25.1.3  Criminal Referrals

Manual Transmittal

May 27, 2014

Purpose

(1) This transmits revised IRM 25.1.3, Fraud Handbook, Criminal Referrals.

Material Changes

(1) Material changes to the IRM are listed in the table below:

IRM Description of Change
25.1.3.1 Updated Overview.
25.1.3.1.1 Updated Background.
25.1.3.2(2)(d) Added clarification of the initial conference participants.
25.1.3.2(3) and (4) Clarified method of transmission of Form 2797 and provided clarification of "group manager" .
25.1.3.2(5) and (6) Clarified method of transmission of Form 2797.
25.1.3.3(1) Changed "meeting" to "conference" .
25.1.3.4(1) Updated sections to be completed on Form 2797 and clarified method of transmission of Form 2797.
25.1.3.4(2) Additional guidance provided to revenue officers.
25.1.3.4(4) Clarified guidance to distinguish between administrative and Grand Jury investigations.
25.1.3.4(5) Guidance moved from IRM 25.1.4.3.2(1) to address mandatory four-way conferences.
25.1.3.4(6) Guidance added to address secured delinquent or amended returns during a joint investigation.
25.1.3.4(7) Guidance added to address when to send case to fraud/Grand Jury suspense.
25.1.3.5(1) Updated sections to be completed on Form 2797 and clarified method of transmission of Form 2797.
25.1.3.5(2) Clarified method of transmission of Form 2797. Added guidance on amending the plan of action in declined criminal referrals.
25.1.3.5(3) Defined "SAC" and "ASAC" .
25.1.3.6(2) Clarified method of transmission of Form 2797 and defined "PACs" .
25.1.3.6(3) Provided additional guidance on preparation of Form 2797 for return preparer/promoter referrals.
25.1.3.6(5) Added reference to IRM 25.1.2.9 for additional guidance.

Effect on Other Documents

This IRM supersedes IRM 25.1.3 dated December 27, 2011.

Audience

Criminal Investigation (CI), Large Business & International (LB&I), Small Business/Self-Employed (SB/SE), Tax Exempt/Government Entities (TE/GE), and Wage and Investment (W&I)

Effective Date

(05-27-2014)

William P. Marshall, Director, Fraud/BSA, SB/SE

25.1.3.1  (05-27-2014)
Overview

  1. This section discusses the purpose and processing of criminal fraud referrals. An important part of this process is the compliance employee's ability to identify potential criminal fraud.

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

  3. CI'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.

  4. The primary objective of CI is the prosecution, conviction and incarceration of individuals who violate criminal tax laws and commit related offenses.

  5. Criminal prosecutions serve to enhance voluntary compliance.

25.1.3.1.1  (05-27-2014)
Background

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25.1.3.2  (05-27-2014)
Preparation of Form 2797 - Referral Report of Potential Criminal Fraud Cases

  1. If after consultation with the FTA, it is determined that a potential fraud case has firm indications of fraud/willfulness and meets criminal criteria, the compliance employee 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. Guidance from the courts provides that compliance employees:

    • May decline to answer questions about criminal potential

    • 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, or

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

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

    2. The compliance employee will complete the current version of Form 2797 (accessed through the Forms Repository). Electronic Publishing provides a fillable form that can be downloaded, saved as a PDF file, edited and electronically transmitted via Microsoft Outlook/Secured Messaging. The FTA is available to assist the compliance employee with preparation of Form 2797.

  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 [defined in IRM 25.1.1.3(2), Affirmative Acts (Firm Indications) of Fraud ];

      • 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 parties (e.g., husband and wife, corporation and corporate officers, etc.), the most culpable party (individual or entity) likely to be numbered as the primary investigation (PI)) will be identified in items 1a and 1b. All known parties involved in the fraudulent scheme (including the one identified in items 1a and 1b) will be listed in item 1c.

    3. If the referral is a joint referral from multiple sources, the FTA group manager will ensure that each operating division and/or business unit is properly identified and credited for the referral.

    4. No work papers or documents are required with the referral. If attachments are necessary to enhance the referral, they must be embedded in the Form 2797 as a PDF file. The initial conference between the referring compliance employee, the FTA and the evaluating special agent (SA) allows the compliance employee 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 conference.

  3. The compliance employee will enter his/her name and grade, and enter the date the referral is being forwarded via secured e-mail to the compliance employee's group manager.

