25.1.4  Administrative Joint Investigation

Manual Transmittal

June 10, 2014

Purpose

(1) This transmits revised IRM 25.1.4, Fraud Handbook, Administrative Joint Investigation.

Material Changes

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

IRM Description of Change
Throughout Editorial changes made as necessary.
25.1.4.2(2) Clarified "group manager" .
25.1.4.3.1(1) Corrected IRM references.
25.1.4.3.2(1) Added guidance for CI initiated investigations and moved guidance for quarterly (four-way) conferences to IRM 25.1.3.4(5).
25.1.4.3.4(2) Deleted reference to Form 5345 because this form is obsolete. Corrected reference to Form 5345-B and Form 5345-D. Corrected IRM reference.
25.1.4.3.5(5) Clarified "group manager" and added IRM site for Policy Statement 5-133.
25.1.4.3.6(6) Corrected title of IRM 25.1.8.
25.1.4.3.7(3) Corrected IRM reference.
25.1.4.3.7(4) Corrected title of Form 10498-B.
25.1.4.3.7.1(10) Corrected reference to IRM Exhibit.
25.1.4.3.10(2)(a) Corrected IRM reference.

Effect on Other Documents

This IRM supersedes IRM 25.1.4 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

(06-10-2014)

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

25.1.4.1  (06-10-2014)
Overview

  1. This section assists compliance employees involved in joint investigations with Criminal Investigation (CI).

  2. A joint investigation is conducted by CI together with Small Business/Self-Employed (SB/SE), Large Business and International (LB&I), Tax Exempt/Government Entities (TE/GE), or Wage and Investment (W&I). Investigations involving alleged tax evasion, willful failure to file a tax return and willful failure to pay a tax are usually jointly investigated by CI and a civil enforcement function. The cooperating compliance employee is responsible for the examination or collection features of the investigation, for taking actions necessary to protect the interests of the Government with respect to the statutory period of assessment and/or collection, and for examination/collection actions on prior and/or subsequent years, and related returns.

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

    • A compliance-initiated criminal fraud referral (submission of Form 2797, Referral Report of Potential Criminal Fraud Cases), or

    • A CI-initiated criminal investigation

  4. There are two types of joint investigations:

    • Administrative (non-grand jury), and

    • Grand jury.

  5. Upon involvement in a joint investigation, the assigned compliance employee must verify the investigation type (administrative or grand jury). This section provides guidance for administrative joint investigations. IRM 25.1.5, Grand Jury Investigations, covers the procedures followed in grand jury investigations.

25.1.4.2  (06-10-2014)
Request for Cooperating Compliance Employee

  1. CI requests the cooperation of a compliance employee when technical assistance is needed. Generally, the assistance of an examiner is required when issues relate to tax assessments or audit issues. A revenue officer is required when issues relate to delinquent tax collection or a previous collection assignment. When needed, the request is made by the Special Agent in Charge (SAC) via Form 6544, Request for Cooperating Examiner/Revenue Officer. The SAC will forward the request to the territory manager (TM) or equivalent authorized to make the assignment (TM/equivalent).

  2. If the request is granted, the TM/equivalent will forward the Form 6544 to the group manager of the compliance employee already assigned the case or who will be assigned the case. The compliance group manager will complete the form and return it to the originating SAC within 30 days of receipt of the request, or by the agreed-upon extension date, whichever occurs later.

  3. If the reasons stated or duties requested appear unwarranted, the TM/equivalent will prepare a memorandum explaining the reason(s) for a decision not to grant the request and will forward it to the originating SAC. If the SAC does not agree with the TM/equivalent's decision, the matter will be elevated to the Compliance Area Director/equivalent and the CI Director of Field Operations. If unable to agree, the final decision will be made by the next higher level of management.

  4. CI will retain the original tax returns as evidence and provide copies of the tax returns for all open periods and for related taxpayers to the cooperating compliance employee. This should occur within 30 days of the approval of the request for a cooperating examiner or revenue officer or when the original returns are received, whichever occurs later.

  5. The cooperating examiner will request Automated Inventory Management System (AIMS) controls on all years involved in the administrative joint investigation and not currently under audit using Push Code 049 (Joint Investigation) and Project Code 096 (Request for Cooperating Officer Not Based on Examination Referral). The examiner is also responsible for monitoring the assessment statute expiration date (ASED) of the return(s) established on AIMS.

