The IRS has issued a Chief Counsel Notice (CCN 2019-004) updating guidance on the assessment and collection of interest and penalties on criminal restitution following the Tax Court's decision in Klein, (2017) 149 TC 341. In Klein, the Tax Court determined that the IRS does not have authority to assess and collect underpayment interest under Code Sec. 6601 on criminal restitution assessed under Code Sec. 6201(a)(4)(A).
Background. Under Code Sec. 6201(a)(4)(a), the IRS may assess and collect criminal restitution ordered pursuant to 18 USC 3556 for failure to pay any tax imposed under Title 26 in the same manner as if such restitution were such tax. Code Sec. 6601(a) provides that interest will accrue on any amount of tax imposed by Title 26 that is not timely paid. Code Sec. 6651(a)(3) imposes an “addition to tax” or penalty for failure to timely pay any tax required to be shown on a return.
On Aug. 26, 2011, IRS Chief Counsel issued Chief Counsel Notice 2011-018, which stated in Q&A 12 that underpayment interest under Code Sec. 6601(a) would accrue on criminal restitution assessed under Code Sec. 6201(a)(4)(A) until the criminal restitution was paid in full.
On Oct. 3, 2017, the Tax Court issued its decision in Klein, holding that the IRS wasn’t authorized under Code Sec. 6201(a)(4) to assess and collect underpayment interest under Code Sec. 6601, or failure to pay penalties under Code Sec. 6651(a)(3), on the Kleins’ restitution. The Tax Court held that criminal restitution clearly wasn’t a tax imposed by Title 26 as required by Code Sec. 6601. Therefore, criminal restitution wasn’t an amount upon which interest arose under Code Sec. 6601(a), or to which failure to timely pay penalties applied under Code Sec. 6651(a).
Interest on criminal restitution-based assessments. Consistent with Klein, the updated Chief Counsel Notice (CCN) provides that interest on criminal restitution should be abated if a taxpayer (1) challenges in litigation the accrual of interest on criminal restitution assessed under Code Sec. 6201(a)(4)(A), or (2) otherwise seeks to abate interest assessed on criminal restitution under Code Sec. 6201(a)(4)(A).
The CCN adds that interest should not be abated when the criminal restitution order includes interest because Klein does not apply to the assessment of interest included in a criminal restitution order.
The CCN goes on to suggest that Chief Counsel attorneys should review any case that includes criminal restitution assessed under Code Sec. 6201(a)(4)(A) to determine whether interest under Code Sec. 6601 was (1) improperly accruing on criminal restitution assessed under Code Sec. 6201(a)(4)(A), or (2) properly assessed as a component of the total amount of criminal restitution ordered.
When reviewing criminal restitution cases, Chief Counsel attorneys should review documents from the court ordering the criminal restitution, including (1) the court’s judgment and commitment order, (2) a transcript of the sentencing hearing, (3) any plea agreement, (4) the government’s sentencing memorandum, which may indicate whether interest under Code Sec. 6601 was ordered as part of the total amount of criminal restitution, and (5) Form 14104, Notification of Court Ordered Criminal Restitution Payable to IRS, which identifies the individual components of the total amount of criminal restitution.
Failure to timely pay penalty. Similarly, the CCN notes that criminal restitution assessed under Code Sec. 6201(a)(4)(A) is not a tax, and does not represent an amount of tax required to be shown on a return under Code Sec. 6651(a)(1). Accordingly, the failure to timely pay penalty under Code Sec. 6651(a) does not apply to an amount of criminal restitution assessed under Code Sec. 6201(a)(4)(A).
However, if the failure to timely pay penalty is a component of the total amount of restitution ordered by the court, then the taxpayer is liable for the penalty included in the order. The CCN notes that the two most common situations in which this may arise are when (1) the taxpayer has agreed to be held liable for the failure to timely pay penalty in a plea agreement as part of the total amount of criminal restitution, or (2) the restitution was based on an already-assessed tax liability that included an already-assessed failure to timely pay penalty. The assessment and collection of the failure to timely pay penalty is proper to the extent it is a component of the total amount of restitution ordered.
References: For assessment of criminal restitution, see FTC 2d/FIN ¶T-3639; United States Tax Reporter ¶62,014.
