4.8.2  Case Processing (Cont. 1)

4.8.2.10 
Suspense Cases

4.8.2.10.3 
Fraud and Grand Jury Suspense

4.8.2.10.3.4 
Statute Protection

4.8.2.10.3.4.4 
Form 10498-B,

4.8.2.10.3.4.4.1  (06-27-2013)
Soliciting a Consent - Approved

  1. When the signed Form 10498-B approving the solicitation of a consent is returned by the Technical Services territory manager, the suspense clerk (if applicable) will prepare a Letter 907, Request to Extend Assessment Statute, and the consent. The Letter 907, consent, and Pub 1035, Extending the Tax Assessment Period, will be sent to the taxpayer and power of attorney, if applicable, and copies will be maintained in the case file. Please refer to IRM 25.6.22, Extension of Assessment Statute of Limitations By Consent, where CI grants permission to either solicit by mail or in person.

  2. If no response is received to the first solicitation by mail, a follow-up request on Letter 928, Request to Extend Statute - Follow Up Letter, is sent.

4.8.2.10.3.4.5  (06-27-2013)
Allowing the Statute to Expire

  1. To allow any live (e.g. IRC 6501(a), (c)(8), (c)(9), (c)(10), (e), etc.) statute to expire, Form 10498-B must be executed by the supervisory special agent, the special agent in charge (or delegate), and the Technical Services territory manager. After permission is obtained to allow a statute to expire (meaning that the taxpayer did not execute a statute extension and examination concurs with a recommendation by CI that civil action to protect the statute should not proceed), Form 5348, AIMS/ERCS Update (Examination Update), must be used to update the statute. For Technical Services cases only, if any other live statute applies (for example, a six-year statute in the case of a 25% omission of income), it must be used in lieu of "CC" . If more than one live statute is applicable, the most conservative live statute date is used on AIMS, and Form 895 must be notated to explain any other applicable live statutes. If the six-year statute under IRC 6501(e) is applicable, the statute should be updated to the actual six-year statute and not the alpha "NN" statute. Form 895 is updated and initialed by the reviewer and manager. Permission to allow a statute to expire using the Form 10498-B is only valid if the statute expires while it is under control of CI or the Assistant US Attorney.

4.8.2.10.3.4.5.1  (06-27-2013)
IRC 6501(e), Six Year Statute

  1. If a taxpayer omits from gross income an amount in excess of 25% of the amount of gross income reported on the return, IRC 6501(e) provides a six-year statute of limitations. The burden of proof is on the government. If a return contains a 25% omission of income, the three-year statute is close to expiring, and Form 10498-B has been properly executed to allow the three-year statute to expire, AIMS will be updated to reflect the actual six-year statute (alpha code "NN" will not be used). Only after the six-year statute has expired will the fraud statute under IRC 6501(c) be relied upon, if Form 10498-B is used to allow the six-year statute to expire.

  2. A computation detailing the 25% omission of income such as Exhibit 4.8.2-8 (or workpaper located in Office Documents in RGS) and a memorandum summarizing the facts of the case will be attached to Form 10498-B. Care will be exercised in preparing this computation, especially if the return contains income from a flow through entity. Refer to IRM 25.1.4..3.7.1(4), IRC § 6501(e), 6-Year Statute, for the income to include in the omission of income computation.. Some common errors are:

    1. Using the wrong numerator and denominator

    2. Not using net capital gains

    3. Not using the partner's share of the partnership gross income

    4. Using figures from an amended return

    5. Failing to exclude from omitted income any items adequately disclosed on the return as filed

4.8.2.10.3.4.5.2  (06-27-2013)
IRC 6501(c)(1), False or Fraudulent Return

  1. IRC 6501(c)(1) provides that in the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for the collection of such tax may begin without assessment, at any time.

4.8.2.10.3.4.5.3  (06-27-2013)
IRC 6501(c)(2), Willful Attempt to Evade Tax

  1. In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by Subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may begin without assessment, at any time.

  2. The statute will be updated to "CC" if:

    • A return in suspense does not have a 25% omission of income (IRC 6501(e)) and the three-year statue will shortly expire and Form 10498-B has been secured, or

    • The six-year statute for IRC 6501(e) will shortly expire and Form 10498-B has been secured.

