25.1.10  LB&I Fraud Procedures

Manual Transmittal

March 20, 2015

Purpose

(1) This transmits revised IRM 25.1.10, LB&I Fraud Procedures.

Material Changes

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

IRM Description of Change
Title Changed to LB&I Fraud Procedures.
Audience Added Tax Exempt/Government Entities (TE/GE).
25.1.10.1(1) Clarified that this section provides additional guidance to LB&I employees.
25.1.10.1(2) Moved information about fraud technical advisors to 25.1.10.2(2).
25.1.10.1(3) Stated the responsibilities of the LB&I PFTG Senior Program Analyst and explained that each industry within LB&I has a designated fraud coordinator to assist and act as a liaison for each industry.
25.1.10.1(4) Provided a link to the LB&I Fraud Program web site.
25.1.10.2(1) Emphasized that the procedures in IRM 25.1.1 and 25.1.2 should be reviewed.
25.1.10.2(2) Moved information on the role of the FTA from IRM 25.1.10.1(2).
25.1.10.2(3) Moved information on the role of LB&I Counsel from IRM 25.1.10.3.
25.1.10.2(4) Clarified the use of the Form 11661.
25.1.10.2(5) Explained how the Form 11661 is used to update a case to fraud development status.
25.1.10.3 Moved from IRM 25.1.10.4.
25.1.10.3.1 Moved from IRM 25.1.10.5.
25.1.10.3.1(2) Outlined timeframes for CI to meet with the referring team.
25.1.10.3.1(3) Guidance provided on when a case should be updated to status 18.
25.1.10.3.1(4) Provided guidance on declined referral meetings.
25.1.10.3.1(5) Provided guidance on FTA attendance of meetings.
25.1.10.4 Section added to provide guidance on administrative investigation procedures.
25.1.10.5 Section added to provide guidance on grand jury investigation procedures.
25.1.10.6 Updated guidance on fraud and grand jury suspense procedures.
25.1.10.7 Moved from IRM 25.1.10.8.
25.1.10.7(2) Added guidance as to when civil fraud penalties are appropriate.
25.1.10.7(3) Added guidance that LB&I Counsel and the FTA will work together with the team to ensure that the fraud penalty narrative does in fact support assertion of a fraud penalty.
25.1.10.7(4) Provided civil case closing requirements.
25.1.10.7(5) Added reminder that LB&I Counsel approval is required for all statutory notice of deficiency cases in which a civil fraud and/or fraudulent failure to file penalty is asserted.
25.1.10.8 Moved from 25.1.10.7.
25.1.10.8(2) Provided guidance as to when a parallel investigation should be considered.
25.1.10.9 Added procedures for LB&I cases involving criminal restitution assessments.
25.1.10.10 Added guidance for CI initiated cases.
25.1.10.11 Moved from IRM 25.1.10.9.
25.1.10.11(2) Added physical mailing address for Form 5346.

Effect on Other Documents

This material supersedes IRM 25.1.10, dated November 8, 2012.

Audience

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

Effective Date

(03-20-2015)

Maria Hwang, Director, Servicewide Operations, SB/SE

25.1.10.1  (03-20-2015)
Overview

  1. This section provides additional guidance to Large Business and International (LB&I) employees. The procedures prescribed in Sections 25.1.1, Overview/Definitions, through 25.1.7, Failure to File, should be followed unless otherwise specified in this section.

  2. The detection and deterrence of fraud is every compliance employee's responsibility and should be a top priority when discovered. Active involvement of the team manager is essential to the success of a fraud referral. When an examiner suspects a potentially fraudulent situation, the employee will discuss the case, at the earliest possible convenience, with his/her manager.

  3. The LB&I Pre-Filing and Technical Guidance (PFTG) Senior Program Analyst is responsible for all policy and program issues. Each industry within LB&I has designated a fraud coordinator to assist and act as a liaison for their industry.

  4. The LB&I Fraud Program web site http://lmsb.irs.gov/hq/pqa/Post-filing/fraud_LMSB_home.asp contains additional information and contact listings.

25.1.10.2  (03-20-2015)
Fraud Development within LB&I

  1. The procedures prescribed in Sections 25.1.1, Overview/Definitions, and 25.1.2, Recognizing and Developing Fraud, should be reviewed.

  2. The fraud technical advisor (FTA) Program is a service-wide program administered by seven groups. The groups are comprised of revenue agents and revenue officers who are located strategically throughout the country to assist with the development of fraud. The FTA plays a vital role and must be consulted in all cases involving potential criminal fraud, as well as cases that have potential for a civil fraud penalty. A geographical list of the FTAs and their managers is available on the LB&I Fraud Program web site.

  3. LB&I Counsel established a counter-fraud working group to monitor fraud issues and to ensure consistency in fraud matters. LB&I attorneys will work with the teams and the FTAs to review and provide assistance on all criminal fraud referrals and cases involving assertion of the civil fraud penalty and/or the fraudulent failure to file penalty. Except as required in IRM 25.1.7.7(2) and IRM 25.1.10.7(5), the timing of advice or involvement of LB&I Counsel will be left to the discretion of the team manager. LB&I Counsel involvement does not replace the requirement to contact and include the FTA.

