This section discusses the procedures to follow in a civil fraud case.

A civil fraud penalty case may be developed based on facts and circumstances of a civil examination or result from the completion of a criminal prosecution case.

Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to civil fraud. Such evidence must show the taxpayer’s intent to evade the payment of tax which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, honest difference of opinion, negligence or carelessness. In the case of a joint return, intent must be established for each spouse separately as required by IRC 6663(c) . The fraud of one spouse cannot be used to impute fraud by the other spouse. The civil fraud penalty may be asserted on one spouse only.

Specific guidance on fraud indicators and the development of fraud may be found in IRM 25.1.1 and 25.1.2.

IRM 20.1 provides specific procedures for assertion of the civil fraud penalty.

Civil fraud no longer requires a referral to CI. Determination of this penalty is the shared responsibility of the examiner, his/her group manager and the FRS. If agreement cannot be reached regarding the assertion of the civil fraud penalty, the decision will rest with the examiner and group manager.

Upon concurrence of the group manager and FRS, cases being developed for potential fraud should be updated to Status Code 17. Form 11661, Fraud Development Status may be utilized to document the decision to update the case to Status Code 17.

For civil settlement of a prosecution case, the examiner should contact Cl to ascertain which criminal statutes the taxpayer was convicted of before attempting to resolve the related civil fraud penalty. The examiner should obtain a copy of the plea agreement or judgment notating the applicable criminal statutes and years. See 25.1.5 for procedures to utilize in securing nongrand jury materials for use in the civil settlement of cases investigated through grand jury procedures.

In cases where fraud was considered and the civil fraud penalty is not being recommended, the examiner will explain in the workpapers why the penalty was not asserted.

If criminal prosecution of a taxpayer has been recommended by CI to the Department of Justice, the civil fraud penalty or fraudulent failure to file may be removed only upon written recommendation or concurrence by Area Counsel. This rule applies also in the case of any related taxpayer involved in the same transaction and to any other year or period of the same taxpayer which is related to or affects the year or period for which criminal prosecution is recommended. Cases back for civil settlement should be updated upon receipt to AIMS Status Code 12. During the period of time, however, that the examiner is considering civil fraud in a case back for civil settlement, the case should be updated to AIMS Status Code 17. If it is later determined that the civil fraud penalty is not applicable, the case should be returned to AIMS Status Code 12.

In statutory notice cases, Area Counsel must approve civil fraud penalties prior to issuance.

Examiners and managers should be aware of collateral estoppel and the important distinction it can have in civil tax fraud penalty cases.

Collateral estoppel is a legal doctrine that prevents a taxpayer, who has been previously convicted of criminal tax evasion under 7201, from asserting a defense to the civil fraud penalty. " Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation." Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979). The courts routinely look to the presence of several factors in applying collateral estoppel. The issue for which estoppel is being sought must have been necessary in reaching the original decision (see Parklane case cited above), the party to be estopped had a "full and fair opportunity to litigate" the issue in the original suit - Montana v. United States, 440 U.S. 147, 154 (1979), and the issue must have been part of a valid and final judgment.'' Ashe v. Swenson, 397 U.S. 436, 443 (1970). The doctrine of collateral estoppel applies only to the years for which the taxpayer has been convicted. Intent must be established for non-conviction years.

A conviction under 7206(1), false return, does not collaterally estop the taxpayer from asserting a defense to the civil fraud penalty since conviction under 7206(1) does not require proof of fraudulent intent to evade federal income taxes. In these cases, additional development will be needed to establish the taxpayer’s intent to evade payment of a tax to be due and owing.

Form 6809 (Civil Fraud Penalty Monitoring Form) is required in order to monitor all cases where the civil fraud penalty is an issue.

A separate Form 6809 must be prepared for each person or legal entity involved. However, only one Form 6809 is prepared for a joint return.

Upon updating a case to Status Code 17, prepare Form 6809 in triplicate, completing items 1 – 11. Retain the original and one copy in the case file. Forward one copy to the fraud referral specialist (FRS).

When the case is ready to close, the examiner will complete items 12a–12f. Upon final disposition of the case, the completed Form 6809 is provided to the FRS.

Closing a fraud case requires an entry of "C" or "F" on the appropriate line of Form 5344 (currently Line 38 of Form 5344, Revised 1–2002) to ensure the capture of the penalty on AIMS. Form 5599, EO Examined Closing Record should be utilized when closing TEGE cases.

Form 3198, Special Handling Notice, may be used for routing of civil fraud cases.