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Part 25. Special Topics

Chapter 1. Fraud Handbook

Section 3. Criminal Referrals

25.1.3  Criminal Referrals

25.1.3.1  (10-30-2009)
Overview

  1. This section discusses the purpose and processing of criminal fraud referrals. The identification of potential criminal fraud by compliance employees is an important part of this process.

  2. When affirmative acts (firm indications) of fraud/willfulness exist and criminal criteria are met, the compliance employee should refer the case to Criminal Investigation (CI) via Form 2797,Referral Report of Potential Criminal Fraud Cases. The fraud technical advisor (FTA) is available to assist (determine if firm indications of fraud/willfulness are present, criminal criteria has been met, etc.).

  3. Criminal prosecutions serve to enhance voluntary compliance.

25.1.3.1.1  (10-30-2009)
Background

  1. C I's mission is to serve the American public by investigating potential criminal violations of the Internal Revenue Code (IRC), and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law. The primary objective of CI is the prosecution, conviction and incarceration of individuals who violate criminal tax laws and commit related offenses. The Federal Sentencing Guidelines tie the period of incarceration to the monetary value of the violation. Consequently, the amount of the "tax loss" (see 2 below) must usually be higher than the minimum Law Enforcement Manual (LEM) criteria for a sentence of incarceration to be imposed (commonly referred to as "criminal criteria" ). Prosecuting attorneys from the Assistant United States Attorney's Office and the Department of Justice, are reluctant to use their resources to prosecute individuals who will not receive a prison sentence. Thus, when evaluating a potential criminal case, it is essential to determine if the individual is likely to be incarcerated if convicted.

  2. "Tax loss," as calculated in criminal tax cases pursuant to the Federal Sentencing Guidelines, may encompass amounts greater than the criminal tax computation in the Special Agent’s Report (SAR). It may include amounts from years outside of the prosecution period and/or state tax loss. This determination is dependant upon the taxpayers " relevant conduct" , as it relates to the amounts in question. Tax loss is computed using all of the years for which a preponderance of the evidence shows understatements or tax due is attributed to the basis for conviction. The criminal tax computation differs from the civil tax computation because it includes only those adjustments due to the criminal conduct of the taxpayer.

  3. The criminal criteria with respect to non-tax violations is based on other criteria. For example, Bank Secrecy Act (BSA) violations consider the aggregate amount required to be reported in Currency Transaction Reports (CTR's) or the amount structured into or out of a financial institution.

25.1.3.2  (10-30-2009)
Preparation of Form 2797

  1. If after consultation with the FTA, it is determined that a potential fraud case has firm indications of fraud or willfulness and meets criminal criteria, the examiner/revenue officer will suspend the examination/collection activity without disclosing to the taxpayer or representative the reason for the suspension. When the taxpayer asks if a fraud referral is being considered or whether CI is involved, the examiner or revenue officer must not give a false or deceitful response. However, silence or declining to provide an affirmative "yes" or "no" on the matter is not false or deceitful. Guidance from the courts provides that civil enforcement examiners and officers:

    • May not deceive taxpayers when asked specifically about the character or nature of an investigation,

    • Are not required to initiate disclosure about developing indicators of fraud or a potential referral to CI,

    • May decline to answer questions about criminal potential, or

    • May simply advise that when firm indicators of fraud are present, a referral to CI is required.

    Each case is unique. Contact your local FTA for additional guidance.

    The examiner/revenue officer will complete the current version of Form 2797 (accessed through the Forms Repository at http://publish.no.irs.gov/catlg.html . Electronic Publishing provides a fill able form that can be downloaded, saved as a PDF file, edited and electronically transmitted, via Microsoft Outlook/Secured Messaging. The FTA will assist in the preparation, if necessary.

  2. Preparation of Form 2797

    1. The referral will be a detailed presentation of the facts that establish firm indications of fraud/willfulness, including, but not limited to:

      • A description of the firm indications/willfulness,

      • Taxpayer’s explanation of the firm indications/willfulness,

      • The estimated criminal tax liability, and

      • The method of proof used for income verification.

