25.1.8  Field Collection

Manual Transmittal

April 22, 2015

Purpose

(1) This transmits a revised IRM 25.1.8, Fraud Handbook, Field Collection.

Material Changes

(1) Editorial changes made throughout the document.

(2) IRM 25.1.8.2(1)g - Added fictitious partner.

(3) IRM 25.1.8.2(1)h - Clarified attempts to interfere with a tax investigation.

(4) IRM 25.1.8.2(1)j - Added example of use of undocumented workers.

(5) IRM 25.1.8.2(1)k - Added example of other business related fraud.

(6) IRM 25.1.8.2(2) - Removed OUO information and made reference to IRM 25.1.3.1.1.

(7) IRM 25.1.8.2(4) - Clarified when Letter 903 should be issued and removed Note.

(8) IRM 25.1.8.2(5) - Clarified that Letter 903 should be considered in egregious cases of noncompliance and/or when levy sources have been exhausted and the repeater or pyramiding taxpayer has no assets.

(9) IRM 25.1.8.2(6) - Removed Note as IRM 5.17.4 was published on November 12, 2014.

(10) IRM 25.1.8.3(1) - Removed reference to Exhibit 25.1.1-1 since it is covered in IRM 25.1.8.3(2).

(11) IRM 25.1.8.4(3) - Removed second Note and covered in IRM 25.1.8.4(4).

(12) IRM 25.1.8.4(4) - Clarified guidance by referring to IRM 5.8.4.19.

(13) IRM 25.1.8.4(5) - Clarified when CI will contact the taxpayer after acceptance of a referral.

(14) IRM 25.1.8.5(3) - Corrected link to FOIA Library.

(15) IRM 25.1.8.6(1) - Added general statement regarding referral for summons enforcement.

(16) IRM 25.1.8.6(4) - Added guidance on cases which may warrant additional third party contacts.

(17) IRM 25.1.8.7(3) - Clarified guidance to include actions to protect Collection statutes, dissipating assets and/or accrual of additional liabilities.

(18) IRM 25.1.8.7(4) - Deleted paragraph as this information is now contained in IRM 5.1.5 and renumbered subsequent paragraphs.

(19) IRM 25.1.8.7(6) - Deleted information in second and third sentences as that information is duplicative of information contained in IRM 25.1.4.

(20) IRM 25.1.8.8(6) - Information moved to IRM 25.1.8.8(4) and renumbered subsequent paragraphs.

(21) IRM 25.1.8.8(7) - Added instructions if the ICS subcode is not present.

(22) IRM 25.1.8.9(3) - Clarified Note for proper use of ICS subcode 910.

(23) IRM 25.1.8.9(6) - Moved to IRM 25.1.8.9(5) and renumbered subsequent paragraphs. Information in the existing Note was moved to IRM 25.1.8.9(3).

(24) IRM 25.1.8.10(1) - Added guidance that ROs must ensure that transferred cases meet CCP monitoring requirements.

(25) IRM 25.1.8.10(2) - Deleted as that information is now contained in IRM 5.1.5.

(26) IRM 25.1.8.10(3) - Clarified the guidance to be followed to transfer the case to CCP is outlined in IRM 5.1.5.13.1-3.

(27) IRM 25.1.8.10(4) to (11) - Deleted as this information is now contained in IRM 5.1.5.

Effect on Other Documents

This material supersedes IRM 25.1.8, dated July 11, 2013.

Audience

Criminal Investigation (CI), Small Business/Self-Employed (SB/SE)

Effective Date

(04-22-2015)

Maria Hwang, Director, Servicewide Operations, SB/SE

25.1.8.1  (04-22-2015)
Overview

  1. Collection is an important cross-functional partner in the detection and referral of fraud issues. The very nature of collection work lends itself to numerous areas of potential fraudulent noncompliance. The following sections highlight some of the fraudulent areas encountered in varying degrees by revenue officers (ROs). Refer to the Fraud Handbook, IRM Sections 25.1.1, Overview/Definitions, through 25.1.7, Failure to File, for detailed guidance in developing indications of fraud and completing the fraud referral process. Of particular value to ROs are the sections devoted to IRM 25.1.2, Recognizing and Developing Fraud, IRM 25.1.3, Criminal Referrals, and IRM 25.1.7, Failure to File, respectively. ROs could also refer to National Fraud Program Standard Operating Procedures, Document 12722, for invaluable assistance in recognizing and developing fraud in the collection arena.