  4. If the examiner, his/her manager, and the FTA agree that the potential for fraud exists, the revenue agent must prepare the Form 11661, Fraud Development Recommendation - Examination. The FTA comments and specific action plan is mandatory and must be included on the Form 11661 submitted for approval. See IRM 25.1.2.2(3) and IRM 25.1.2.2(4), Fraud Development Procedures.

  5. An approved Form 11661 places a case in Fraud Development status. Team managers must update Audit Information Management Systems (AIMS) to status code 17. Case development should continue in accordance with the FTAs Plan of Action. A case must not be placed in or out of fraud development status without consulting the FTA. If a disagreement exists on whether a case should be in fraud development status, contact the PFTG Senior Program Analyst for assistance.

25.1.10.3  (03-20-2015)
Referrals to Criminal Investigation (CI)

  1. See IRM 25.1.3, Criminal Referrals.

  2. The examiner and team manager must sign Form 2797, Referral Report of Potential Criminal Fraud Cases, for referrals of privately-held entities or individuals. Referrals related to publicly-traded entities or any case deemed highly sensitive must additionally be coordinated with the PFTG Senior Program Analyst.

25.1.10.3.1  (03-20-2015)
Referral Evaluation

  1. See IRM 25.1.3.3, Referral Evaluation, IRM 25.1.3.4, Accepted Criminal Referrals, and IRM 25.1.3.5, Declined Criminal Referrals.

  2. CI is required to meet with the referring team within 10 workdays of receipt to evaluate and discuss the referral. Within 30 workdays (60 workdays for international referrals) of referral receipt, the same individuals must meet again to discuss CI's decision to accept or decline. LB&I considers the timing and meeting discussions to be critical to effective case management. Whether CI accepts or declines the referral, either a face-to-face meeting (when feasible) or call should always occur. E-mails for this purpose are never advised in order to avoid any potential misunderstanding.

  3. If accepted, the team manager must immediately update the case to AIMS status code 18. The referring agent will serve as the cooperating agent if requested by CI on Form 2797. CI is not required to complete Form 6544, Request for Cooperating Examiner, for LB&I referrals. The 30 day meeting will be the first opportunity to plan or discuss civil actions (statute extensions, related investigations, etc.) as well as the duties of the cooperating agent.

  4. If declined, the 30 day face-to-face meeting is critical to assure that the team fully understands CI's reasons for the declination. The team should not waive this meeting.

  5. The FTA should (schedule permitting) be included in all meetings. The PFTG Senior Program Analyst may be included if there are concerns or questions.

25.1.10.4  (03-20-2015)
Administrative (Non-Grand Jury) Investigations

  1. See IRM 25.1.4, Administrative Joint Investigations.

  2. Administrative cases remain with the team in AIMS status code 18 until either the CI investigation is completed, discontinued, or a grand jury investigation is approved. The referring/cooperating agent may have full access to all documents secured by CI during the course of the investigation.

  3. See IRM 25.1.4.3.1, Duties and Responsibilities, for the role of the cooperating examiner in a joint administrative investigation.

  4. Quarterly conferences are critical to the effective management of cases referred to CI. CI retains primary responsibility to schedule these meetings every 90 days commencing after the referral is accepted. Team Managers should assure these meetings are held timely and documented by CI as required on Form 6084, Quarterly Joint Workplan and Conference Memorandum. Face-to-face or conference calls are preferred. E-mail only updates are not recommended. See IRM 25.1.3.4(5), Accepted Criminal Referrals, for more information on quarterly conferences involving a cooperating agent in an administrative joint investigation.

  5. Quarterly conferences are also required for all accepted criminal referrals where the referring revenue agent is not asked to participate as the cooperating agent. In this scenario, the mandatory quarterly conferences are designed to inform the referring team of the updated investigation status. All documents secured by CI and information learned during the course of the investigation may be freely shared with the team during an administrative investigation.

25.1.10.5  (03-20-2015)
Grand Jury Investigations

  1. See IRM 25.1.5, Grand Jury Investigations. Grand jury investigations can be very complex and involve Federal Rules of Criminal Procedure, Rule 6(e). When an examiner is going to be involved in a grand jury investigation, it is highly recommended that the team manager seek immediate advice from the PFTG Senior Program Analyst.

  2. LB&I employees will be assigned to grand jury cases and placed on the Grand Jury list when requested by CI. LB&I team managers should not be placed on the grand jury list.

  3. If the case is grand jury, all quarterly conference participants must be on the Rule 6(e) list. See IRM 25.1.5.3, Cooperating Grand Jury Examiner/Revenue Officer Procedures, for more information on quarterly conferences and the role of a cooperating examiner in the grand jury investigation.

