25.1.7  Failure to File

25.1.7.1  (10-30-2009)
Overview

  1. This section discusses the various procedures concerning fraud in a failure to file case.

  2. Willful failure to file a tax return is a misdemeanor pursuant to IRC § 7203. In cases where an overt act of evasion occurred, willful failure to file may be elevated to a felony under IRC § 7201, Tax Evasion.

  3. If failure to file a return is fraudulent, a civil penalty known as the "fraudulent failure to file (FFTF) penalty" may apply under IRC § 6651(f). This penalty may apply to all returns due after 12/31/1989 (determined without regard to extensions).

    Note:

    The civil fraud penalty may be applied to all returns required to be filed on or before 12/31/1989.

  4. Specific guidance on fraud indicators and the development of fraud can be found under IRM 25.1.1 and 25.1.2.

  5. IRM 20.1 provides specific procedures for assertion of the FFTF penalty.

25.1.7.2  (10-30-2009)
Pre-screening Non-filers

  1. On the initial screening of a non-filer case, the compliance employee must determine if the facts indicate potential fraud. Indicators of fraud to be considered, in addition to those previously identified in IRM 25.1.2, are as follows:

    • History of non-filing or late filing and an apparent ability to pay;

      Note:

      This indicator of fraud is insufficient support for assertion of the FFTF penalty when not in combination with any of the other fraud indicators listed below.

    • Repeated contacts by the Service;

    • Knowledge of the filing requirements (i.e., advanced education, business (especially tax) experience, record of previous filing etc.);

    • Failure to reveal or attempts to conceal assets;

    • Age and occupation of the taxpayer;

    • Substantial tax liability after withholding credits and estimated tax payments;

    • Large number of cash transactions (i.e., purchases by cash and large cash deposits evidenced by a currency and banking retrieval system (CBRS) printout), payment of personal and business expenses in cash when cash payment is unusual and/or the cashing (as opposed to the deposit) of business receipts;

    • Indications of significant income per Information Return Processing (IRP) or Taxpayer Delinquency Investigation (TDI) documents (i.e., substantial interest and dividends earned, investments in IRA accounts, stock and bond transactions, high mortgage interest paid);

      Note:

      Consideration should be given to any allowable expenses the taxpayer may have to offset self-employment income.

    • Refuses or is unable to explain the failure to file;

    • Experience of the taxpayer in tax matters such as a law professor, CPA or tax attorney; and,

    • Prior history of criminal tax prosecutions for Title 26 violations.

  2. If indications of fraud exist, the compliance employee will discuss the case with the group manager. If the group manager concurs that the possibility of fraud exists, the fraud technical advisor (FTA) will be contacted. Whenever feasible, a meeting will be held between the compliance employee, group manager and FTA to discuss the need for fraud development.

  3. If the possibility of fraud exists:

    1. DO NOT SOLICIT tax returns. If returns are submitted, they should be accepted.

    2. DO NOT VOLUNTEER ADVICE to the taxpayer concerning any course of action he/she should follow.

    3. DO NOT DISCUSS tax liabilities, penalties, fraud, or criminal referral possibilities with the taxpayer.

25.1.7.3  (10-30-2009)
Audit Information Management System (AIMS) - Examination Function only

  1. In non-filer cases where a criminal referral is probable and where it is determined that a substitute for return (SFR) should not be posted to the Master File, use push code 037, potential criminal investigation referral/non-filer. The Audit Information Management System (AIMS) will remain a skeletal base until a transaction code (TC) 150 posts. Otherwise, use push code 036, non-filer, and an SFR will be generated.

  2. The AIMS project code should be changed to 0149, non-filer referral for fraud, if a criminal referral is probable.

25.1.7.4  (10-30-2009)
Development of Fraud

  1. If there are indicators of fraud that warrant fraud development, the FTA will recommend updating the case on AIMS to Status 17, Fraud Development, via Form 11661, Fraud Development Recommendation - Examination. The examiner will update the case to AIMS status code 17 and proceed to develop the potential fraud issue(s) with the guidance and recommendations of the group manager and the FTA. The following actions should assist the employee in establishing affirmative acts (firm indications) of fraud:

    1. Interview the taxpayer to determine the reason or the intent of the taxpayer’s noncompliance.

    2. Ask sufficient questions to determine the extent of the delinquency, including the periods and tax due.

    3. Document verbatim, if possible, the questions asked and the taxpayer’s response or lack of response.

    4. Identify any personal reasons that could affect the taxpayer’s ability to comply. If the information is unavailable from the taxpayer, attempt to secure the information from third party sources.

    5. Attempt tp get a definitive statement from the taxpayer regarding additional expenses not listed in the books and records. These expenses could include, but are not limited to, expenses paid in cash or "under-the-table " payments to employees.

    6. Attempt to establish year-end cash on hand for each year under investigation.

  2. Verify income from all available sources. Methods of income verification include, but are not limited to:

    1. Currency, Banking, and Retrieval System (CBRS) data;

    2. Information Data Retrieval System (IDRS) via: INOLE, IROLE, SUPOL, IRPTR, IRPOL;

    3. Securing copies of Forms W–2 from employers and Forms 1099 from customers;

    4. Securing copies of checks issued to the taxpayer from Form 1099 issuer(s);

    5. Examining the taxpayer’s books and records of income and expenses;

    6. Reviewing the last return filed. This will assist in identifying income sources as well as deductions and exemptions used in tax computations; and

    7. Securing current financial information including a check of public records for assets, and a physical observation of the taxpayer’s residence, place of business and/or other identified properties. This information will be used to determine whether the taxpayer had the ability to pay the taxes owed when the return(s) was required to be filed.

