25.1.3  Criminal Referrals

Manual Transmittal

December 27, 2011

Purpose

(1) This transmits revised IRM 25.1.3, Criminal Referrals:

Material Changes

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

IRM Description of Change
Throughout Replaced "examiner/revenue officer" with "compliance employee" .
Audience Replaced "Large & Mid-Size Business (LMSB)" with "Large Business & International (LB&I)" .
25.1.3.1.1
  • Rephrased paragraph (1), defined criminal criteria, and added a note that explains the inclusion of self-employment tax .

  • Deleted paragraph (2).

25.1.3.2(1)
  • Deleted "However, silence or declining to provide an affirmative yes or no on the matter is not false or deceitful."

  • Deleted the web site.

25.1.3.2(2)
  • Replaced the content in c. with "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."

  • Added "If attachments are necessary to enhance the referral, they must be inserted into the Form 2797 as a pdf file."

  • Deleted the note.

25.1.3.2(5) Deleted "(word doc file" , "(see Exhibit 25.1.3-1 for instructions)" , and "The FTA will retain a copy of the file for his/her record."
25.1.3.2(6)
  • Revised the first sentence and deleted the remaining content.

  • Deleted the footnote.

25.1.3.3(1) Replaced "evidence" with "evidence gathered to support the alleged offense" .
25.1.3.3(2) Added "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."
25.1.3.4(1) Deleted the bullet items.
25.1.3.4(2)
  • Replaced "CI reply" with "accepted referral" .

  • Replaced "to the FTA, the group manager, and the examiner/revenue officer" with "so that the FTA can send it to the referring compliance employee and his/her group manager"

  • Deleted the last sentence.

25.1.3.5(1) Replaced the entire content with "If the referral is declined, CI will complete sections 13 and 14 of Form 2797 and return it to the FTA group manager along with a memorandum explaining the reason(s) for the declination."
25.1.3.5(2)
  • Replaced "CI reply" with "declined referral" .

  • Replaced "FTA, the group manager, and the examiner/revenue officer" with "referring FTA so that the FTA can send it to the referring compliance employee and his/her group manager"

  • Replaced "continue" with "resume" .

  • Replaced "will" with "may" .

  • Replaced "above" with "in IRM 25.1.3.2" .

25.1.3.5(4) Replaced the entire content with the procedures when no further actions related to criminal or civil fraud are anticipated.
25.1.3.6 Deleted the entire sub-section.
25.1.3.7 Moved "Return Preparers" to this sub-section.
25.1.3.7(1) Replaced the content after the first sentence with "See IRM 25.1.6, Civil Fraud, concerning the assertion of penalties on the client(s) and return preparer while a case is under criminal investigation consideration or criminal investigation."
25.1.3.7(2)
  • Deleted the first sentence.

  • Added " 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." as the last sentence.

Effect on Other Documents

This IRM supersedes IRM 25.1.3 dated October 30, 2009.

Audience

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

Effective Date

(12-27-2011)

Signed Kevin McCarthy, Acting Director, Fraud/BSA, SB/SE

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 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. Criminal prosecutions serve to enhance voluntary compliance.

25.1.3.1.1  (12-27-2011)
Background

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

25.1.3.2  (12-27-2011)
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 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 fill able 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 sections 1a and 1b. All known parties involved in the fraudulent scheme (including the one identified in sections 1a and 1b) will be listed in section 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 inserted into the Form 2797 as a pdf file. The initial conference 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 meeting.

  3. The compliance employee 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 a 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 into the Form 2797 pdf file, and electronically forward it to the FTA group manager for consideration.

  6. The FTA group manager will review and approve the referral, enter the FTA Management Control Number and electronically forward it to the appropriate CI Field Office.

25.1.3.3  (12-27-2011)
Referral Evaluation

  1. Within 10 workdays of receipt of the referral, the special agent (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 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 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  (12-27-2011)
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 sections 1c, 13b, and 14 of Form 2797 and return it to the FTA group manager.

  2. CI will place TC 914 controls in the Master File. The FTA group manager will electronically forward the accepted referral to the referring FTA so that the FTA can send it 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).

  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.

25.1.3.5  (12-27-2011)
Declined Criminal Referrals

  1. If the referral is declined, CI will complete sections 13 and 14 of Form 2797 and return it to the FTA group manager along with a memorandum explaining the reason(s) for the declination.

  2. The FTA group manager will electronically forward the declined referral to the referring FTA so that the FTA can send it to the referring compliance employee and his/her group manager. The referring compliance employee will resume the examination/collection activity once he/she has received notification of the declination. 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, he/she will address the concerns with the SAC/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 with Respect to the Civil Fraud Penalty; IRM 25.1.7.7, Assessment Procedure for the Fraudulent Failure to File Penalty and IRM 25.1.7.8, Civil Closure for additional information.

25.1.3.6  (12-27-2011)
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 electronically forward a copy of the Form 2797 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 PAC's. 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 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:

    • Names of the taxpayers,

    • Taxpayer identification numbers (TINs),

    • 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.


More Internal Revenue Manual