Understanding Restitution in Criminal Tax Cases | Criminal Tax Blog

Understanding Restitution in Criminal Tax Cases

Criminal tax cases revolve around the tax loss involved in the alleged scheme.  The tax loss will shape charging decisions before indictment, the sentencing calculations following a conviction, and the amount of restitution ordered by the Court.  In prior posts, we have discussed the role of the tax loss in charging decisions and the sentencing guidelines.  However, we have not dissected the interplay between the tax loss and criminal restitution in a Title 26 violation.  Restitution is a main cog in the sentencing phase of a criminal tax case and must be well understood by practitioners to provide competent representation.

In this post, we will lay out the role of restitution in a criminal tax case.  This will include defining restitution and outlining the relevant restitution statutes which empower the Court to act under a Title 26 conviction.

What is Criminal Restitution in a Tax Case?

Criminal restitution is the amount of money owed to a victim of an offense.  In a theft case, it is the fair market value of the stolen items.  In an embezzlement case, it is the value of the funds improperly diverted.  In a criminal tax case, it is the amount of government loss attributed to the offense.

At first blush, it appears tax loss and restitution are synonymous with the restitution being equal to the tax loss associated with sentencing.  Though the tax loss certainly serves as a guiding post for the criminal restitution figure, the two calculations serve two distinct purposes; tax loss describes the harm under the sentencing guidelines and restitution describes the amount of money the defendant must repay the government as part of his sentence.  The former is governed nearly exclusively by the Sentencing Guidelines, and the latter is governed by restitution specific statutes in Title 18.  Having discussed tax loss in a prior post, below we will review the statutes and case law that dictate restitution in a criminal tax case.

Statutory Authority for Ordering Restitution for a Criminal Tax Violation

Generally, a district court may only order restitution if authorized by statute.  Criminal restitution is governed by three separate statutes: 18 U.S.C. § 3663A (Mandatory Victim Restitution Act (MVRA)), 18 U.S.C. § 3583 (Supervised Release Conditions), and 18 U.S.C. § 3563(b) (Conditions of Probation).   These three statutes interplay to create the restitution rules for a criminal tax case.  Below, we will analyze the three statutes independently before drawing some final conclusions.

  • 18 U.S.C. § 3663A (Mandatory Victim Restitution Act)

The MVRA was created to ensure “people” harmed by criminal conduct were made whole in the federal system.  By allowing a district court judge to make monetary orders in the criminal case, the victim could avoid lengthy civil disputes and recoup their losses efficiently.  This stated purpose for the MVRA runs afoul of restitution in the criminal tax arena.

The victim in a tax case is the government.  In a classic Title 26 case, the government is the only aggrieved party.  The defendant’s actions caused a loss in revenue to the United States Treasury.  The MVRA did not provide authorization for a district court to make the government whole when they are a victim to an offense.

This reality led the Courts of Appeals to rule the MVRA does not authorize restitution orders in a criminal tax case.   Put differently, a district court cannot make repayment of backed taxes part of the final judgment and sentence.

That base line rule has one notable exception found at 18 U.S.C. § 3663A(a)(3).  This section states the Court may order criminal restitution if agreed to by the government and defendant within the plea agreement.  The Courts of Appeals have upheld the plain meaning of this section and allowed the district court to order restitution under the MVRA if the defendant agrees to an amount in their plea agreement.

  • 18 U.S.C. § 3583 and § 3563 (Supervised Release and Probation Conditions)

Sections 3583 and 3563 deal with court ordered conditions placed on a defendant on probation or supervised release in the federal system.  These two statutes have their own authorization paragraphs detailing the powers of the court to order restitution.  Under both statutes, the district court can order restitution to the government as a condition of supervision.

The Courts of Appeals have echoed the plain meaning of the authorization terms, stating a Court may order restitution in a criminal tax case as a condition of supervised release or probation. Though the Court is authorized to order restitution, they are limited to the loss underlying the count of conviction.  Relevant conduct cannot be used to authorize criminal restitution as a condition of either supervised release or probation.