  3. Access to a full credit report is governed by the Fair Credit Reporting Act (Act). In addition to releasing credit reports based on five " permissible" purposes, the Act also provides for the release of credit reports compelled by a court order or in accordance with the consumer's written instructions. The Federal Trade Commission also interprets the Act as allowing consumer reporting agencies to release full credit reports in compliance with a summons issued under IRC § 7609. In cases where a taxing authority creditor, such as the Service, has taken steps to reduce the taxpayer's (consumer's) liability to judgment, imposed a lien on the taxpayer's property or entered into an offer-in-compromise or settlement agreement to dispose of the liability, a credit relationship exists as contemplated by the Act. Under those circumstances, the Service may obtain a full credit report of a sole proprietor, partner or fiduciary without a court order, summons or written permission. If subsequent to receipt of a full credit report for a Balance (BAL) DUE investigation, fraud is discovered on a delinquent return (DEL RET) or a previously filed return, or unreported income is discovered, a summons must be issued under IRC § 7609 for another credit report. Finally, in order to use a full credit report as a basis for a referral to CI, a summons must be issued in accordance with IRC § 7609, because of the third party record keeper notice requirement. However, the Service may not obtain a full credit report of a sole proprietor, partner or fiduciary without a summons where there is no lien against the individual taxpayer.

25.1.7.5  (01-01-2003)
Criminal Referral

  1. Contact the FTA for the criminal criteria when considering submission of a criminal fraud referral of a non-filer.

  2. When the group manager and the FTA concur that firm indications of fraud exist and criminal criteria are met, the compliance employee will prepare Form 2797, Referral Report of Potential Criminal Fraud Cases . The Form 2797 should be prepared as described in IRM 25.1.3.

25.1.7.6  (10-30-2009)
Secured Delinquent Return (DEL RET)

  1. Compliance employees should consider referring a DEL RET having a substantial understatement of income and/or substantial overstated deductions to, Criminal Investigation (Cl) for criminal investigation consideration, if it is determined that the substantial understatement of income and/or substantial overstated deductions are fraudulent and criminal criteria are met. The group manager and the FTA should become involved as discussed in IRM 25.1.7.5.

  2. If failure to file and the DEL RET are fraudulent, assertion of both the FFTF penalty (based on the FFTF net amount due) and the civil fraud penalty (based on the DEL RET deficiency) should be considered. Again, the group manager and the FTA should become involved as discussed in IRM 25.1.7.5.

  3. Collection function employees should consider a referral to the examination function Planning and Special Programs office (PSP), for FFTF penalty and civil fraud penalty consideration, if the DEL RET(s) is fraudulent and criminal criteria are not met. The referral information (including identifying taxpayer information) should be placed on a memorandum and forwarded to the Area PSP for assignment consideration.

25.1.7.7  (10-30-2009)
Assessment Procedure for the Fraudulent Failure to File (FFTF) Penalty

  1. If the taxpayer files a DEL RET, the limitation period for assessment begins to run. Thus, the portion of the FFTF penalty, based on the tax reported on the delinquent return, is immediately assessable and should be assessed as soon as possible after the return is filed. Written pre-assessment approval by the immediate supervisor is required. See IRM 20.1.2.7(8)

  2. The portion of the FFTF penalty, based on the tax reported on the DEL RET, is not subject to deficiency procedures and should not be included in the notice of deficiency. However, if the delinquent filing results in a deficiency, only that portion of the FFTF penalty attributable to the deficiency should be included in the notice of deficiency.

    Note:

    To ensure case facts support fraud and because the assessment of a FFTF penalty attributable to the amount originally shown on a return is not reviewable by the Tax Court, all 30-day letters proposing a FFTF penalty on a deficiency must be reviewed and approved by Area Counsel prior to issuance. See IRM 20.1.2.7(7).

25.1.7.8  (10-30-2009)
Civil Closure

  1. If the criminal criteria are not met, the compliance employee will complete the examination and attempt to secure the unfiled return(s).

  2. Compliance employees should contact the FTA, if necessary, for assistance in developing the FFTF penalty. Further direction on assertion of the penalty is contained in IRM 20.1, Penalties Handbook.

  3. Penalty under IRC § 6651(f) or § 6663 should be proposed only where evidence clearly indicates the non-filer fraudulently failed to file a return and/or filed a fraudulent DEL RET to evade tax. Penalties should not be used as a bargaining tool.

  4. In non-filer cases, prosecuted under IRC § 7203 returned for civil settlement, a conviction of willful failure to file a Federal return only collaterally estops a taxpayer from denying liability under IRC § 6651(a), the delinquency penalty. The FFTF penalty and/or the civil fraud penalty is not automatic.

  5. If the non-filer is prosecuted under IRC § 7201, the fraud penalty is automatic and the taxpayer is collaterally estopped from denying liability for the civil fraud penalty or the FFTF penalty.

  6. The mere fact of failing to file a return does not constitute sufficient evidence to sustain fraud. Overt acts of evasion must be identified to impose the FFTF penalty. In addition to the previously listed firm indications of fraud, the following examples can apply to failure to file cases:

    1. Attempts by the non-filer to conceal or transfer assets to evade collection of tax subsequently assessed;

    2. Taxpayer furnishes a false W–4 to his employer; and/or

    3. Taxpayer’s use of dummy business entities, bank accounts opened under assumed names and use of false taxpayer identification numbers in an attempt to conceal the source of income or identity of the owner.

  7. Area Counsel must provide written approval for non-assertion of the FFTF penalty, if criminal prosecution of a taxpayer has been recommended by CI to the Department of Justice.


More Internal Revenue Manual