25.1.8.2  (04-22-2015)
Trust Fund Violations

  1. A substantial part of Collection's work involves unpaid payroll taxes, under-reported payroll taxes, and delinquent Forms 941, Employer's Quarterly Federal Tax Return. Many of these cases involve prior quarters and current quarter pyramiding, multiple business entities, or a string of similar defunct businesses. When investigating cases involving unpaid payroll taxes, ROs should look for potential indicators of fraud, such as:

    1. Concealment, false statements or false documents;

    2. Abusive tax avoidance schemes regarding payroll;

    3. Unusual business practices (such as requesting certain sources of income to pay by cash or other acts of questionable ethics) which serve to circumvent normal bookkeeping practices;

    4. Disorganized or non-existent payroll records;

    5. Taxpayer paying business and personal expenses in cash, when cash payments are not customary;

    6. The owner/officers have a standard of living or lifestyle that is inconsistent with reported income;

    7. Use of nominees (wife, partner, relatives, friends, fictitious partner, other business entities, etc.) to shield business or personal assets;

    8. Business owner/officer is evasive, uncooperative, belligerent, threatening or attempts to interfere with a tax investigation;

    9. A history of non-compliance by the officers including previous entities with unpaid payroll tax liabilities;

    10. Business use of undocumented workers; and/or

    11. Other business related fraudulent activity identified in civil and/or criminal filings or other public sources.

      Note:

      Refer to IRM 25.1.2.3, Indicators of Fraud, for an expanded list of fraud indicators on trust fund and other types of cases involving potential fraud.

  2. When initial indicators of fraud are identified and warrant potential fraud development, ROs should consider the potential for:

    1. Pursuit of IRC 7201, Attempt to Evade or Defeat Tax;

    2. Pursuit of IRC 7202, Willful Failure to Collect or Pay Over Tax;

    3. Pursuit of IRC 7206(1), Declaration under penalties of perjury (i.e. false return); and

    4. Civil Injunction

    Note:

    See IRM 25.1.3.1, Overview, for factors to consider whether further development is warranted.

    Note:

    IRC 7201, 7202 and 7206(1) are felonies. IRM Exhibit 25.1.1-1, Criminal Violations, is a listing of the elements necessary for the most common statutes under which criminal prosecution may be recommended by Criminal Investigation (CI). Many of the elements associated with establishing proof of responsibility and willfulness in fraud cases are similar to those in a trust fund recovery penalty (TFRP) investigation. Therefore, ROs should continue to conduct TFRP investigations when warranted. However, ROs should be careful not to pursue potential TFRP assessments if indicators of fraud have been identified. ROs should discuss any proposed TFRP assessment with the group manager and local fraud technical advisor (FTA) when indicators of fraud have been established.

  3. The RO will discuss the case with the group manager. If the group manager concurs with the fraud potential, the RO should contact the FTA. To identify the local FTA, go to the Fraud website and select Fraud Contacts.

  4. Since IRC 7201, IRC 7202, and IRC 7206(1) prosecutions require the government to establish that responsible persons knew of their tax responsibilities and willfully failed to perform them, Letter 903,Letter to Employer - You Haven't Deposited Federal Employment Taxes, should be issued early in the development of any employment tax case where an indication of fraud is present. Although Letter 903 is primarily a warning of the potential for additional enforcement actions, it also provides specific instructions and a notice of personal responsibility to the potentially responsible individuals.

  5. Letter 903 should be considered in egregious cases of noncompliance and/or when levy sources have been exhausted and the repeater or pyramiding taxpayer has no assets in resolving or offsetting the liability. In cases where criminal charges are pursued based on the failure to adhere to the reporting and payment requirements, use Form 2797, Referral Report of Potential Fraud Cases. See IRM 5.7.2.4, Referrals For Criminal Enforcement. In cases where only civil sanctions (e.g., an injunction under IRC 7402(a)) are contemplated, see IRM 5.7.2.3,Referrals For Civil Enforcement.