An example likely highlights this point best.  Under the sentencing guidelines, the tax loss is comprised of the loss attributed to the offense of conviction and all relevant conduct.  For example, let’s assume a taxpayer underreports income for eight years.  Each year, the tax loss is $100,000.  If the taxpayer pleads guilty to one count, and the others are dismissed, his tax loss for sentencing is still $800,000.  The taxpayer’s recommended sentence is not affected by the number of counts for which he pleads guilty so long as the government can prove up the false returns in the other years.

While relevant conduct is an important consideration under the sentencing manual, it can not be considered by the district court when ordering restitution under § 3583 or § 3563.  Restitution is capped at the amounts behind the count of conviction.  In the above example, the court would be limited to a restitution order of $100,000.  If the defendant pled to five counts, the restitution order would expand to $500,000.

The Implications When Representing a Criminal Tax Client

The overarching rules derived from the previous sections are: 1) a district court cannot order restitution under the MVRA without an agreement from the client, 2) a district court may order restitution as a condition of probation or supervised release, and 3) any restitution ordered as a condition of probation or supervised release may not consider relevant conduct.

Once the case law is reviewed, the rules seem simple enough.  However, these rules provide some useful leverage points if all parties understand how they function.  First, the government cannot get a criminal restitution order as part of the judgment and sentence without the defendant’s agreement.  Period.  Most plea agreements in criminal tax cases will include an agreed restitution amount.  They are included as a matter of course and often signed by attorneys without much thought outside of accuracy.

The reality is the defendant is giving the government a very valuable right by signing the agreement.  The taxpayer is giving the government the right to obtain backed taxes via a criminal judgment without need for the civil process.  Without the agreement, the government has no means to obtain that final order.  The government cannot argue for its inclusion at sentencing as the court does not have the power to grant the requested relief.  Agreeing to criminal restitution should not be an afterthought in a criminal tax case.  It should be used as a point of leverage in the negotiation process.

Second, the government cannot receive restitution as a condition of probation or supervised release that includes relevant conduct without an agreement by the taxpayer.  If the client pleads guilty to a Title 26 charge, there will nearly always be relevant conduct at sentencing that does not fall under the count(s) of conviction.  This is true in nearly every plea and most trial cases.  The government’s only route to obtaining a court order for relevant conduct amounts is through an agreement under the MVRA.

If a taxpayer refuses to agree to restitution, two things will happen legally.  One, there will be no entry within the judgment and sentence and two, any condition will be limited to the count of conviction.  Most seasoned tax prosecutors understand this reality and view cooperation on restitution as a valuable concession.  But do not assume this is true. There are prosecutors throughout the country who do not understand the legal implications.  It is the criminal tax attorney’s responsibility to educate them and level the playing field.

Restitution Payment is the Key to Sentencing

Our firm has handled numerous criminal tax cases over the years.  We have always advised our clients to pay as much restitution as possible prior to the day of sentencing.  This practice was developed after hearing federal judges repeatedly discuss the importance of our client’s payments when delivering a lighter than expected sentence.

While the MVRA does not define the government as a “victim” for restitution purposes, the courts do not have such limitations.  The harm caused in any criminal tax violation is monetary.  They all involve losses to the United States Treasury.

Unlike a personal crime where psychological/physical trauma, litigation stress, and damaged property are potential harms, tax cases are all about finances.  While the former circumstances cannot be easily rectified, the latter ones can.  Through the payment of restitution, the client can right the wrongs underlying the offense.  This unique reality opens the door to various strategic advantages if the client has the capital to catch up on past tax bills.

Criminal restitution is an area often ignored by federal defense attorneys.  The overarching assumption is the court may order the amount of tax loss outlined at sentencing.  This assumption fails to account for the restitution framework under the MVRA and its companion statutes.  Only with a thorough understanding of the authorization statutes can an attorney ensure the Court’s orders comply with established federal law.