4.8.2.10.3.4.6  (06-27-2013)
All Suspense Cases

  1. At least every six months, each tax year in fraud suspense must be verified. Suspense Type 591/592 should be input on each tax year when the case is updated to Status Code 32/36, and the ERCS six-month default action date should be input. ERCS suspense reports should be used to determine which cases are due for a six-month check. See Exhibit 4.8.2-7 for recommended six-month check procedures.

  2. At a minimum, there should be some form of a contact with CI on every case in suspense to ensure that there is still an active investigation. If no information is contained on the activity record regarding the case status within the last 6 months, CI should be contacted.

  3. Other actions that should be taken at each six-month action date include Z-freeze/TC 914, ERCS coding, Form 895, and check for returns filed since last periodic check.

4.8.2.10.3.4.7  (06-27-2013)
Non-Filer Cases

  1. At least every six months, each non-filed tax year should be checked for indications of filing. Due to the often lengthy prosecution time frame in criminal fraud cases and the existence of the Z-freeze/TC 914, care must be taken to ensure that evidence of filing is considered. See Exhibit 4.8.2-3 for recommended non-filer checks.

  2. At a minimum, the suspense clerk (if applicable) will be asked to check IDRS and corporate files on line (CFOL) for all returns in suspense with a statute alpha code of "EE" , No Return Filed, to determine if returns have been filed. The taxpayer may have filed while the case is in suspense. Be alert to TC 976/977, posted duplicate return, on the module. The IMFOLT/BMFOLT does not show if the case is a substitute for return (SFR) or "live" case. Check RTVUE/BRTVU and compare TC 150 dates with the date the SFR was submitted for processing. Also, contact the special agent to determine whether the taxpayer has submitted any returns to the special agent.

4.8.2.10.3.4.8  (06-27-2013)
Fugitive Cases

  1. In order to better control and identify fugitive cases, Review Type 43, Fugitive, will be used.

  2. Fugitive cases should be reviewed at least every six months.

4.8.2.10.3.4.8.1  (06-27-2013)
Sources to Be Researched During Fugitive Checks

  1. The following sources are to be researched for new locator information. Employees should use the Online 5081 process to obtain access, as necessary.

    1. CBRS - The currency and banking retrieval system (CBRS) is an on-line database that contains Bank Secrecy Act (BSA) information. Service examiners, as well as federal law enforcement and regulatory agencies, access the database for tax cases, tracking money-laundering activities and regulatory enforcement. It is standard procedure for Service examiners to use the system during tax fraud investigations and compliance probes. CBRS information is also used for investigative leads.

    2. ENMOD - This command code will provide name, address, and other entity information from an input of the taxpayer identification number.

    3. LEVYS - This command code is used to research levy source information on the TIF. LEVYS also establishes the screen format for other LEVY command codes.

    4. RFINQ - This command code is used to research the reporting agent file in any of several ways.

    5. INOLE - This command code provides access to the national account profile (NAP) which contains selected entity information for all master file accounts. The NAP contains vital information that can identify the taxpayer, but does not contain all the entity data for the taxpayer.

    6. IRPTR - This command code allows IDRS users to request either on-line or hardcopy IRP transcripts from IRMF.

    7. SPARQ - This command code is designed to research for a more current address of a former spouse.

    8. PACER - public access to court electronic records (PACER) is an electronic public access service that allows users to obtain case and docket information from Federal Appellate, district and bankruptcy courts, and from the U.S. Party/Case Index.

    9. Accurint - Accurint is a great research tool. It offers a powerful and friendly method of accessing investigative public records information using any standard Web Browser.

  2. The links below are accesses to free internet people finders or public records for various states. The Bureau of Prisons should be checked to determine if the taxpayer is currently incarcerated.

  3. If during the course of research a new address or locator information is found, CI and area counsel should be notified. All research results should be documented in the case activity record. Additionally, Exhibit 4.8.2-9 is a sample checksheet to document research performed that may be used and included in the case file.

4.8.2.10.3.5  (06-27-2013)
Requests and Notices From Criminal Investigation

  1. CI must determine if any civil action is being taken or planned before making a request for a grand jury investigation. CI may also check on civil action on other non-grand jury cases. CI will send a memo to Technical Services and Planning and Special Programs (PSP) (depending on the area) to notify SB/SE of the initiation of criminal proceedings and to verify current and prior civil activity on the criminal suspects and related returns.