    2. If the fraudulent scheme involves multiple taxpayers/filers (e.g., husband and wife, corporation and corporate officers, etc.), the most culpable taxpayer/filer (individual or entity likely to be numbered as the primary investigation (PI)) will be identified in sections 1a and 1b. All known taxpayers/filers involved in the fraudulent scheme (including the one identified in sections 1a and 1b) will be listed in section 1c.

    3. A multiple source referral (e.g., Examination and BSA, Collection and Employment Tax, etc.) will be entered on separate Forms 2797. Each operating division/function will prepare a Form 2797 to include the information mentioned in Section 2a above that pertains to their specific examination/collection activity.

    4. No work papers or documents are required with the referral. The initial conference allows the examiner/revenue officer the opportunity to explain the case in detail and address any questions regarding the potential criminal violations. CI will be provided access to all work papers and documents needed to effectively evaluate the referral during the initial meeting.

      Note:

      Attachments (Microsoft Word, Excel and PowerPoint files) must be inserted into the Form 2797 PDF file. See Exhibit 25.1.3.2-1 for instructions on how to insert files.

  3. The examiner/revenue officer will enter his/her name and grade, and enter the date the referral is being electronically forwarded to the group manager.

  4. The group manager will review the referral, ensure that the proper Area/Territory/Group is entered, approve* the referral and electronically forward it to the FTA, for consideration. The group manager will retain an approved copy of the referral for the case file.

  5. The FTA will review and approve* the referral, prepare a one-page narrative (used to describe additional facts and/or the fraud development process), if necessary, insert the narrative (word doc file) into the Form 2797 PDF file (see Exhibit 25.1.3-1 for instructions), and electronically forward it to the FTA manager for consideration. The FTA will retain a copy of the referral for his/her record.

  6. The FTA manager will review and approve the referral by entering his/her name or electronic signature, enter the FTA Management Control Number, rename the Form 2797 PDF file by the FTA Management Control Number (e.g., if the FTA Management Control Number is 40707311 the file will be renamed 40707311.pdf), and electronically forward it to the appropriate CI Field Office. Also, the FTA manager will electronically forward the referral to the National Fraud Program (NFP) for data entry and tracking purposes, and retain a copy of the referral. If the referral is from multiple sources (two or more Forms 2797), the FTA manager will:

    • Electronically forward the Forms 2797 in one message (if possible) and identify them as "multiple source referrals" .

    • Enter the same FTA Management Control Number, with respect to the first six digits on each Form 2797, and enter the appropriate source for the last two digits. The last two digits of the FTA Management Control Number are used to identify the source of the referral for NFP database purposes.

    • Ensure the same (primary) source of the referral is entered in Section 9b (CI Source of Referral: SB/SE-E, SB/SE-C, SB/SE-other, LMSB, TEGE or W&I) of Forms 2797. CI enters the source of the referral in their database (CMIS).

      * By entering name or electronic signature.

25.1.3.3  (10-30-2009)
Referral Evaluation

  1. Within 10 workdays of receipt of the referral, the special agent (SA) assigned to evaluate the referral will identify the primary investigation (PI) of the individual or entity under criminal investigation consideration, assign a PI number to the case and set up the initial conference. At that conference, the referring examiner/revenue officer, his/her group manager, the evaluating SA, his/her supervisory special agent (SSA) and the FTA, if available, will meet to discuss the referral and review tax returns, evidence, criminal tax computations, etc. Also, the following issues should be discussed at the initial meeting:

    1. Verification of income,

    2. Explanations offered concerning the alleged offense,

    3. Whether returns were solicited, attempts were made to resolve the civil issues and prior IRS action(s) involving a similar alleged offense, and

    4. Observations about the age, health (physical and mental), education and occupation of the taxpayer.

    Additional factors to consider during the evaluation of the referral include additional tax due to fraud, flagrancy, significance, public interest and the deterrent effect.

  2. Within 30 workdays of receipt of the referral, the same individuals will meet again (disposition conference) to discuss CI’s decision to accept or decline the referral. CI is required to provide written feedback to the referring examiner/revenue officer, as to their decision (see IRM 25.1.3.4(1) and 25.1.3.5(1). Area Counsel will be invited to offer legal advice, if it is deemed necessary.