  4. The compliance employee's group manager will review the referral and if in agreement, will ensure that the proper Area/Territory/Group is entered, approve the referral and forward it via secured e-mail to the FTA for consideration. The compliance employee's group manager will retain a copy of the referral for the case file.

  5. The FTA will review the referral and if in agreement, will approve the referral and prepare a one-page narrative (used to describe additional facts and/or the fraud development process), if necessary, embed the narrative in the Form 2797 PDF file, and forward it via secured e-mail to the FTA group manager for consideration.

  6. The FTA group manager will review the referral and if in agreement, will approve the referral and enter the FTA Management Control Number and forward it via secure e-mail to the appropriate CI Field Office.

25.1.3.3  (05-27-2014)
Referral Evaluation

  1. Within 10 workdays of receipt of the referral, the SA assigned to evaluate the referral will identify the subject (individual or entity under criminal investigation consideration) as the primary investigation (PI), assign a PI number to the case and set up the initial conference. At that conference, the referring compliance employee, 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 gathered to support the alleged offense, criminal tax computations, etc. Also, the following issues should be discussed at the initial conference:

    1. Verification of income

    2. Explanations offered by the taxpayer, the taxpayer's representative, and/or the return preparer concerning the alleged offense

    3. Whether returns were solicited and 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 compliance employee, 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. Also, the transfer of original tax returns, the need for a cooperating compliance employee, and civil actions concerning statute and prior/subsequent/related return consideration need to be discussed.

  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  (05-27-2014)
Accepted Criminal Referrals

  1. If CI accepts the referral, the PI will be elevated as a Subject Criminal Investigation (SCI). CI will provide feedback by completing the "For Criminal Investigation Use Only" portion of item 1c, item 10 and item 11 of Form 2797 and return it via secure e-mail to the FTA group manager.

  2. CI will place TC 914 controls in the Master File record. The FTA group manager will forward the accepted referral via secure e-mail to the referring FTA. The FTA will send the accepted referral via secure e-mail to the referring compliance employee and his/her group manager. If the referral was initiated by Examination, 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, Collection Case Disposition). If further action is required, the revenue officer should open an Other Investigation (OI). See IRM 25.1.8.9(7).

  3. The SA will promptly meet with the referring compliance employee 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 compliance employee 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, Administrative Joint Investigation, provides specific guidance to compliance employees assigned to a joint investigation case as a cooperating compliance employee.

    1. A joint investigation case can originate from one of two sources:

      • A compliance initiated criminal fraud referral (submission of Form 2797), or

      • A CI initiated criminal investigation

    2. There are two types of joint investigations, administrative (non-Grand Jury) and Grand Jury. Among the procedural distinctions are the roles and requirements that apply to mandatory quarterly (four-way) conferences.

    • Specific guidance for the compliance employee cooperating in administrative joint investigations is found in IRM 25.1.4, Administrative Joint Investigation.

    • Specific guidance for the compliance employee cooperating in Grand Jury investigations is found in IRM 25.1.5, Grand Jury Investigations.

  5. All criminal investigations (administrative and Grand Jury) involving cooperating compliance employees (joint investigations) are subject to mandatory quarterly (four-way) conferences. Four-way conferences are also required for all accepted criminal referrals (administrative and Grand Jury) in which a compliance employee is not asked to participate (non-joint investigations). In this scenario, the mandatory four-way conferences are designed to inform the referring compliance function of the updated investigation status. A status update for this purpose includes: the SA is writing the special agent's report (SAR), discontinuing the case, case forwarded to Department of Justice (DOJ) - Tax or the Assistant United States Attorneys (AUSAs) office, case is going to trial, etc.). The SSA and the manager of the cooperating examiner/officer should exercise sufficient control and follow-up to ensure the conferences are conducted and prompt completion of the investigation. The SSA should contact the compliance group manager to schedule the required four-way conference. If the SSA has not contacted the compliance group manager to schedule a mandatory four-way conference when one is due, the compliance group manager may also contact the SA to schedule a four-way conference. However, CI has primary responsibility for scheduling the mandatory four-way conference.

    1. The four-way conference must be attended by the SSA, SA, the compliance group manager and the cooperating compliance employee. The FTA may also attend, when necessary.

    2. The purpose of the four-way conference is to review the status of the investigation and plan actions required of the cooperating compliance employee and the SA. Appropriate follow-up should be done periodically to ensure prompt completion of the investigation and proper use of resources. The inclusion of the FTA does not override the compliance group manager's responsibility for case and resource oversight.