  2. Criminal Investigation shall terminate an investigation when it is determined that there is no prosecution potential. CI will send Form 13308, Criminal Investigation Closing Report (Tax and Tax Related Only), to Technical Services.

4.8.2.10.3.6  (06-27-2013)
Initial Receipt of Fraud and Grand Jury Cases for Suspense in Technical Services

  1. Fraud and grand jury suspense cases differ as to the timing of receipt of the case in Technical Services for suspense. Whereas administrative (non-grand jury) fraud cases are worked jointly by CI and Examination in the field and are not sent to Technical Services for suspense until the criminal case is accepted for prosecution, the civil work on grand jury cases being worked by CI, even those involving a cooperating examiner from Examination, is not completed until after the criminal prosecution is completed and jurisdiction is released by CI. As a result, fraud suspense cases should normally be complete in virtually all respects when arriving for fraud suspense, whereas grand jury suspense cases will vary considerably (from unstarted with no ERCS/AIMS controls established to virtually complete), depending upon the status of the civil case as of the date of grand jury notification.

  2. When a joint non-grand jury investigation is completed and CI recommends criminal prosecution to the Assistant United States Attorney or Department of Justice, CI will send a memorandum to Technical Services to initiate suspense action of the taxpayer’s civil examination. The fraud reviewer will research AIMS/ERCS, contact the special agent (SA), or use a PSP specialist to determine the identity of the cooperating examiner and the appropriate group. If the case is open in a compliance group, the fraud reviewer will prepare a memorandum to instruct the compliance group to suspend the case. The memorandum should specify a response date for receipt of the case in Technical Services (e.g., 30 days). The group should forward the case to Technical Services in Status Code 21 and check the "Suspense Cases" and "Fraud Suspense" boxes in the "Forward to Technical Services" section of Form 3198.

  3. Once an investigation request has been approved, CI will send a notification memo to Technical Services to initiate suspense action for the taxpayer’s administrative case files as required by IRM 9.5.2.6.3, Civil Actions During the Grand Jury Investigation. Upon receipt of a notification by Examination, taxpayer contact must immediately cease on tax year(s) currently under examination. Absent initiation of P-4-26 procedures, the examination must be documented to the point of receipt of a notification. No additional AIMS/ERCS controls will be established on any prior, subsequent, or related returns to those already under examination once an investigation has commenced. The open civil case file is sent to Technical Services for grand jury suspense. This is to avoid the possibility of tainting the civil files with secret grand jury information. There could be serious consequences for not adhering to these procedures. If the civil case file becomes tainted, it could render all information and documents unusable for civil purposes. All grand jury information is secret and must be treated with special handling according to Federal Rules of Criminal Procedure 6(e). Once CI’s notification memorandum is received, the fraud reviewer, a suspense clerk (if applicable), or a PSP specialist will determine whether or not the taxpayer’s returns are under examination by checking AIMS/ERCS. If it is determined that the taxpayer is under examination, send the examination group a memorandum and instructions notifying the group of the investigation. The group must cease taxpayer contact immediately upon notification, promptly document all examination work done to date, and prepare an examination report on adjustments developed prior to notification of proceedings. The group should then forward the case to Technical Services in Status Code 21 and check the "Suspense Cases" and "Fraud Suspense" boxes in the "Forward to Technical Services" section of Form 3198.

  4. The fraud reviewer will retain a copy of the memorandum to the field requesting the case for fraud or grand jury suspense for monitoring purposes. If the case is not received in Technical Services by the response date set in the initial memo, follow-up with the group is required. The memo should be kept in a pending/purge file and monitored until the case is received in Technical Services for fraud or grand jury suspense. It is particularly important to follow up on grand jury cases, due to the risk that these cases can become "tainted" with grand jury information, particularly in instances in which the same examiner was the administrative cooperating examiner on a case that later is accepted for grand jury investigation.

  5. When the case is received for suspense, remove the copy of the memorandum in the pending file and associate it with the case. The fraud reviewer will review the case to determine if all qualifications have been met before placing it in fraud or grand jury suspense.

  6. The case should be updated from Status Code 21 to Status Code 20 when it is received in Technical Services. Once the review of the case is completed and it is accepted into suspense, the case is updated to Status Code 32 (fraud) or Status Code 36 (grand jury).