    Note:

    AIMS controls do not have to be established on returns that were inspected and determined to have no civil tax consequence.

  6. The cooperating examiner or revenue officer should review all modules and related entities under investigation, and ensure management controls and the transaction code (TC) 914 are updated to all relevant modules. The compliance employee must conduct a statute review and inform the SAC of any ASEDs and collection statute expiration dates (CSEDs) that would affect the investigation or collection of tax. The fraud technical advisor (FTA) will assist compliance employees with SAC interactions upon request.

25.1.4.3  (06-10-2014)
Administrative Joint Investigations

  1. This subsection focuses on the procedures that apply to administrative joint investigations.

25.1.4.3.1  (06-10-2014)
Duties and Responsibilities

  1. The examiner is concerned primarily with the determination of the civil tax liability and/or applicable penalties. In general, the following tasks are performed by the examiner:

    • Reconciling taxpayer’s books and records to the return;

    • Examining books and records to determine adjustments;

    • Analyzing bank accounts;

    • Verifying inventories;

    • Compiling depreciation schedules;

    • Ascertaining basis of assets;

    • Participating in interviews of the taxpayer and witnesses;

    • Computing civil tax liability for a pre-prosecution report;

    • Assisting with the computation of criminal tax liability for the Special Agent's Report (SAR);

    • Providing original tax returns to the special agent (SA) within 30 days of the joint investigation initiation or when received;

      Note:

      See IRM 4.11.17.4, Requesting Returns Filed Electronically, for guidance on requesting returns filed electronically.

    • Reviewing prior and subsequent period returns, and related returns for examination potential (see IRM 25.1.4 3.6 for procedures);

    • Protecting the Statute of limitation (SOL), see IRM 25.1.4.3.7 for procedures;

    • Maintaining a chronological record of time charged to the case, and

    • Preparing administrative file prior to placing case in fraud suspense.

  2. The revenue officer is concerned primarily with identification of assets, asset valuation, and interpretation of collection-related records and transcripts. In general, the following tasks are performed by the revenue officer:

    • Providing technical assistance regarding collection issues/processes during CI interviews with subjects and witnesses;

    • Providing advice regarding nominee, transferee and alter-ego issues;

    • Assisting with expert witness preparation and testimony;

    • Coordinating between the SA and Counsel regarding potential collection enforcement such as levy or seizure;

    • Monitoring statutes, taxpayer assets and local actions to protect the Government's interest;

    • Informing the SA when changes occur with the taxpayer and/or assets, which may affect the investigation and recommend the appropriate civil actions (including the filing of Notice of Federal Tax Lien);

    • Performing courthouse searches;

    • Interpreting collection transcripts, including Integrated Data Retrieval System (IDRS), Integrated Collection System (ICS), Automated Trust Fund Recovery (ATFR), Automated Insolvency System (AIS), etc.;

    • Initiating civil suits, when requested, such as a suit to foreclose, injunctive relief, setting aside a fraudulent transfer, and petitioning for a bankruptcy dismissal;

    • Securing original tax returns, via ESTAB, to assist in information and evidence gathering;

    • Assisting and verifying taxpayer action time-lines using IDRS and other internal resources, and

    • Protecting assets by assisting when a warrant is executed.

    Note:

    ESTAB is an IDRS command code used to establish a document request. ESTAB is followed by a letter code identifying the type of document(s) requested.

  3. The criminal component is predominant in a joint investigation. The SA's main responsibility is to gather evidence to prove criminal violation(s). The SA is responsible for the following actions as they relate to the criminal case:

    • Reading the non "custodial rights" as it relates to a jointly-conducted interview of the subject during the course of an investigation;

    • Obtaining testimony of witnesses;

    • Conducting necessary surveillance and undercover work;

    • Executing arrests;

    • Executing search warrants and/or seizures of property;

    • Developing and documenting evidence of criminal intent;

    • Computing the criminal tax liability;

    • Preparing and issuing Form 2039, Summons;

    • Scheduling and prioritizing investigative actions; and

    • Providing the examiner with a copy of the investigations subject's and related taxpayer's tax returns for all open periods within 30 days of the joint investigation initiation or when received, whichever occurs later.

  4. The compliance employee and the SA will work together in the Government's best interest and consider the following additional actions:

    • Using non-technical employees to perform voluminous and/or clerical tasks;

    • Ensuring, when feasible, both the SA and compliance employee are present at taxpayer and witness interviews, and

    • Planning the joint investigation.