    3. Form 6084, Quarterly Joint Workplan and Conference Memorandum, is used to document the conference discussion. The form is completed by the SSA and should include the following information:

      • Status/progress of the investigation;

      • Investigative obstacles (technical issues, noteworthy defenses);

      • Planned activities of both the SA and the cooperating examiner/revenue officer;

      • Discussions of civil actions (statute extensions, statutory notices of deficiency, prior/subsequent year and related return considerations); and

      • Coordination of related investigations with other field offices (venue issues, similar investigative agendas/plans).

      Note:

      A copy of the completed form must be issued to all attendees.

  6. If a taxpayer files a delinquent or amended return during a joint investigation (administrative or Grand Jury), the assigned cooperating compliance employee must discuss such with the assigned SA. The assigned SA must provide written guidance to the cooperating compliance employee whether or not any tax shown on such return should be immediately assessed. If the SA determined that such an assessment may jeopardize the criminal case, then the SA should advise the cooperating compliance employee to not make the assessment at that time. At a minimum, however, the cooperating compliance employee must update the statute for assessment on AIMS to reflect receipt of the delinquent or amended return.

  7. The SA must advise Examination if the case has been accepted by the DOJ for prosecution or the case is now the subject of a Grand Jury. If so, CI must submit a memorandum to Examination advising of such. The memorandum will serve as Examination's supporting documentation to submit the case to fraud/Grand Jury suspense.

25.1.3.5  (05-27-2014)
Declined Criminal Referrals

  1. If the referral is declined, CI will complete items 10 and 11 of Form 2797 and return it to the FTA group manager via secure e-mail along with a memorandum explaining the reason(s) for the declination.

  2. The FTA group manager will forward via secure e-mail the declined referral to the referring FTA. The FTA will send the declined referral via secure e-mail to the referring compliance employee and his/her group manager. The referring compliance employee will resume the examination/collection activity once notification of the declination is received. The compliance employee and FTA will amend the plan of action (Form 11661 or Form 11661-A), which will include a schedule of future discussions, if warranted. If additional (new) firm indications of fraud develop, the case may again be referred to CI for criminal investigation consideration, as outlined in IRM 25.1.3.2.

  3. If the FTA group manager disagrees with the decision to decline the referral, the concerns will be addressed with the special agent in charge (SAC)/assistant special agent in charge (ASAC). If an agreement cannot be reached, the FTA group manager will discuss the matter with the FTA, the compliance group manager, the initiating compliance employee 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. The compliance employee should remove the case from fraud development status, if no further actions related to criminal or civil fraud development are anticipated. For Collection cases, the TC 971 AC 281 should be reversed and/or the Sub Code 910 should be removed. See IRM 25.1.8.8(4), Aging of Collection Fraud Cases, for more information. Examination cases will be returned to AIMS Status Code 12 or other appropriate status code if civil fraud (Civil Fraud Penalty and/or Fraudulent Failure to File Penalty) is not being pursued. See IRM 25.1.6.2, Procedures; IRM 25.1.7.7, Assessment Procedure for the Fraudulent Failure to File (FFTF) Penalty and IRM 25.1.7.8, Civil Closure for additional information.

25.1.3.6  (05-27-2014)
Return Preparers

  1. All potential criminal fraud referrals regarding a return preparer should be discussed with the return preparer coordinator (RPC) and the FTA.

  2. Form 2797 will be prepared, as described in IRM 25.1.3.2, when the compliance group manager and FTA agree that a return preparer is involved in criminal fraud. The compliance group manager will retain a copy of Form 2797 for the return preparer case file and the FTA will forward a copy of the Form 2797 via secure e-mail to the RPC or the returns classifying officer (RCO) if the returns are TE/GE-related. See IRM 4.1.10, Planning and Special Programs - Return Preparer Program Coordinator, for procedures relating to preparer action cases (PACs). If it is determined that the return preparer is not involved in criminal fraud, the Area RPC should be contacted for consideration of a PAC.

  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 items 1a and 1b and all entities and/or individuals, including the individual or legal entity identified in items 1a and 1b, will be listed in item 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:

    • Names of the taxpayers (i.e. clients of the return preparer/promoter);

    • Taxpayer identification numbers (TINs);

    • Tax form numbers;

    • Amount of the adjustment for each client of the return preparer/promoter; and

    • Resulting deficiencies for each client of the return preparer/promoter.

  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.

  5. See IRM 25.1.2.9, Return Preparer Fraud, for additional guidance.


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