4.8.2.10.3.6.1  (06-27-2013)
Review of Cases Submitted to Fraud or Grand Jury Suspense

  1. Incoming fraud or grand jury suspense cases should be reviewed as soon as possible after arriving in Technical Services, or if not possible, a cursory review should be performed to verify the statute of limitations and determine if all documentation required for the review is contained in the case file.

  2. Review each incoming fraud suspense case received in Technical Services in which prosecution has been recommended. Use the quality attributes in IRM Exhibit 4.8.3-1 and the procedures outlined in IRM 4.8.2, Fraud and Grand Jury Suspense, to aid in the review. These IRM sections should be used as a guide for reviewing these cases. The case files should contain sufficient development to support the proposed adjustments and penalties reflected in the workpapers and the RAR if applicable. The case files should contain sufficient explanations, supporting schedules and copies of supporting documentation to support any proposed adjustments identified prior to the suspense of the case. As a general rule, a completed fraud suspense case sent to Technical Services should be a complete unagreed case in all respects. See Exhibit 4.8.2-5, Statute Protection Job Aide - Incoming Cases.

  3. Review of incoming grand jury suspense cases is different from the review of incoming fraud suspense cases in that the examination on an incoming grand jury case ceased "as is, where is" upon notification of grand jury proceedings. Therefore, the case may or may not have progressed far enough for the examiner to propose specific adjustments, and may or not have ceased after some but not all issues were examined. This may present problems because the case file may lack clear and concise documentation. Regardless of these problems, the case file documentation for work done to date must be reviewed, and the case must be placed in suspense and the statutes monitored. No additional audit activity may be performed once notification of the grand jury investigation is received. The group is responsible for properly documenting the case file to the point at which examination activity ceased. Actual review of the case is done in the same manner as in fraud suspense cases, except that the fraud reviewer must recognize that the group was not responsible for any additional work after notification of grand jury commencement. The focus of the review of a grand jury suspense case is on proper documentation of work done prior to notice of grand jury commencement.

    Any evidence constituting "matters before the grand jury" obtained while the case is under grand jury investigation is unavailable for use in civil settlement. It is, therefore, essential for the reviewer to ensure that the evidence in the case file is documented with a date prior to initiation of the grand jury investigation. One option is to have the examiner working the case stamp the back of pages in the case file with the following: "This document was received directly by the Service, SB/SE ________ office on or before {insert date}." Placing this stamp on pages in the case file provides a clear designation that the information was received before the case went to the grand jury. The date to be used with the stamp would be the date that CI provides in a memorandum notifying SB/SE that the case is going before a grand jury. If possible, the examiner working the case should prepare a report containing the adjustments developed prior to the approval of the grand jury investigation to establish a starting point for civil settlement of the case.

  4. At a minimum, the fraud reviewer will ensure the case includes the following:

    1. TD F 15-05.11, SBU Cover Sheet, attached to the front of the file folder.

    2. Documentation that criminal action is either ongoing or pending.

    3. Form 2797, Referral Report of Potential Criminal Fraud Cases, signed and accepted by CI; a completed Form 6544, Request for Cooperating Examiner, reflecting assignment of RA as cooperating examiner on a CI-initiated investigation; or a notification of an investigation initiation.

    4. A current transcript reflecting TC 914 for each tax period in the case file. If TC 914 controls are not present, contact the special agent assigned the case to have 914 controls input or to determine why no TC 914 was input on the primary case, any related cases or particular years in the related group.

      Note:

      Only tax or tax-related investigation years qualify for suspense.

    5. Workpapers supporting the criminal and civil adjustments. Ensure the file is clearly documented with the source documents necessary to establish any unreported income. Referencing the criminal file is not sufficient. If a decision is made to issue a notice of deficiency or a computation is made to update the statute to a six-year statute, IRC 6501(e), documents must be readily available. In particular, it is essential that a copy of the return or CFOL print be obtained for any flow-through returns involved in the IRC 6501(e) computation. Necessary action to obtain any missing documents should be initiated upon initial review of the case. The reviewer should not wait until the statute is imminent due to delays that may be encountered and/or the possible unavailability of required CFOL information needed to meet the government's burden of proof under IRC 6501(e).