25.1.4.3.2  (06-10-2014)
Required Communications

  1. CI-Initiated Investigations:

    1. When CI initiates an administrative criminal investigation, CI will send a memorandum to SB/SE Technical Services (TS) and Planning and Special Programs (PSP) (depending on the Area) to check for and cease all civil activity.

    2. If TS identifies an open civil examination, the controlling Examination group will be notified that CI has initiated an administrative criminal investigation and to immediately cease all civil activity on the case.

    3. The Examination group manager must immediately contact the assigned SA or supervisory special agent (SSA), if known, to schedule a meeting to discuss the case.

    4. The conference should include the compliance employee, his/her group manager, the SA, and the SSA. The FTA may also attend when necessary.

    5. During this conference, a decision, based on the facts and circumstances, must be reached based on whether Examination will participate in the criminal investigation as a joint investigation, conduct a parallel investigation, or suspend all civil activity and not participate in the criminal investigation. No further civil actions will be taken until the meeting occurs and a decision is made.

    6. Regardless of the decision reached, the Examination case must be placed into AIMS status code 18 and retained in the group. At a minimum, quarterly (four-way) conferences must occur.

  2. Quarterly (Four-Way) Conferences:

    1. All criminal administrative joint investigations involving cooperating compliance employees are subject to mandatory quarterly (four-way) conferences. See IRM 25.1.3.4(5), Accepted Criminal Referrals, for conference activities, and participants' roles and responsibilities for ensuring productive and informative exchanges occur within the prescribed frequency.

    2. All accepted administrative criminal referrals that are not joint investigations (no cooperating compliance employee) also require mandatory quarterly four-way conferences. See IRM 25.1.3.4(5) for conference activities in this scenario.

  3. Significant Milestones Communications - Collection:

    If a cooperating revenue officer is not assigned to the case, CI is required to update Collection management at significant milestones on accepted Collection criminal referrals. It is important that these milestones are addressed in a timely manner. The following are examples of four significant milestones for Collection criminal referrals:

    1. Active Start of the CI Investigation - Provide a CI contact person as soon as possible to Collection management. This provides Collection management with a way to communicate with CI on issues relating to the taxpayer or related entities. This applies to situations when the case assignment may not be determined at the conclusion of the 30-day meeting or upon acceptance of the referral.

    2. Expansion of CI Investigation - Notify Collection management when subsequent subjects or years are added to the referred investigation. It is important for Collection to ensure that its inventory control systems reflect CI’s involvement on all taxpayers and modules to avoid actions by other IRS divisions/functions.

    3. Case Direction - Notify Collection management whether the CI case will be worked administratively or through the grand jury process. If CI decides to discontinue the investigation, Collection will be given the opportunity to provide additional information to CI for final consideration before the case is closed.

    4. Investigation Outcome - Provide Collection management with timely notification of the investigation outcome. The outcome is important to Collection employees, in that knowledge of a successful referral enhances overall support of the National Fraud Program. Providing reasons for a declined prosecution case educates Collection employees on referral weaknesses and allows them to benefit from lessons learned and to generate solutions during future case development.

    While these milestones are important, they are not considered all encompassing. Open and continued communication with Collection is required.

25.1.4.3.3  (06-10-2014)
Jeopardy Assessments

  1. When collection of a civil liability is threatened and a jeopardy assessment is recommended, coordination among IRS functions is necessary. Care must be taken to avoid unnecessary disclosures that may place a criminal investigation or prosecution at risk. Jeopardy assessments will not be made if they imperil a criminal investigation or prosecution.

  2. Because of the urgency of jeopardy assessments, such cases must be given the highest priority by the coordinating functions. When fraud is an issue, additional approval is required from the SAC before assessment. The FTA will also be consulted if the civil fraud penalty applies.

  3. Recommendations for jeopardy assessments should be made in accordance with IRM 4.15, Jeopardy/Termination Assessments, and IRM 5.1.4, Jeopardy, Termination, Quick and Prompt Assessments.

25.1.4.3.4  (06-10-2014)
Examination Controls - AIMS

  1. In a failure to file a tax return case where Master File controls were established using push code 037 (Substitute for Return), a TC 424 record will remain on the module for 26 months or until a tax return posts, whichever occurs first. After 26 months, the TC 424 will drop from the module. If the TC 424 dropped from AIMS control prior to the case being submitted to Fraud Suspense, the examiner will re-establish the control(s).