  6. The RO will advise the group manager and follow guidelines for making a criminal referral (IRM 25.1.3, Criminal Referrals) or civil referral (IRM 5.17.4.17, Civil Injunctions under IRC 7402(a) to Restrain Pyramiding).

    Note:

    IRM 5.17.4.17.1 has not been updated since 2010 and continues to refer to Treas. Reg § 31.6011(a)-5 and to Form 941-M, Employer's Monthly Federal Tax Return, and to special deposit procedures that are not longer used.

  7. ROs will monitor the taxpayer's actions and keep the group manager and CI informed while the case is in fraud referral status.

  8. If the taxpayer has previously abandoned other business ventures, leaving unpaid and uncollectible tax liabilities, it may be appropriate to seek a civil injunction to stop further pyramiding. Consult with the FTA and local SB/SE Counsel when dealing with this situation.

25.1.8.3  (04-22-2015)
Evasion of Payment

  1. IRC 7201 includes two separate offenses:

    1. the willful attempt to evade or defeat the assessment of a tax; and

    2. the willful attempt to evade or defeat the payment of a tax.

    The affirmative acts associated with evasion of payment cases almost always involve some form of concealment of the taxpayer’s ability to pay the tax due and owing or the removal of assets from the reach of the IRS. It should be noted that refusing to pay taxes due, possession of the funds needed to pay the taxes, and even the open assignment of income, without more, do not meet the requirement of the affirmative acts necessary for this felony evasion charge.

  2. In addition to the affirmative acts/indicators listed in IRM 25.1.2.2,Fraud Development Procedures, other examples of affirmative acts of evasion of payment include:

    • placing assets in the names of others;

    • dealing in currency when payment of currency is not a standard business practice;

    • causing receipts to be received through and in the name of others;

    • causing debts to be paid through and in the name of others;

    • paying creditors instead of the government;

    • bankrupting a corporation and hiding the assets to avoid payment of employment taxes; and

    • a complete change of taxpayer identity.

    See IRM 25.1.8.4, Fraudulent Offers in Compromise, for examples of indications of fraud relating to false statements under penalty of perjury.

    Note:

    If someone other than the taxpayer completed and signed the Form 433-A or 433-B, the RO will need to take additional steps to substantiate perjury. Contact the local FTA for assistance.

  3. When initial indications of fraud are identified, the RO will discuss the case with the group manager. If the group manager concurs with the fraud potential, contact the FTA.

25.1.8.4  (04-22-2015)
Fraudulent Offers In Compromise

  1. IRM 5.8.10.10, Indicators of Taxpayer Fraud, provides a comprehensive discussion of indications of potential fraud warning signs most identifiable during an interview relating to Offers in Compromise. In addition to those indications of fraud, the ROs should be alert to the potential for false statements under penalty of perjury, i.e., relating to Form 433-A and Form 433-B. Examples of these include, but are not limited to:

    1. False or fraudulent valuation statements or appraisals in support of Form 433-A or Form 433-B;

    2. Sham loans and mortgages;

    3. Significant omission or asset undervaluation;

    4. Understated income;

    5. Overstated expenses;

    6. Large number of claimed dependents;

    7. Similar amounts in both checking and savings accounts (e.g. $100 or $1,000);

    8. No available credit;

    9. Similar listings for monthly income and expenses (e.g. same low wages, same child care expenses); and

    10. Reclassification of wage income.

  2. When indicators of potential fraud arise during an offer investigation, the offer specialist (OS) will follow guidelines outlined in IRM 5.8.4.18, Potential Fraud Referrals.

  3. Open criminal investigations can be identified on the Integrated Data Retrieval System (IDRS) by an unreversed TC 914, TC 916, or TC 918. Cases with a TC 910 are being monitored by CI. When these transaction codes are discovered, contact must be made with the assigned special agent (SA) and procedures in IRM 5.1.5,Balancing Civil and Criminal Cases, must be followed. It may be necessary for the group manager to contact the supervisory special agent (SSA) to determine the next appropriate action. A decision will need to be made on the appropriate actions to take and what may or may not be discussed with the taxpayer.