  3. The FTA will monitor the conference dates and response obligations to ensure all actions occur in a timely manner.

  4. The decision to accept or decline a referral may be extended by written agreement of the appropriate field territory manager (TM) or individual responsible for making such decision. The agreement should specify the reason(s) for the request (e.g., delay in receiving original tax returns or an opinion from Counsel) and the date the referring office can expect a determination.

25.1.3.4  (10-30-2009)
Accepted Criminal Referrals

  1. If CI accepts the referral, the PI will be numbered as a Subject Criminal Investigation (SCI). CI will provide feedback by completing the following sections of the Form 2797 and returning it to the FTA manager (CI reply):

    • Section 13b: Check the box "Accepted for Investigation" ;

    • Section 14a: Name, grade, group and telephone number of the SA assigned to the investigation;

    • Section 14b: Indicate whether a cooperating examiner/revenue officer should be assigned to the investigation by checking the"Yes " or"No" box;

    • Section 14c: Electronic signature or name and date of the SSA;

    • Section 14d: PI number assigned to the case; and

    • Section 1c (if applicable): Check the appropriate "PI" box and the "SCI" boxes for the taxpayer(s)/filer(s) accepted for investigation and check the"Yes" or " No" box(s) under the"Continue Civil/Collection Activity " heading.

  2. CI will place TC 914 controls in the Master File. The FTA manager will electronically forward the CI reply to the FTA, the Group manager, and the examiner/revenue officer. If the referral was Examination initiated, the examiner/group manager will update the case to AIMS status code 18. If the referral originated from Collection, the revenue officer/group manager will close the case when the TC 914 is posted to the module, if no further action is required (see IRM 25.1.8.9). Also, the FTA manager will electronically forward the referral to the NFP for data entry and tracking purposes and retain a copy of the referral.

  3. The SA will promptly meet with the referring examiner/revenue officer and determine whether a detailed memorandum is required concerning contacts with the taxpayer, the taxpayer's representative, or the preparer of the returns (preparer) under criminal investigation. If a memorandum is needed, the following areas should be included:

    1. The date of each contact the referring examiner/revenue officer had with the taxpayer, the taxpayers representative, and/or the preparer; and

    2. A summary of what took place during each contact, any explanations offered concerning the alleged offense, and/or any action that could be construed as solicitation, condonation, or an attempt at civil settlement.

  4. IRM 25.1.4 provides specific guidance to compliance employees assigned to a joint investigation case as a cooperating examiner/revenue officer.

25.1.3.5  (10-30-2009)
Declined Criminal Referrals

  1. If the referral is declined, CI will provide feedback by completing the following sections of the Form 2797 and returning it to the FTA manager (CI reply):

    • Section 13a: Check the box "Declined before Investigation " ,

    • Section 14c: Electronic signature or name and date of the SAC/ASAC, and

    • Section 14d: PI number assigned to the case.

    Also, a memorandum explaining the reason(s) for the declination will be provided with the CI reply.

  2. The FTA manager will electronically forward the CI reply to the FTA, the Group manager, and the examiner/revenue officer. The referring examiner/revenue officer will continue the examination/collection activity once he/she has received notification of the declination. If additional (new) firm indications of fraud develop, the case will again be referred to CI for criminal investigation consideration, as outlined above.

  3. If the FTA manager disagrees with the decision to decline the referral, he/she will address the concerns with the SAC/ASAC. If an agreement cannot be reached, the FTA manager will discuss the matter with the FTA, the group manager, the initiating examiner/revenue officer and the TM/equivalent with group responsibility. If everyone concurs that the decision to decline the referral is inappropriate, the matter will be elevated to the area director/equivalent and the CI Director of Field Operations for resolution.

  4. Groups of cases involving similar examination issues declined by CI will be afforded special attention. Area Counsel will be consulted in such cases before an agreement is reached for the deficiency in tax and penalty in any one case. This will allow Area Counsel to advise of the litigation possibilities in the event subsequent cases are unagreed.