  2. If CI inputs a TC 914 (Z) freeze before Compliance requests controls in a failure to file case where there is no TC 150 or TC 424 on the module, the examiner should request Master File controls by submitting Form 5345-B, Examination Request Non-ERCS Users, or Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users. However, the examiner must secure CI's approval prior to establishing the return control(s) on AIMS. See IRM 4.4.23, AIMS Procedures and Processing Instructions, Openings, and IRM 4.4.9.2.3.1, Criminal Investigation (CI) Freeze, for additional instructions.

  3. In cases where returns are filed and CI has a TC 914 (Z) freeze on the module, the examiner will request Master File controls using Push Code 049. The examiner must secure CI's approval prior to establishing the return(s) on AIMS.

  4. Per IRM 25.1.4.2 (5), the examiner must request AIMS controls on all years involved in the administrative joint investigation using Push Code 049, Project Code 095 (Request for Cooperating Officer Based on Examination Referral), or Project Code 096 (Request for Cooperating Officer Not Based on Examination Referral).

25.1.4.3.5  (06-10-2014)
Parallel Investigations

  1. The purpose of a parallel investigation is to balance both the civil and criminal aspects of a case under criminal investigation. Consideration should be given to continuing the civil activity of any related taxpayer and/or tax that doesn't adversely impact the criminal proceedings.

  2. Revenue officers involved in parallel investigations should follow the procedures prescribed in IRM 5.1.5, Balancing Civil and Criminal Cases.

  3. Examiners involved in parallel investigations should follow the procedures prescribed in IRM 4.32.2.6, Parallel Investigations.

  4. Policy Statement 4-26 (formerly P-4-84), Criminal and Civil Aspects in Enforcement, under IRM 1.2.13.1.11, indicates civil enforcement actions, including collection activity with respect to taxable periods of the same and other types of tax not included in the criminal investigation, generally do not imperil a criminal investigation or subsequent prosecution. The Policy Statement concludes that civil enforcement actions in these cases should proceed concurrently, unless there is agreement among the responsible functions to withhold civil action, in whole or part, during the duration of the criminal investigation.

  5. During required discussions involving the SSA, SA, compliance group manager and compliance employee, the compliance group manager may propose concurrent civil enforcement action consistent with Policy Statement 4-26 and Policy Statement 5-133, Delinquent Returns - Enforcement of Filing Requirements, under IRM 1.2.14.1.18. If the proposal is unresolved among CI and the civil function, the decision to proceed will be elevated to the next management level.

25.1.4.3.6  (06-10-2014)
Prior and Subsequent Years and Related Returns

  1. During the joint investigation, the examiner will secure all prior and subsequent period returns, and returns related to those included in the joint investigation, and will review the return(s) for examination potential.

  2. Examiners must ensure administrative actions on prior or subsequent years or related returns do not imperil a prosecution. Compliance must notify CI of any proposed action such as examining returns, soliciting consents or issuing a notice of deficiency. Form 10498-A, Intent to Commence Civil Action - Expansion of Examination, is used by Examination to notify CI of its intent to examine prior and subsequent years, or related returns. Notification of the proposed action to solicit a consent and/or issue a notice of deficiency is covered below in IRM 25.1.4.3.7, Statute Protection.

  3. The TM/equivalent will forward via Microsoft Outlook Secure Messaging, a completed Form 10498-A to the SAC indicating his/her request to examine the prior, subsequent or related tax returns. The form is used to document CI's concurrence or non-concurrence with the proposed action.

  4. If an agreement to proceed cannot be reached between Compliance and CI; the Area Director/equivalent and the CI Director of Field Operations will make the decision, consistent with Policy Statement P-4–26. If an agreement is not reached at this level, the case is elevated to the Operating Division Commissioner and Chief, CI for resolution.

  5. If civil action is suspended, the suspended years will be periodically reviewed as Compliance deems appropriate, to protect the Government’s interest.

  6. The Collection procedures are located in IRM 25.1.8, Field Collection and IRM 5.1.5.3.2, Case Monitoring When Civil Action Is Suspended.

25.1.4.3.7  (06-10-2014)
Statute Protection

  1. Compliance employees are responsible for monitoring all civil statute of limitations (SOLs) during joint investigations, including prior and subsequent years, and related tax returns under examination/collection activity.

  2. The collection procedures with respect to statute protection are located in IRM 25.1.8.9, Collection Case Disposition, and IRM 5.1.5.13.1, Cases with Imminent Statutes.