    Note:

    CI should be advised of the TIPRA law (Tax Increase Prevention and Reconciliation Act), which includes a provision for automatic acceptance of the offer if the IRS does not reject it within 24 months of the received date. IRS can no longer hold offers open indefinitely pending criminal investigation.

  4. OS must follow the guidance in IRM 5.8.4.19, Criminal Investigations, when an offer may be or might have been involved in a criminal investigation.

  5. If the referral is accepted, CI will make contact with the taxpayer at the appropriate time.

25.1.8.5  (04-22-2015)
Statute of Limitations

  1. The criminal statute of limitations must be taken into consideration when developing a case for fraud. It is generally six years for tax offenses.

  2. Issues regarding statutes of limitations should be discussed with the FTA during the initial stages of fraud development.

  3. Refer to the Department of Justice (DOJ) Criminal Tax Manual on Statute of Limitations which includes a reference table on the Limitations Periods for Common Tax Offenses. This Criminal Tax Manual can be found at the following website: http://www.justice.gov/tax/readingroom/foia/tax.htm.

25.1.8.6  (04-22-2015)
Summons Referral

  1. Referral for summons enforcement can be an important part of the potential fraud development process. The ability to enforce a summons is dependent upon many factors.

  2. In most instances, summons enforcement will be conducted as an IRC 7604 civil matter, through SB/SE Area Counsel, and is directed toward requiring the person summoned to comply (see IRM 25.5.10,Enforcement of Summons).

    Note:

    IRC 7602(d) does not allow a summons to be issued or enforced concerning any person if a DOJ referral has been made by the IRS for such person. A DOJ referral is in effect with respect to any person when CI recommends to DOJ either a Grand Jury investigation or criminal prosecution of such person for tax-related offenses, or DOJ requests returns or return information of such person pursuant to IRC 6103(h)(3)(B). See IRM 5.1.5.10, Administrative Summons.

  3. Criminal prosecution under IRC 7210 for failure to obey a summons is rarely utilized and should be considered only after review of IRM 5.17.6,Legal Reference Guide for Revenue Officers, Summonses, relating to criminal proceedings and civil enforcement, and consultation with SB/SE Area Counsel.

  4. In addition to considering a referral for summons enforcement, cases may warrant additional third party contacts to prove willful intent to deceive. See IRM 25.27.1, Third Party Contact Program, for guidance on third party contact information and specifically, IRM 25.27.1.3.2, Exceptions to IRC 7602(c) Notification Requirements.

25.1.8.7  (04-22-2015)
Coordination with Criminal Investigation

  1. Where CI case controls (TC 914) are active in any module, ROs will contact CI to discuss potential problems prior to initiating contact with taxpayers or their representatives (see IRM 5.1.5, Balancing Civil and Criminal Cases).

  2. When balancing civil and criminal priorities, consider the impact and/or lost revenue potential relating to:

    1. Trust Fund Recovery Penalty and Transferee assessment statute expiration dates (ASED);

    2. Collection Statute Expiration Dates (CSED);

    3. Pyramiding of collected or withheld taxes; and

    4. Collection jeopardy.

    Note:

    If a Trust Fund Recovery Penalty investigation has begun and the Letter 1153(DO), 10-Day Notification Letter, 100% Penalty Proposed Against Filer for Corporation, has already been issued to the potentially responsible officer prior to the commencement of the criminal investigation, Collection must notify CI that the letter has been issued, explain the appeal rights the taxpayer has as a result of the notification (See IRM 5.7.6.1.3,Appealing the Proposed Assessment), and determine the best course of action.

  3. Refer to IRM 5.1.5, Balancing Civil and Criminal Cases, and Policy Statement 4-26 (see IRM 1.2.13.1.11,Policy Statement 4-26 (Formerly P-4-84)) when evaluating the need for concurrent civil and criminal investigations. IRM 5.1.5 includes detailed information on required coordination efforts between CI and Collection in parallel investigations. This information includes actions necessary to protect Collection statutes, dissipating assets and/or the accrual of additional liabilities.

    Note:

    If the civil and criminal investigations are conducted simultaneously, close coordination and communication is necessary among all functions. Contact the FTA and Area Counsel for appropriate coordination and procedures.

