Volume 19 Issue 6 -- November/December 2007
If a client of yours were the
victim of a financial crime, such as embezzlement, would you know what to
“Restitution,” which is
intended “to restore to a previous condition,” is not well understood. In
most jurisdictions, restitution is available to victims of financial crimes to
compensate them for the losses suffered.
For example embezzlement is
fairly common and occurs with alarming frequency.
Unfortunately, in many cases of embezzlement, a restitution order many
not provide adequate monetary compensation.
First, the embezzler may have
spent the money on a wild fling or wasted it and does not have the wherewithal
to pay restitution even if a court orders it. In many states, the embezzler’s
ability to pay restitution is a factor that courts will consider.
Next is the question of how
restitution is determined. In many situations, the embezzler will admit to the
crime after being caught and the embezzlement will be investigated by city or
state police, but often the investigators are more concerned with getting a
conviction or a plea agreement than with a clear picture of the full extent of
For example, let’s look at the
case of Wilbert (hereafter, “Bert”) who bought a business that had a
bookkeeper named Malrose (hereafter, “Mal”). Because she was familiar with
the business, Bert hired Mal to be his company’s bookkeeper-office manager.
Mal signed all the checks and handled all the office work.
Unfortunately, Mal also developed a penchant for gambling, using the
business’s funds. Five hundred
thousand dollars later, Bert became aware that something was wrong.
The local police investigated
the crime but did not get into all of the avenues of the embezzlement such as
cash purchases. Instead the police
detectives looked only for checks where the check stub and the actual payee of
the check differed, because this was the easiest embezzlement to prove.
When Mal admitted to the
embezzlement, the local police informed Bert that no one goes to jail for White
Collar crime in that jurisdiction. Mal was ordered to pay restitution of
$200,000, the amount of the fraudulent checks, but not the full amount of the
embezzlement, $500,000. The restitution was ordered to be paid at a rate of $500
per month for more than 33 years!
The embezzler, of course, has
potential income tax problems when there is an embezzlement.
Embezzled funds and other gains from criminal actions result in taxable
income to the perpetrator.
Does this mean that the Internal
Revenue Service will always investigate embezzlement?
The Criminal Investigation Division (“CID”) of the IRS is probably
one of the best agencies for investigating embezzlement, but CID will often not
undertake a case, even where it is clearly an admitted embezzlement, because the
IRS does not want to appear to be “piling on.”
The procedures and rules for
determining and ordering restitution vary from state to state, but in some
areas, procedural problems and complexities can interfere with getting full
restitution for a victim.
The chances that Bert will ever
recover all of the restitution ordered, let alone his full loss, are limited.
Either Bert or Mal may not live for the full period of the restitution payments.
In addition, if Mal had gone to
jail, Mal would typically not make restitution payments while incarcerated.
In many jurisdictions, victims
of financial crimes can participate in the process of determining the full
amount of the victim’s actual loss. To take advantage of such rights, however,
it is imperative that the victim comes forward at the right time, with the right
information. Victim advocacy groups
can often provide helpful information about this process.
There can also be problems with
getting the criminal to pay the ordered restitution. The obligation to pay
restitution can often be made a condition for any parole. In that case, the
failure to make ordered restitution payments can lead to revocation of parole.
In some states, an order for the
payment of restitution can be treated and enforced much like a monetary judgment
in a civil lawsuit. In other states, a victim can file a lawsuit based on the
Sometimes, the victim can file a
civil lawsuit against the perpetrator of the crime to recover additional amounts
of loss that were not included in the restitution order.
This newsletter is not meant to
be a definitive article on restitution but only to point out to
those who advise business owners the possibilities and
problems with obtaining restitution.
By Tax and Business Professionals, Inc.
9837 Business Way
Manassas, VA 20110
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
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