Tax & Business Insights

Restitution

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 suggest?

“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 the embezzlement.

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 restitution award.

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.

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.

Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.

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