  4. Prior to the expiration of the statute, the RO should document the Integrated Collection System (ICS) history with a summarizing statement that contains the specific MFT, tax period, amount, ASED/CSED and facts to support the decision to allow the statute to expire. The RO will obtain the appropriate managerial concurrence and input any necessary transaction codes (such as an ASED-R indicator). See IRM 5.1.5.13.1, Cases with Imminent Statutes, on how to document statute agreements between CI and Collection.

  5. If a cooperating RO is needed for a joint investigation, quarterly four-way meetings should be conducted to review the status of the investigation and plan activities to be accomplished by the cooperating officer and SA in the next quarter. See IRM 25.1.4.3, Administrative Joint Investigation, for joint investigation procedures.

    Note:

    Please refer to IRM 5.1.5.3, Resolving Conflicts Regarding Parallel Investigations, for guidance in resolving any disagreements between civil and criminal priorities.

25.1.8.8  (04-22-2015)
Aging of Collection Fraud Cases

  1. Upon concurrence of the FTA, the RO will complete Form 11661-A, Fraud Development Recommendation - Collection.

  2. The RO and FTA should identify any significant related entities with open modules that would relate to the development of the potential fraud case, identify them on the Form 11661-A and request assignment of all identified related entities to avoid action being taken on these cases that could harm a future criminal investigation.

  3. After approval of Form 11661-A by the FTA, the group manager or their designee will input ICS subcode 910 FRAUD DEVELOPMENT - FTA to the case. The ICS subcode 910 will automatically trigger input of IDRS Transaction Code (TC) 971 with Action Code (AC) 281 on the entity. The TC 971 AC 281 will stop the cycle clock and prevent the taxpayer entity from being included in systemic IDRS/Entity case aging reports.

    Caution:

    Subcode 910 and TC 971 AC 281 are not modular specific. TC 971 AC 281 can be found under IDRS command code ENMOD.

    Note:

    Although case aging is stopped during the pendency of the fraud development case, it is necessary to continue to take timely and effective case actions designed to move the case forward.

  4. The use of TC 971 AC 281 has been expanded to include:

    1. Abusive Tax Avoidance Transactions (ATAT) cases - ICS subcodes 309 to 339.

      Note:

      See IRM 5.20.2.3, Aging of ATAT and Suit Development Cases, for more information on the appropriate use of TC 971 AC 281.

      Caution:

      ATAT cases in fraud development - It is important to enter "FRD" for fraud in the Location field on ICS. This will include the case in the Area fraud report. If "FRD" is not input on the location block, the case will not be counted in the Area fraud report. See IRM 5.20.2.3(5)(c),Aging of ATAT and Suit Development Cases.

    2. Suit development cases where additional time is needed to analyze and gather the facts necessary for developing a suit recommendation.

      Note:

      See IRM 25.3.2, Suits by the United States, for more information on the appropriate use of TC 971 AC 281.

    3. Procedures must be followed with the corresponding IRMs on the appropriate use of TC 971 AC 281 for ATAT and Suit development.

  5. When the case is no longer in fraud development status or FTA involvement is withdrawn, the manager will be notified and will remove the subcode 910, FRAUD DEVELOPMENT - FTA to the case. When removing the subcode 910, answer "yes" on ICS when asked, "Is TC 972 AC 281 required to re-start the overage clock?" This will trigger the input of TC 972 AC 281 to IDRS.

    Caution:

    Do not mark “No” to this question, as the case will still appear on the 910 Report despite the removal of the subcode 910.

    Exception:

    Cases that require ICS subcodes for time charging purposes will not be updated to ICS subcode 910 when FTA assistance is present and will remain with the specialty assignment. These include specialty assignments such as ATAT - ICS subcode 309 - 339 and Offers in Compromise - ICS subcode 106.

  6. To remove the case from fraud development status, the RO must ensure that the subcode 910 has been removed on ICS and the TC 971 AC 281 has been reversed. To check for an unreversed TC 971 AC 281 on ICS, take the following steps:

    1. From the case summary screen, select "Entity Detail" .

    2. Select item "View Entity Transactions" .

    3. A listing of the Entity Transactions on the case will appear and scroll through to check for any unreversed TC 971 AC 281.