25.1.3.6  (10-30-2009)
Estate & Gift

  1. Form 2797 will be used to refer a case to CI for criminal investigation consideration. See the form and IRM 25.1.3.2 for instructions on how to prepare the form.

  2. If more than one entity and/or individual is involved in a fraudulent scheme, only one Form 2797 will be prepared. For example, if a fraudulent scheme involves co-executors, co-trustees, collusion with heirs or donees and/or split gifts, one Form 2797 will be prepared. The most culpable individual or entity will be identified in sections 1a and 1b and all individuals/entities will be listed in section 1c.

25.1.3.7  (10-30-2009)
Return Preparers

  1. All potential criminal fraud referrals regarding a return preparer should be discussed with the return preparer coordinator (RPC) and the FTA. Also, the examination of clients of a promoter (a person subject to penalty under IRC section 6700 – promoting abusive tax shelters, etc.) or a return preparer under criminal investigation for his/her activities as a return preparer should include assertion of the appropriate tax and penalties based on the facts in each case, regardless of whether the clients testify against the return preparer/promoter or become a defendant.

  2. For return preparers who are not currently being investigated under the Program Action Case (PAC) process, Form 2797 will be prepared, as described in IRM 25.1.3.4, when the group manager and FTA agree that a return preparer is involved in criminal fraud. The group manager will retain a copy of Form 2797 for the return preparer case file and the FTA will electronically forward a copy of the Form 2797 to the RPC or the returns classifying officer (RCO) if the returns are TEGE related. See IRM 4.1.10 for procedures relating to PAC's.

  3. If the return preparer/promoter scheme involves multiple entities/individuals, only one Form 2797 should be prepared. The individual or legal entity that is considered most culpable will be identified in sections 1a and 1b and all entities and/or individuals will be listed in section 1c. A separate Form 2797 is no longer prepared for each type of tax involved or dissimilar fraudulent acts. The Form 2797 should give specific details relating to the apparent fraudulent act(s) including:

    • Name of the taxpayers,

    • Taxpayer identification numbers (TIN's),

    • Tax form numbers,

    • Amount of the adjustment, and

    • Resulting deficiencies.

  4. The examiner should retain a copy of each taxpayer's report of examination and relevant work papers so that the IRC § 6694 civil return preparer penalty can be pursued after disposition of the criminal case.

Exhibit 25.1.3-1  (10-30-2009)
Instructions for Inserting Microsoft Office Applications Into a Form 2797 Adobe Acrobat Portable Document File (PDF).

A. Adobe Acrobat 6.0 Professional

  1. Convert Microsoft Office file (Word, Excel or PowerPoint) to PDF format and save:

    a. Open the file to be converted (Word, Excel, or PowerPoint).

    b. Click the Convert to Adobe PDF button on the toolbar or (Windows) choose Adobe PDF > Convert to Adobe PDF.

    c. Save the PDF in a readily accessible folder (recommend creating a folder for a temporary save of files to be converted).

    d. Close the converted PDF.

    e. Repeat the process for the remaining files requiring conversion.

  2. Insert and Append Pages

    a. Open the document (Form 2797 PDF) to which you want to insert pages and choose Document > Pages > Insert.

    b. Select the document you want to insert and click select.

    c. In the Insert Pages dialog box, specify whether you want to insert the document before or after the Form 2797 PDF and the page (first, last or specific page) and click OK.

    d. Save the file.

B. Adobe Acrobat 5.0

  1. Convert Microsoft Office file (Word, Excel or PowerPoint) to PDF format and save:

    a. Open the file to be converted (Word, Excel, or PowerPoint).

    b. Select File > print.

    c. Select Acrobat PDF Writer in the printer drop down (dialog) box and click OK.

    d. Select name and location for PDF file and click Save (recommend creating a folder for a temporary save of files to be inserted).

    e. Close the converted PDF.

    f. Repeat the process for the remaining files requiring conversion

  2. Insert and Append Pages

    Open the document (Form 2797 PDF) to which you want to insert pages and choose Document > Insert Pages.

    Select the document you want to insert and click select.

    In the Insert Pages dialog box, specify whether you want to insert the document before or after the Form 2797 PDF and the page (first, last or specific page) and click OK.

    Save the file.


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