  3. Examiners must check AIMS periodically to determine if the taxpayer filed tax returns. Also, the examiner must protect the SOL(s) of any subsequent tax return filings in failure to file cases.

  4. Examiners should attempt to protect the earliest SOL of each tax return. When multiple periods are involved, examiners should protect the most imminent SOL among the tax returns. The IRC 6501(a) statute (3-year statute) expires 3 years after the date the tax return was due or filed, whichever is later. If the 3-Year SOL has expired or the taxpayer refuses to extend the period for assessment, the 6-year SOL (omission of income in excess of 25 percent of reported gross income), under IRC 6501(e), should be considered. See IRM 25.1.4.3.7.1 and IRM 25.6.22.6.17.2, More Than 25% Omission of Gross Income. All efforts should be made to secure the taxpayer's consent to extend the period for assessment before either SOL expires. The fraud SOL under IRC 6501(c) should be relied upon only as a last resort.

    Note:

    There are other IRC 6501 mechanisms where the limitations period to assess may be beyond 3 years.

  5. When fewer than 210 days remain on the SOL for assessment, the examiner should complete Form 10498-B, Joint Investigations Intent to Solicit Consent to Extend Statute, to request CI's permission to solicit the taxpayer's consent to extend the statutory period for assessment or issue a notice of deficiency. The completed Form 10498-B is sent via Microsoft Outlook Secure Messaging to the TM/equivalent for signature. The TM/equivalent forwards via Microsoft Outlook Secure Messaging the signed Form 10498-B to the SAC to request a decision on soliciting the taxpayer's consent to extend the period for assessment or on the examiner's intent to issue a notice of deficiency. CI must accept or decline the request within 10 workdays, after receipt of the Form 10498-B. See IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS and the 10498-B instructions for the procedures followed to extend the period for assessment. The signature of the SSA and the SAC, respectively, are required for approval and concurrence.

  6. If CI approves the request to solicit the taxpayer's consent to extend the period for assessment, it must be solicited via Letter 907, Request to Extend Assessment Statute, and it must be accompanied by Publication 1035, Extending the Tax Assessment Period. If the consent is solicited in person and in the presence of an SA, both Letter 907 and Publication 1035 will be presented to the taxpayer. If the consent is solicited by mail, Letter 907 and Publication 1035 will be sent to the last known address of the taxpayer. The examiner requesting the consent will document solicitation of the consent and the required notification of taxpayer's rights on Form 9984, Examining Officer's Activity Record, and Form 895, Notice of Statute Expiration, see IRM 25.6.22, Extension of Assessment Statute of Limitation By Consent. A copy of Letter 907 must be maintained in the case file. CI should be informed of the results of the solicitation of the taxpayer's consent and this action should be documented in the case history. Any subsequent inquiries from the taxpayer should be referred to the SA assigned to the case.

  7. If CI approves the decision to issue a notice of deficiency, the case will be forwarded to TS for notice preparation. TS will obtain Area/Division Counsel's concurrence prior to issuing the notice of deficiency.

  8. If a consent to extend the period for assessment is not secured, and the SAC does not approve the decision to issue a notice of deficiency, a decision must be made whether to rely on the fraud statute, IRC 6501(c)(1), and allow the 3- and 6-year periods for assessment to expire. This decision must be approved by the TM/equivalent and documented in the case file and on Form 895. Refer to IRM 25.6.23.6.6.2, Reliance on IRC Provisions Which Extend Normal Assessment Statute and IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS.

  9. The decision to allow expiration of the 3-year and/or the 6-year periods for assessment will be documented on Form 10498-B with signatures of the TM/equivalent, the SSA and the SAC. The properly-executed Form 10498-B is attached to page two of the applicable return. The SOL should be updated immediately on AIMS using the appropriate alpha code and Form 895 should also be updated to reflect the correct expiration date using the procedures in IRM 25.6.23.6.2, Completion of Form 895 by Area Office Examiner or Specialist.

  10. If agreement cannot be reached, the Compliance Area Director/equivalent and the CI Director of Field Operations will decide. If an agreement is still not reached, the issue will be elevated to the Operating Division Commissioner and Chief, CI for resolution.

25.1.4.3.7.1  (06-10-2014)
IRC 6501(e), 6-Year Statute

  1. IRC 6501(e) replaces the 3-year period for assessment with a 6-year period for assessment under certain circumstances.

