- 25.1.7.1 Overview
- 25.1.7.2 Prescreening Nonfilers
- 25.1.7.3 AIMS (Examination Function only)
- 25.1.7.4 Development of Fraud
- 25.1.7.5 Criminal Referral
- 25.1.7.6 Secured Delinquent Returns
- 25.1.7.7 Assessment Procedure for Fraudulent Failure to File Penalties
- 25.1.7.8 Civil Closure
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This section discusses the various procedures concerning fraud in a failure to file case.
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Willful failure to file a tax return is a misdemeanor per IRC Section 7203. In egregious cases, willful failure to file may be elevated to a felony under IRC 7201 Tax Evasion. In addition, a civil penalty for fraudulent failure to file may be applicable per IRC Section 6651(f).
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On the initial screening of a nonfiler case, the compliance employee should determine if known facts indicate potential fraud. Items to be considered in addition to those previously identified in IRM 25.1.3 are:
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History of nonfiling;
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Repeated contacts by the Service;
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Indications that the non-filer had knowledge of filing requirements (i.e., professional with an advanced education, the person who works directly in the tax field, and individual had previously filed, etc.);
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Age and occupation of the taxpayer;
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Substantial tax liability after withholding credits and estimated tax payments;
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Large number of cash transactions (i.e., purchases by cash, large cash deposits, etc. as evidenced by CBRS printout in the case file), Indications of significant income per Information Return Processing (IRP) or Taxpayer Delinquency Investigation (TDI) documents (i.e., substantial interest and dividends earned, investments in IRA accounts, stock and bond transactions, high mortgage interest paid). Consideration should be given to any allowable expenses the taxpayer may have to offset self-employment income identified.
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If it appears indications of fraud are present, the compliance employee will discuss the case with the group manager. If the group manager concurs there is possible fraud, the fraud referral specialist (FRS) will be contacted. When feasible, a conference will be held between the compliance employee, group manager and FRS.
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If the possibility of fraud exists,
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DO NOT SOLICIT tax returns. If returns are submitted, they should be accepted;
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DO NOT VOLUNTEER ADVICE to the taxpayer concerning any course of action he/she should follow;
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DO NOT DISCUSS tax liabilities, penalties, fraud, or referral possibilities with the taxpayer.
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In non-filer cases in which a criminal referral is a possibility, Master File controls can be requested using push code 037, Potential Investigation Referral. A Substitute For Return Transaction Code 150 will post to the module, but this will not harm any subsequent criminal investigation.
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The AIMS project code should be changed to 149 — Non/filer-Referral for Fraud.
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If indicators of fraud are evident and with the concurrence of the FRS, the case will be updated to AIMS status code 17. The employee will proceed to fully develop the potential fraud issue(s) with the guidance and recommendations of the group manager and FRS. The following actions should assist the employee in developing firm indications of fraud.
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Interview the taxpayer to determine the reason or the intent of the taxpayer’s noncompliance.
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Ask sufficient questions to determine the extent of the delinquency, including the periods and tax due.
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Document verbatim, if possible, the questions asked and the taxpayer’s response or lack of response.
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Identify any personal reasons that could affect the taxpayer’s ability to comply. If the information is unavailable from the taxpayer, attempt to secure the information from third party sources.
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Verify income from all available sources. Methods of income verification include, but are not limited to:
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CBRS data;
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IDRS (cc: INOLE, IROLE, SUPOL, IRPTR, IRPOL);
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Securing copies of W–2’s, 1099’s from employers;
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Securing copies of checks issued to taxpayer from 1099 issuer;
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Examining taxpayer’s books and records of income and expenses;
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Reviewing the last return filed. This will assist identifying income sources as well as deductions and exemptions used in tax computations;
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Securing current financial information including checking public records for assets and a physical observation of the taxpayer’s residence, place of business or both. This information will be used to determine whether the taxpayer is prospering and has the ability to pay the taxes, or not complying due to an inability to pay taxes.
