clients too. The court rejected that. It held that Johnson gets credit against her restitution for amounts later collected from the taxpayers, under 18 U.S.C. § 3664(j)(2). Because of that credit, there was no need to disclose collection figures at sentencing. The restitution order was affirmed.

Challenging the amount of restitution

You may not be able to avoid restitution after a conviction, but you may be able to challenge the amount. Restitution can be very hard to pay in full, especially if the government already seized valuable assets during the investigation, and especially after prison with few job prospects. That is why it is important to do everything you can to reduce the amount. Raise any problems with the amount at sentencing and on direct appeal. As Johnson shows, it also pays to ask the government for its current collection figures before sentencing, so the order reflects what is actually still owed.

Facing a federal sentence? Book a consultation to talk it through with Brandon Sample.