    1. IRC 6501(e)(1)(A) replaces the 3-year period for assessment with a 6-year period for assessment when the taxpayer omits from gross income an amount properly includible on the taxpayer’s return that is in excess of 25 percent of the amount of gross income stated in the return. This IRC section applies only to subtitle A, income tax.

    2. IRC 6501(e)(1)(C) replaces the 3-year period for assessment with a 6-year period for assessment when the taxpayer omits from gross income an amount properly includible therein under IRC 951(a) (constructive dividends paid to U.S. shareholders of foreign controlled corporations).

  2. Fraud does not need to be proven for IRC 6501(e) to apply. However, all efforts should be made to protect the 3-year period for assessment before relying on the 6-year period for assessment.

    Note:

    This 6-year period for assessment under IRC 6501(e) has a fixed and determinable expiration date that also must be protected.

  3. The burden of proof for the omission of gross income is on the Government. Only reportable income, omitted from the return, is included in the computation. Omitted or overstated deductions and expenses are not considered in the computation.

  4. Gross income for the IRC 6501(e) computation includes, but is not limited to:

    1. Gross income in the case of a trade or business means the total of the amounts received or accrued from the sale of goods or services (gross receipts), without reduction for the costs of those goods or services.

    2. Gross income, other than from the sale of goods or services in a trade or business, has the same meaning as provided under IRC 61(a), and includes the total amounts received or accrued, to the extent required to be shown on the return. When the amounts received or accrued relate to the disposition of property, gross income means the excess of the amount realized from the disposition of the property over the unrecovered cost or other basis of the property.

    3. In the case of a partner in a partnership, gross income for this computation includes his/her share of the partnership’s gross income, not the net flow-through. Thus, a copy of the partnership return is required to correctly determine the taxpayer’s gross income.

    4. In the case of a shareholder in an S-corporation, gross income for this computation includes his/her share of the S-corporation’s gross income, not the net flow-through or distributed and undistributed taxable income. Thus, a copy of the S-corporation return is required to correctly determine the taxpayer’s gross income.

    5. Only the net amount of capital gain (sales price less cost basis) on a transaction is included in the computation. Also, capital losses on transactions may not reduce gross income because some capital losses are not netted against capital gains.

    6. In the case of a taxpayer deemed to be in the trade or business of selling stock, the gross income for this calculation is the gross sales price of the stock (no reduction for cost basis).

    7. The taxable portion of pensions and annuities are gross income.

  5. An amount is not considered as omitted from gross income if information sufficient to determine the nature and amount of the item is disclosed in the return, including any schedule or statement attached to the return.

  6. Be careful when using an indirect method of computing income. When using an indirect method of computing income, determining the understatement of adjusted gross income (which includes expenses) is not the same as the IRC 6501(e) computation of gross income.

  7. The 6-year statute can be extended on Form 872. Additional language or reference to IRC 6501(e) should not be included on the consent.

  8. If the Service proves a 25% omission of gross income, a taxpayer's entire tax year is subject to the 6-year period for assessment. Therefore, the entire year is open for adjustment, allowing the Service to determine deficiencies attributable to items other than those creating the substantial omission. Colestock v. Commissioner, 102 T.C. 380 (1994).

  9. See IRM Exhibit 25.1.4-1 for a table used to compute the omission of income. This or a similar spreadsheet must be attached to Form 10498-B to support using the statutory period under IRC 6501(e) when submitted for approval. Care should be exercised in preparing this computation, especially if the return contains income from a flow-through entity. Some common errors include failure to use net capital gains, failure to use the partner's share of partnership gross income, or using figures from an amended tax return.

  10. If a tax return contains a 25% omission of gross income, expiration of the 3-year period for assessment is imminent, and Form 10498-B has been properly executed to allow the 3-year statute to expire, the AIMS statute will be updated to the 6-year statute date (see IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS).

25.1.4.3.8  (06-10-2014)
Discontinued Investigation

  1. CI should withdraw from all investigations when it is determined the case no longer has criminal potential. The SSA will communicate the withdrawal to the cooperating employee's group manager and TS/Advisory.

  2. If Cl withdraws from the joint investigation, the SA will prepare a discontinued investigation report stating the reason(s) for the withdrawal. A copy of the report and the original tax returns will be forwarded to the field TM/equivalent. Cooperating examiners will pursue civil settlement of the case. If the joint investigation involved a revenue officer, the case will be returned to the originator. After all collection activity and enforcement efforts are exhausted, the originating revenue officer should consider whether assertion of the civil fraud penalty will be pursued through a referral to Examination.

