Appeals Court Rejects Tax Fraud Restitution Order Due to Sloppy IRS Substantiation

(Parker Tax Publishing October 2019)

The Eleventh Circuit vacated a district court's restitution order relating to an individual's involvement in a fraudulent tax scheme involving the submission of thousands of tax returns falsely claiming a $1,000 tax credit because it found that the government's evidence submitted in support of its restitution request of over $3.4 million was admittedly and demonstrably inaccurate due to duplicate entries. The Eleventh Circuit reasoned that where, as in this case, the appropriate restitution amount is easy to calculate, the government cannot satisfy its burden of proof by relying on an estimate of the loss. U.S. v. Sheffield, 2019 PTC 382 (11th Cir. 2019).

Background

Roberta Sheffield pled guilty to numerous criminal charges relating to her involvement in a fraudulent tax credit scheme. The scheme involved the submission of thousands of tax returns falsely claiming a $1,000 education tax credit. The returns were fraudulent because the taxpayers had not incurred the $4,000 in educational expenses needed to qualify for the tax credit. Based on the fraudulent returns, the IRS issued a $1,000 refund to each taxpayer for each tax credit claimed. The district court sentenced Sheffield to 37 months' imprisonment followed by a term of supervised release. The court fixed the amount of loss from the fraudulent tax credit scheme at $3,461,638, based on a spreadsheet introduced by the IRS which supposedly documented the amount of the loss from the tax credit scheme. The district court ordered Sheffield to pay restitution in that amount jointly and severally with her co-defendants.

Although Sheffield did not object to the introduction of the IRS spreadsheet, she subsequently argued that the restitution amount should be lower because the spreadsheet contained duplicative entries. The government acknowledged that the spreadsheet might contain duplicate entries and conceded that one taxpayer was listed twice for the same tax year. But the government maintained that a restitution amount does not have to be calculated with absolute precision and that if the amount was inaccurate, it was Sheffield's burden to point out why.

The district court said that it could not tell whether there were duplicate entries and invited Sheffield to provide a list of the entries she believed were duplicative. The district court also noted that, unless Sheffield "hits the lottery sometime between now and the end of her life, the odds of her and her co-defendants paying this money back are below slim." When Sheffield did not provide a list of duplicates, the district court overruled her objection and ordered restitution in the amount set out in the spreadsheet.

Sheffield appealed the restitution order to the Eleventh Circuit.

Analysis

The Eleventh Circuit vacated the restitution order and directed the district court to calculate the actual amount of refunds issued by the IRS as a result of fraudulent tax scheme. The Eleventh Circuit reasoned that, where the appropriate restitution amount is definite and easy to calculate, the government cannot satisfy its burden of proof by relying on the oft-stated (but not always applicable) principle that restitution can be based on a reasonable estimate of loss.

The court noted that the purpose of restitution is to make victims whole by reimbursing them for their losses - not to punish them. According to the court, the amount of the restitution must be based on the amount of loss actually caused by the unlawful conduct. The use of estimation is permitted, according to the court, because it is sometimes impossible to determine an exact restitution amount. But the court noted that a reasonable estimate of restitution will not always suffice.

The Eleventh Circuit found that, in this case, the IRS's losses were definite and easy to calculate. Each fraudulent tax credit triggered a refund of exactly $1,000, so in the court's view, calculating the loss required only a simple calculation of multiplying each false tax credit by $1,000. Further, the court said that once the government acknowledged that there was in fact some duplication in the IRS's spreadsheet, it could not carry its burden of proving the loss without correcting the spreadsheet by, at the very least, removing the one acknowledged duplicative entry.

As to the issue of collectability, the Eleventh Circuit noted that most restitution orders in criminal cases are uncollectable, and it was highly unlikely that Sheffield and her co-defendants would be able to satisfy a restitution obligation of over $3 million. The court recounted that, at trial, Sheffield asserted the duplicate entries totaled $131,000, while the government said the duplicates amounted to only $31,000, and noted that if Sheffield was correct about the extent of the duplication error in the spreadsheet, the error amounted to a mere 0.4 percent of the government's proposed total restitution of $3,461,638. Nevertheless, the court said that Sheffield should not be sentenced on the basis of inaccurate or unreliable information and she should not be required to pay restitution of amounts she was not responsible for. According to the court, in cases like this one, where calculating the total restitution was a simple computational exercise, an exact figure was required. Otherwise, the court reasoned, the IRS would receive an inappropriate windfall.

For a discussion of criminal penalties for false and fraudulent returns, see Parker Tax ¶277,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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