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Tax crime restitution and its impact on civil tax liability

"Let them eat cake" was the notorious phrase attributed to Marie Antoinette, the queen who was beheaded during the French Revolution.

In the field of tax law, there is a similarly short saying that reflects comparable hubris. That saying is: "Only the little people pay taxes." It is attributed to Leona Helmsley, the hotel and real estate magnate who was convicted of criminal tax evasion and served 21 months in prison.

Though the "little people" remark remains indefensible, Helmsley's legal case has come to stand for an important principle. That principle is that when someone has to pay restitution in a criminal tax case, that amount can be claimed as a credit on the person's civil tax liability for that year.

It is important to recognize, however, that the principle does not apply to restitution payments made in connection with some other federal crime.

For example, let’s say someone underreports income or inflates expenses as part of a white-collar scam of some sort. If authorities prosecute the case and a restitution order is imposed, none of the restitution that is paid could be credited to the civil tax liability in the case.

In fact, it isn’t only that restitution will not reduce the civil tax liability. The civil liability in all likelihood will also include interest and tax penalties.

In short, criminal and civil tax issues can be closely linked. And the financial impact of restitution payments can be easy to overlook when so much of the focus of a criminal prosecution is on possible prison time.

Source: Forbes, "Criminal Tax Fraud -- Restitution Traps For The Unwary," Josh Ungerman, Dec. 8, 2013

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