  3. If the compliance employee's group manager objects to the proposed withdrawal, the field TM/equivalent will discuss the objection with the SAC. If agreement cannot be reached at the TM/equivalent level, the Compliance Area Director/equivalent and the CI Director of Field Operations will make the decision.

    Note:

    The compliance employee's group manager can discuss the proposed withdrawal with the FTA group manager prior to elevating it to the TM/equivalent.

25.1.4.3.9  (06-10-2014)
Preparation of the Pre-Prosecution Report

  1. Upon the completion of the joint investigation, the examiner prepares a Form 4549-A, Income Tax Examination Changes, and Form 886-A, Explanation of Items, for each adjustment (unagreed report) explaining all civil and criminal adjustments and penalties in detail. The top of the report should be labeled "Pre-Prosecution Report" . The taxpayer’s position regarding agreement or disagreement, is not necessary.

  2. The civil fraud penalty and/or the fraudulent failure to file penalty should be asserted for all applicable years. Accuracy-related and/or delinquency penalties should be proposed as an alternative position.

  3. Innocent spouse report writing procedures should be followed when applicable.

  4. The report of civil adjustments will be provided to Cl only after it has been approved by the field TM/equivalent.

  5. Upon receipt of the case file, the field TM/equivalent will review and approve the pre-prosecution report for technical accuracy. This report will be provided to Cl for use in the Special Agent’s Report (SAR).

  6. Form 4665, Report Transmittal, should be attached to the front of the Revenue Agent’s Report (RAR). The top margin of the Report Transmittal should be labeled, "Pre-Prosecution Report" and should contain:

    • Background of the case including current status.

    • Summary of SOL expiration dates for all years/periods involved.

    • Computation of 25% omission of gross income for all tax years regardless of reliance on the IRC 6501(e), 6-year statute.

    • Current power of attorney status.

    • Comments regarding innocent spouse relief under both IRC 6015 and IRC 66.

    • Recommendations regarding audit potential of subsequent-year returns and/or related returns.

    • Information of a confidential nature, including informant information.

      Note:

      The informant should not be identified by name nor should the report contain information that might reveal the identity of the informant.

    • Information that may be helpful when the case is returned for civil settlement, including potential civil issues not fully developed.

25.1.4.3.10  (06-10-2014)
Fraud Suspense

  1. Procedures for Fraud Suspense - Examination

    1. When a joint investigation is completed and CI recommends criminal prosecution, CI will send a memorandum to TS to check for and cease all civil activity. The fraud reviewer will prepare a memorandum instructing the group manager to route the case to TS for placement in fraud suspense.

    2. A period of at least one year must remain on the SOLs of the returns being transferred to TS. Otherwise, there must be joint approval (CI and Compliance) for the Service's reliance on the fraud statute (IRC 6501(c)(1) and IRC 6501(c)(2) to keep the civil action (assessment and right to collect) open. See Form 10498-B and IRM 25.1.4.3.7, Statute Protection, for detailed instructions.

    3. Examination will update the AIMS Status Code to 21 and route the case to TS. The case will remain in fraud suspense until the criminal aspects of the case have been completed.

  2. The Examination case file should contain:

    1. Sufficient documentation to support the adjustments and penalties in the RAR. See "Preparation of the Pre-Prosecution Report" in IRM 25.1.4.3.9.

    2. Original tax returns or documented requests for the tax returns, if they are not in the possession of CI or Compliance Area/Division Counsel.

    3. Signed Form 2797 reflecting "Accepted for Investigation" by CI.

    4. A current transcript reflecting TC 914 for each tax period in the case file. If TC 914 is not present, the examiner should contact the SA and request the required action.

    5. Copies of sensitive documents must not be included in the workpapers. The workpapers should make no mention of an informant or specific agencies.

    6. Check the "fraud suspense" box under "forward to Technical Services" of Form 3198, Special Handling Notice, and update AIMS to Status Code 21.

  3. Procedures for Fraud Suspense - Collection

    1. When the decision is made to suspend all collection activity, the case may be transferred to Centralized Case Processing (CCP) for monitoring. IRM 5.1.5.3.2, Case Monitoring When Civil Action Is Suspended, and IRM 25.1.8.10, Monitoring Cases Under Criminal Investigation, outline the proper steps required.

