White collar defense attorneys and accountants engaged to assist in investigations conducted by the IRS Criminal Investigation Division are familiar with these words: “… the tax loss … is … $550,000 to $1,500,000 …”
By Edward M. Waddington and Ricardo J. Zayas
White collar defense attorneys and accountants engaged to assist in investigations conducted by the IRS Criminal Investigation Division are familiar with these words: “… the tax loss … is … $550,000 to $1,500,000 …” These, or comparable words, routinely appear in guilty plea agreements entered into with the United States by defendants and their attorneys in which the defendant admits to violating a criminal provision of the Internal Revenue Code.
Attorneys and accountants practicing in this area know that the amount of “tax loss” is then a crucial component to consider when the parties, including a Federal District Court judge, are assessing the potential and actual sentencing of a defendant. Why? Well the amount of the “tax loss” is a factor in determining the so-called “offense level” which, in turn, influences the “defendant’s guideline range” set forth in the U.S. Sentencing Guidelines (guidelines). The “defendant’s guideline range” specifically refers to the starting point of a potential period of incarceration for the offense set forth in the guidelines.
There is a commonly known, correlation between the tax loss and a potential punishment measured as some period of incarceration. It is also known there will be financial consequences to the defendant in the form of fines, restitution, penalties and/or taxes due the United States. These consequences are frequently addressed in guilty plea agreements with language as follows:
- “The defendant agrees to cooperate fully with the Internal Revenue Service concerning restitution, that is, personal taxes owed …”;
- “The defendant agrees to pay restitution as directed by the court to the Internal Revenue Service.”;
- “Prior to sentencing, the defendant will pay at least $… to the IRS to be applied to the taxes, interest, and penalties owed …”;
- “The defendant agrees to pay all remaining taxes, interest and penalties, as determined by the IRS to be due and owing … ; and
- “Prior to sentencing, the defendant will properly execute and deliver to the IRS Examination Division IRS Form 4549 or IRS Form 870 …”.
While the parties accept there will be financial consequences to the defendant, as outlined in the agreements, the full extent of those financial consequences can be masked (and may be duplicative) by the agreement language for persons not experienced with the interplay between the IRS criminal and civil process. What follows is a brief introduction to financial ramifications of these criminal plea agreement provisions on an individual defendant.
What Is Tax Loss?
Within the context of a criminal income tax related plea agreement and the guidelines, “tax loss” is a measure of the federal income tax that would have been due on the unreported income attributed to the taxpayer’s criminal actions as contained in the plea agreement.
“Tax loss” is not synonymous with the amount a defendant may ultimately be obligated to pay the IRS. It is only one component of a potentially larger amount determined to be due to the IRS. However, the “tax loss” may be synonymous with court ordered restitution to the IRS.
A common measure of the “tax loss” for an individual defendant, permitted by the guidelines and used by practitioners and the U.S. alike, is 28 percent of the unreported income. For illustration,” $3,600,000 of unreported income would correlate to approximately $1,000,000 “tax loss” ($3,600,000 x 28 percent).
For purposes of this discussion, let’s use the “tax loss” range of…