  7. If the subcode 910 is not present on the case but the TC 971 AC 281 is on the case, then select "Generate 971/972 AC 281" from the Collection Activities menu within ICS to remove the case from fraud development status. Then select "Generate TC 972 AC 281" option and submit. Next confirm that TC 972/281 will be generated by indicating "yes" .

    Note:

    Currently ICS only cases (no open tax modules) will not allow for the removal of the TC 971 AC 281 on ICS. A manual Form 4844, Request for Terminal Action, must be completed requesting the TC 972 AC 281 on ENMOD for IDRS.

25.1.8.9  (04-22-2015)
Collection Case Disposition

  1. When the RO, Collection group manager, and FTA agree that a firm indication of fraud has been established and criminal criteria has been met, a Form 2797 will be completed and all collection activity will be discontinued until further advice from CI is received. See IRM 25.1.3, Criminal Referrals.

  2. When a tax loss computation is needed to support the fraud referral, the FTA will assist the RO in pursuing a collateral referral or securing Exam assistance. Procedures for requesting a collateral referral can be found in IRM 4.1.4.3.20, Collateral Referrals.

  3. Refer to IRM 5.1.11.6.2, Referral to Criminal Investigation, for instructions relating to disposition of Delinquent Return investigations (DEL RET’s). Do not use TC 596 to close BMF DEL RET modules.

    Note:

    Subcode 910 should only be used for cases in potential fraud development, up to the point of time when CI makes their determination to either accept or decline a fraud referral. See IRM 25.1.8.8(5).

  4. Careful consideration should be given to any imminent ASED or CSED statutes that could expire during the CI investigation. Refer to IRM 25.1.8.7 and consider the need for parallel proceedings if necessary.

    Note:

    Statute expirations should be addressed prior to transferring the case to Centralized Case Processing (CCP) for monitoring.

  5. Upon acceptance of the referral, the Collection group manager will remove the ICS subcode 910 and reverse TC 971 AC 281. The RO must document the ICS history with an appropriate closing narrative that addresses any imminent statutes. If a statute will be allowed to expire during the pendency of the criminal investigation, refer to IRM 25.1.8.7, Coordination with Criminal Investigation, and secure approval for the appropriate form.

  6. CI will initiate the input of TC 914 controls to control the cases accepted for criminal investigation. If TC 914 is present in some tax periods, but not in others, ROs should contact CI to determine whether or not collection actions should be suspended and additional TC 914s should be initiated by CI. It is recommended that the RO contact their local FTA for assistance with this process.

  7. If a determination is made that some type of civil action should be taken while the criminal case is active and CI agrees with the proposed civil action, the RO should create an Other Investigation (OI) and follow the procedures in IRM 5.1.5.2, IRS Policy Concerning Parallel Investigations, for parallel investigations. The RO should input subcode 912 on the case in ICS. Subcode 912 should be used when a case has been accepted by CI and additional collection actions are necessary. Subsequent actions may include joint or parallel investigations, statute control, probation/parole, or post-sentencing compliance.

  8. If the fraud referral is declined by CI, the RO, Collection group manager and FTA should conduct a post-declination meeting to discuss the criminal referral and possible alternative means of civil closure such as referring the case to Examination for consideration of civil fraud penalties.

    Note:

    The RO must document the ICS history about the post-declination meeting and any consideration on referring the case to Examination.

25.1.8.10  (04-22-2015)
Monitoring Cases Under Criminal Investigation

  1. If the TC 914 appears on all modules and a decision has been made to suspend all civil enforcement activities on the case, CCP may assume monitoring responsibilities for the case. ROs must ensure that transferred cases meet CCP monitoring requirements. See IRM 5.1.5.13, Transferring Cases to Centralized Case Processing (CCP).

    Note:

    See IRM 5.7.3.8, Reporting Expiration of the TFRP Statute, for procedures for reporting the expiration of the TFRP statute and IRM 5.1.19.5,Imminent CSEDs, for procedures for imminent CSEDs, as well as the process outlined in IRM 5.1.5.13.1,Cases with Imminent Statutes, to document agreement between CI and Collection to allow the expiration of an imminent statute due to ongoing criminal investigative actions.

  2. To transfer the case to CCP, ROs must follow guidance outlined in IRM 5.1.5.13.2,Procedures for Transferring Cases to CCP.


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