  4. If the LB&I team is examining a related case or is participating in a parallel civil investigation, a separate quarterly meeting will be required with that team as well. No grand jury information can be discussed; however, issues such as the status of the case, statutes, or timing of various activities may be discussed without violating grand jury rules. Examples of status updates may include the following:

    1. The special agent (SA) is writing the special agent's report (SAR);

    2. The SA is discontinuing the case;

    3. The case is being forwarded to Department of Justice (DOJ) - Tax or the Assistant United States Attorneys (AUSAs) office; or

    4. The case is going to trial, etc.

25.1.10.6  (03-20-2015)
General Fraud and Grand Jury Suspense Procedures

  1. See IRM 25.1.4.3.10, Fraud Suspense, for procedures for general fraud suspense. When a joint administrative investigation is completed and CI recommends criminal prosecution, LB&I teams must forward the case to Technical Services using AIMS status code 21. Technical Services will update the case to AIMS status code 32 and hold the case in fraud suspense until the criminal case is completed.

  2. See IRM 25.1.5.2, Grand Jury Suspense, for procedures for grand jury suspense. CI may request a grand jury investigation at any point in the investigation. If a grand jury investigation is approved, it is critical that LB&I suspend all actions unless a parallel investigation is approved. See IRM 25.1.10.8 below. The LB&I team must forward the case to Technical Services using AIMS status code 21. Technical Services will update the case to AIMS status code 36 and hold the case in fraud suspense until the criminal case is completed.

  3. All questions regarding suspense issues should be discussed with the respective industry fraud coordinator.

  4. The examiner may contact the Technical Services Fraud and Grand Jury Suspense Coordinator http://mysbse.web.irs.gov/examination/tip/fraud/contacts/11888.aspx for additional guidance on preparing the case for transfer to suspense.

25.1.10.7  (03-20-2015)
Civil Fraud

  1. See IRM 25.1.6, Civil Fraud.

  2. Civil fraud penalties will be asserted when there is clear and convincing evidence establishing that some part of the underpayment of tax is due to fraud. A civil fraud penalty may be developed based on facts and circumstances from a civil examination, a case initiated by CI, or from a post prosecution case.

  3. The FTA and LB&I Counsel should work jointly with the team to develop and ensure that the fraud penalty narrative does, in fact, substantiate the assertion of the civil fraud and/or fraudulent failure to file penalty. The FTA will indicate his/her concurrence with the assertion of the civil fraud penalty and/or fraudulent failure to file penalty on Form 11661. This concurrence is mandatory.

  4. Cases developed for civil fraud must be in AIMS status code 17. Case closing requires:

    1. Form 5344, Examination Closing Record, to capture the following information in item 38:

      • Enter "F" if criminal prosecution has been successfully concluded;

      • Enter "C" if the 75% fraud penalty was asserted under IRC 6663; or,

      • Enter "B" if both apply.

    2. Form 3198, Special Handling Notice, must be used for routing of civil fraud penalty cases. The revenue agent identifies the applicable penalty code section and computed penalty amount for each tax period on this form and provides any special closing instructions for Centralized Case Processing.

  5. LB&I Counsel must approve the civil fraud penalty and/or fraudulent failure to file penalty prior to issuance of a statutory notice of deficiency. If a statutory notice of deficiency is anticipated, early involvement of LB&I Counsel is recommended.

25.1.10.8  (03-20-2015)
Parallel Investigations

  1. See IRM 25.1.4.3.5, Parallel Investigations, and Policy Statement 4-26 (Formerly P-4-84) located at IRM 1.2.13.1.11.

  2. LB&I cases typically involve many entities and individuals. The purpose of a parallel investigation is to balance both the civil and criminal aspects of a case under criminal investigation. The team manager and/or examiner should discuss the potential parallel investigation with the Senior PFTG Program Analyst. LB&I team managers must discuss with CI the possibility of continuing civil activity on related taxpayers and/or tax that does not adversely impact the criminal proceeding.

25.1.10.9  (03-20-2015)
Criminal Restitution

  1. Contact the PFTG Senior Program Fraud Analyst for guidance and procedures for any case received with criminal restitution assessed.

  2. Refer also to IRM 25.26, Special Topics, Restitution, for additional information.

25.1.10.10  (03-20-2015)
CI Initiated Cases

  1. CI initiates many investigations during each year. In addition, the DOJ and US Attorney’s office will request assistance for their cases. This may require LB&I agents to cease all civil activity on an open examination, request a parallel investigation, or provide technical tax law assistance when requested.

  2. If LB&I managers receive a request from CI to cease civil activity on a taxpayer that has not been referred, cease all contact as requested. Contact the PFTG Senior Analyst immediately for additional guidance.

  3. If an LB&I manager receives a request for a cooperating agent for a CI initiated case (non-referral), then:

    1. For a domestic case he/she should advise CI to send the request to the PFTG Senior Program Analyst for assignment; and,

    2. For an international case the request for assistance should be e-mailed to lbi.iic.requests.and.leads.from.ci@irs.gov.

25.1.10.11  (03-20-2015)
Third Party Examinations

  1. Potential third party examinations that have indications of fraud should be secured for examination by the same LB&I team. If the identified third party is located outside the team's geographical area, or it is determined that the examination should be assigned to another operating division, prepare Form 5346, Examination Information Report, and forward it to:
    LB&I Ogden PSP - Attention: LB&I Info Item Classifier M/S 4912
    1973 N. Rulon White Blvd
    Ogden, UT 84404


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