25.1.4.4  (06-10-2014)
Civil Settlement of Prosecution Cases

  1. When the criminal prosecution aspects have been completed (i.e., criminal prosecution is concluded or the criminal investigation is discontinued), CI will notify TS/Advisory of the formal closing of the criminal case by use of Form 13308, Criminal Investigation Closing Report (Tax and Tax Related Only), and advise that civil actions on the case should resume.

  2. The fraud coordinator will prepare a memorandum directing return of the case to the originating group for civil resolution. Collection procedures are located in IRM 5.1.5.13.4, Closing Cases Monitored by CCP, and IRM 5.1.5.15, Advisory Actions - Probation Cases.

  3. If the civil fraud penalty and/or the fraudulent failure to file penalty is pursued, the tax years/periods under penalty consideration will return to AIMS Status Code 17 (Fraud Development), and documented by the FTA on Form 11661, Fraud Development Recommendation - Examination.

25.1.4.5  (06-10-2014)
Special Conditions of Probation

  1. See IRM 5.1.5.15, Advisory Actions - Probation Cases, for procedures Advisory and Field Collection follow in probation cases.

  2. The court may order probation for the taxpayer as part of the sentence imposed. The order of probation may contain special conditions relating to the settlement and/or payment of civil tax liabilities and penalties. The SAC will notify TS/Advisory via Form 13308, of the special conditions of probation. TS will prepare a memorandum to the field TM/equivalent to return the case to the field for civil settlement and to consider the taxpayer's conditions of probation. The memorandum will instruct the TM/equivalent to provide a response to the SAC regarding the taxpayer's compliance with the conditions of probation no later than the closing of the case or 180 days prior to the probation expiration date, whichever occurs earliest.

  3. Cl will reverse the TC(s) 914 and establish a TC 910 control(s). The TC 910 will not be released until the special conditions of probation have been satisfied or the conditions are terminated by the court.

  4. The field TM/equivalent will prepare a response memorandum to the SAC.

  5. The response memorandum will include information relative to the taxpayer’s compliance with the conditions of probation listed in the judgement and commitment order, and should indicate any unwarranted actions.

  6. The SAC will recommend legal action if the taxpayer fails to comply with the conditions of probation.

  7. IRC 6103(h)(4) allows for disclosure of returns and return information to a U.S. Probation Officer under the following circumstances:

    1. The tax returns and tax return information must relate to a taxpayer convicted of a criminal tax violation,

    2. The U.S. Probation Officer must have the responsibility of determining compliance with the tax-related conditions of probation,

    3. The returns and return information are limited to those years specified in the conditions of probation, and

    4. The disclosure would not identify a confidential informant or seriously impair a civil or criminal tax investigation.

  8. Any disclosure to a U.S. Probation Officer must be coordinated with the Field Disclosure Manager. See IRM 11.3.22.18.2, Probation Proceedings.

Exhibit 25.1.4-1 
Percentage of Omitted Income Calculation

Note Type of Income Amount Per Return Amount Per Exam Income Omission
  Wages 0.00 0.00 0.00
  Taxable Interest 0.00 0.00 0.00
  Ordinary Dividends 0.00 0.00 0.00
  Taxable Refunds 0.00 0.00 0.00
  Alimony Received 0.00 0.00 0.00
a) Sch C Gross Receipts (GRs) 0.00 0.00 0.00
b) Capital Gains 0.00 0.00 0.00
b) Other Gains 0.00 0.00 0.00
  Taxable IRA Distributions 0.00 0.00 0.00
  Taxable Pensions & Annuities 0.00 0.00 0.00
  Sch E GRs:      
  Rental Receipts 0.00 0.00 0.00
  S-Corp GRs + Other Income X TP's Share 0.00 0.00 0.00
  P/S GRs + Other Income X TP's Share 0.00 0.00 0.00
c) Trust Flow Thru Income 0.00 0.00 0.00
  Sch F GRs 0.00 0.00 0.00
  Taxable Unemployment Compensation 0.00 0.00 0.00
  Taxable Social Security Benefits 0.00 0.00 0.00
  Other Taxable Income 0.00 0.00 0.00
  Totals 0.00 0.00 0.00
Total Income Omission Divided BY Total Amount Per Return %
  1. Gross receipts without expenses.

  2. Include net gain from each transaction. Do not include net losses.

  3. Include TP's share of the income distribution deduction shown on Form 1041.


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