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Access to a full credit report is governed by the Fair Credit Reporting Act (Act). In addition to releasing credit reports based on five "permissible" purposes, the Act also provides for the release of credit reports in response to court order or in accordance with the consumer's written instructions. The Federal Trade Commission also interprets that consumer reporting agencies may also release full credit reports in compliance with a summons issued under IRC 7609. In cases where a taxing authority creditor such as the Service has taken steps to reduce the taxpayer's (consumer's) liability to judgment, imposed a lien on the taxpayer's property or entered into an offer-in-compromise or settlement agreement to dispose of the liability, a credit relationship exists as contemplated by the Act. Under those circumstances, the Service may obtain a full credit report of a sole proprietor, partner or fiduciary without a court order, summons or written permission. If subsequent to receipt of a full credit report for a BAL DUE investigation, fraud is discovered for a DEL RET return or a previously filed return or unreported income is discovered, a summons must be issued under 7609 for another credit report. Finally, in order to use a full credit report as a basis for a referral to CI, a summons must be issued in accordance with 7609, because of the third party record keeper notice requirement. The Service, however, may not obtain a full credit report of a sole proprietor, partner or fiduciary without a summons where there is no lien against the individual taxpayer.
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Refer to the Law Enforcement Manual (LEM) for the criminal criteria when considering submission of a criminal fraud referral on a non-filer.
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When the group manager and FRS concur that firm indications of fraud exist and the criminal criteria are met, the compliance employee will prepare Form 2797, Referral Report for Potential Criminal Fraud. The Form 2797 should be prepared as described in IRM 25.1.3.
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Delinquent returns (DEL RET's) secured by compliance employees that have substantial understatements of income and/or substantial overstatements of deductions should be considered for referral to Cl if it is determined that criminal criteria are met. The group manager and FRS should become involved as discussed in IRM 25.1.7.5.
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Collection function employees should consider a referral to the examination function if these returns do not meet criminal criteria.
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If the taxpayer files a delinquent return after a fraudulent failure to file, the period of limitations on assessment begins to run. Furthermore, the portion of the Fraudulent Failure to File (FFTF) penalty based on the tax reported on the delinquent return is not subject to deficiency procedures, but is an immediately assessable penalty. Therefore, the portion of the FFTF penalty based on the tax reported on the delinquent return should be assessed as soon as possible after the return is filed and should not be included in any deficiency notice. If the Service determines a deficiency, only that portion of the FFTF attributable to the deficiency should be included in the notice of deficiency.
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If the criminal criteria are not met, the compliance employee will complete the investigation and attempt to secure the nonfiled return(s).
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Compliance employees should contact the FRS, if necessary, for assistance in developing the civil fraud penalty. Further direction for the assertion of the penalties is contained in IRM 20.1, Penalties Handbook.
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Penalties under IRC Sections 6651(f) or 6663 should be proposed only where evidence clearly indicates the non-filer fraudulently failed to file a return to evade tax. Penalties should not be used as a bargaining tool.
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In non-filer cases prosecuted under IRC 7203 returned for civil settlement, a conviction of willful failure to file a federal return only collaterally estops a taxpayer from denying liability under IRC 6651(a), the delinquency penalty. The fraudulent failure to file or civil fraud penalty is not automatic.
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If the non-filer is prosecuted under IRC 7201, the fraud penalty is automatic. The taxpayer is collaterally estopped from denying liability for the civil fraud or fraudulent failure to file penalty.
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The mere fact of failing to file a return does not constitute sufficient evidence to sustain fraud. Other overt acts of evasion must be identified to impose the fraudulent failure to file or civil fraud penalty. In addition to the previously listed indications of fraud, the following examples are specific to failure to file cases:
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Attempts by the non-filer to conceal or transfer assets to evade collection of tax later assessed;
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Taxpayer furnishes a false W–4 to his employer;
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Experience of taxpayer in tax matters such as law professor, CPA or tax attorney;
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Taxpayer’s use of dummy business entities, bank accounts opened under assumed names and false SSNs in an attempt to conceal the identity of income/owner;
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A prior history of criminal tax prosecutions for Title 26 violations:
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Taxpayer’s filing of returns with third parties such as lending institutions with the intent to secure loans when no returns have been filed.
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Area Counsel must provide written approval for the non-assertion of the civil fraud or fraudulent failure to file penalty if criminal prosecution of a taxpayer has been recommended by CI to the Department of Justice.