Did a trial court's reduced restitution order prevent Virginia from collecting the remaining tax, interest, and 100% fraud penalty?

Plain-English summary

Virginia held that a criminal restitution order did not cap the taxpayers' civil tax liability or eliminate the 100% fraud penalty. A criminal investigation found unreported business and passive income for 2004 through 2007. The taxpayers entered an Alford plea to one count of filing a false return.

The trial court ultimately removed the penalty portion from criminal restitution. But criminal sentencing and civil tax enforcement served separate roles, and both could apply to the same conduct. Virginia law still required the Department to assess all unpaid tax and interest.

The Alford plea also supported the fraud penalty. Although the plea did not admit the underlying acts, it acknowledged that the Commonwealth possessed overwhelming evidence sufficient to prove intentional fraud. Virginia therefore upheld the 100% penalty for a false or fraudulent underpayment intended to evade tax.

Any payment plan could be adjusted, but interest would continue until the balance was paid.

What this means for you

• Criminal restitution is not necessarily a settlement of the underlying civil tax account.
• A court's sentencing decision does not prevent statutory tax, interest, and civil penalties.
• An Alford plea can carry major tax consequences even without an express factual admission.
• Payment plans extend time but generally do not stop statutory interest.

Common questions

Q: Why did the restitution order not control the tax bill?
A: Restitution was a criminal sentencing remedy; Virginia's tax statutes separately required assessment and collection.

Q: Did the Alford plea count despite a claim of innocence?
A: Yes. Virginia treated it as acknowledging overwhelming evidence of intentional false-return conduct.

Q: Was the fraud penalty upheld?
A: Yes, at 100% of the fraudulent underpayment under the cited statute.

Q: Could the taxpayers use a payment plan?
A: Yes, but interest would keep accruing until full payment.

Citations and references

• Va. Code §§ 19.2-305.1, 58.1-202, 58.1-308, 58.1-348, and 58.1-1812.
• Deal v. Commonwealth, 15 Va. App. 160, 421 S.E.2d 899 (1992).
• Hudson v. United States, 522 U.S. 93 (1997).
• North Carolina v. Alford, 400 U.S. 25 (1970).

Subject

Business and passive income/fraud penalty

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-111

Original ruling text

June 21, 2013

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the Virginia individual income tax assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2004 through 2007. I apologize for the delay in responding to your appeal.

FACTS

Pursuant to a criminal investigation, the Department determined that the Taxpayers failed to report business and passive income on their Virginia individual income tax returns for the taxable years at issue. The Taxpayers were prosecuted and proffered an Alford plea to one count of filing a false income tax return. Originally, the Taxpayers were sentenced to suspended incarceration and restitution equal to the approximate amount of tax and a 100% fraud penalty. The Court subsequently eliminated the penalty portion of the restitution.

The Department then issued assessments for the entire Virginia income tax due, plus a 100% fraud penalty and interest. The Taxpayers appeal the assessments, contending their liability should be limited to the restitution amount ordered by the trial court.

DETERMINATION

Virginia Code § 19.2-305.1 provides that "no person convicted of a crime . . . which resulted in property damage or loss, shall be placed on probation or have his sentence suspended unless such person shall make at least partial restitution for such property damage or loss . . . ." A trial court has "wide latitude" to make sentencing decisions, such as the ordering of restitution. See Deal v. Commonwealth , 15 Va. App. 160, 421 S.E.2d 899 (1992). Because the Taxpayers received a suspended sentence, the trial Court ordered restitution.

The Taxpayers assert that their liability for Virginia income tax was reduced by the trial court to the restitution amount. As such, they are not liable for the balance of any income tax, penalty or interest assessed above the restitution amount. Both criminal and civil sanctions, however, may be imposed for the same offense. See Hudson et al. v United States , 522 U.S. 93, 118 S.Ct. 488 (1997).

Virginia Code § 58.1-348 provides:

Notwithstanding any other provisions of this title [58.1] and in addition to any other penalties provided by law , any individual or fiduciary required under this chapter to make a return of income, who . . . with intent to defraud the Commonwealth, makes any false statement in any such return, shall be guilty of a Class 6 felony. [Emphasis Added.]

As such, any sentence or restitution imposed by a trial court is exclusive of any other statutes under Title 58.1. Thus, any criminal sentence imposed under Va. Code § 58.1-348 does not preclude the enforcement of any other of the Commonwealth's tax laws.

Virginia Code § 58.1-1812 provides that the Tax Commissioner must assess any tax not paid in full by a taxpayer and apply interest to this tax liability. Under Va. Code § 58.1-202, the Commissioner is required to administer the tax laws of the Commonwealth. Therefore, Virginia law requires that the Department assess any Virginia income tax liability above the amounts of restitution ordered plus interest.

Virginia Code § 58.1-308 provides for a 100% fraud penalty if the underpayment of tax is false or fraudulent with the intent to evade payment. According to the plea bargain agreement, the Taxpayers plead guilty in accordance with North Carolina v Alford , 400 U.S. 25 (1970). In Alford , the United States Supreme Court held that:

an accused may voluntarily, knowingly and intentionally plead guilty and consent to the imposition of a prison sentence even though he is unwilling to admit participation in the crime, or even if his guilty plea contains a protestation of innocence, when . . . the record strongly evidences his guilt

Under Va. Code § 58.1-348, filing a false Virginia income tax return is a Class 6 felony. The Taxpayers entered an Alford plea to one count of filing a false income tax return. An Alford plea is a "guilty plea that a defendant enters as part of a plea bargain, without actually admitting guilt." See Black's Law Dictionary (Eighth Edition, 2004, p. 78). By entering such a plea, the Taxpayers admit that the Commonwealth had overwhelming evidence to prove that they intentionally defrauded Virginia. As such, the Department properly assessed the 100% fraud penalty.

Based on the foregoing, the assessments are upheld. In accordance with the enclosed schedule and criminal investigation, an updated bill, with interest accrued to date, will be mailed to the Taxpayers shortly. No further interest will accrue provided the outstanding balance is paid within 30 days from the date indicated of the revised bill.

The Taxpayers currently have a payment plan for the Court ordered restitution amount. If they are unable to pay the balance due of the updated bills in full within the time provided, you may contact * of the Department's Compliance Unit at ***, to adjust the payment plan in accordance with this determination.

Please note that while a payment plan will provide an extended period for payment of the balance due, interest will continue to accrue on the balance until paid, pursuant to Va. Code § 58.1-1812.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Law, Rules and Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4828000052.B