    6. Copies of source documents supporting all proposed adjustments should be included in the civil case file.

    7. Workpapers supporting the indicators of fraud and the penalties proposed - clear documentation of intent to defraud should be established. The discussion of criminal intent in the criminal report may be used, if available. The badges of fraud should be detailed and included in the case file. In administrative (non-grand jury) cases, a copy of the special agent's report (SAR) should be included in the civil case file. If missing, a copy should be requested from the assigned special agent. In grand jury cases, the examiner may or may not have been pursuing fraud as of the date notification of grand jury commencement was received.

  5. A Fraud and Grand Jury Suspense Control Sheet (see Exhibit 4.8.2-4 will be prepared and attached to the front of the case.

4.8.2.10.3.6.1.1  (06-27-2013)
Confirm the Statute of Limitations

  1. When reviewing a case submitted for fraud or grand jury suspense, the first thing the reviewer will determine is the correct statute of limitations. This date will be compared to Form 895 and to the date reflected on a current AIMS print. If different, the dates will be reconciled, and AIMS/ERCS will be updated to reflect the correct date using Form 5348. The suspense control sheet will aid in this determination. The reviewer should review the return, copy of the return and/or CFOL and make an independent determination regarding the statute(s). A control sheet is completed for each case listing the statute of limitations for each return placed in suspense. See Exhibit 4.8.2-4. Related cases referred to Technical Services for suspense should be included on the control sheet. Refer to Statute Protection at IRM 4.8.2.10.3.4 above for more detailed procedures.

4.8.2.10.3.6.1.2  (06-27-2013)
Specially Colored Folder

  1. Many case files placed into suspense are voluminous, so all pertinent information should be placed in a specially colored folder (as determined by the local fraud reviewer) so that it can be located quickly. The folder should contain the following:

    1. The federal tax returns

    2. RAR

    3. Form 10498-B (CI memorandum recommending prosecution or informing Technical Services of the start of an investigation and any correspondence between CI, Technical Services, CT Counsel, and the group, including memorandum, e-mails, etc.)

    4. Case activity record (several Technical Services employees may be accessing this file while the case is in suspense and their activity should be documented on the case activity record.)

4.8.2.10.3.6.1.3  (06-27-2013)
Subsequent Year Returns

  1. Years subsequent to the years in fraud or grand jury suspense will be handled as follows:

    1. Annually (usually after April 15th and then again after October 15th, if a return was not filed as of the prior check after April), secure IMFOLI/ BMFOLI transcripts for tax periods subsequent to the years in fraud or grand jury suspense to determine if returns have been filed.

    2. If a subsequent year return has been filed, secure a copy of a RTVUE or BRTVUE transcript and place it in a "Subsequent Year" folder in the suspense case file. Ensure that the returns have been processed and that the statutes were updated accordingly. The subsequent years will be addressed in the civil settlement memorandum.

4.8.2.10.3.6.2  (06-27-2013)
Post Review Procedures

  1. Complete the suspense control sheet and attach it to the top of the case file.

  2. The case will be given to the suspense clerk (if applicable) to complete the following:

    1. Set up statute controls and update to Status Code 32 and Review Type 45, Suspense Type 591 (fraud) or Status Code 36, Review Type 46, Suspense Type 592 (grand jury), and set either a default six-month or a specific action date.

    2. Set up general inventory controls.

    3. File the case in a securely locked file cabinet while suspense status is maintained.

  3. The suspense clerk (if applicable) working with the fraud reviewer will complete required six-month check procedures at the six-month action date and maintain statute control for cases placed in suspense. When a statute becomes imminent (within 210 days), the suspense clerk (if applicable) will give the case to the fraud reviewer to determine the action to take.

4.8.2.10.3.6.3  (06-27-2013)
Civil Settlement

  1. When the criminal aspects of the fraud case have been completed, e.g., criminal prosecution is concluded or the criminal investigation is discontinued, CI will notify Technical Services of the formal closing of the criminal case by use of Form 13308 and advise that the civil aspects of the case may now be continued. When a criminal case includes court ordered restitution that is payable to the Service, CI will also forward Form 14104, Notification of Restitution, and a Judgement and Commitment Order (J and C).

4.8.2.10.3.6.3.1  (06-27-2013)
Case File Maintained in Suspense

  1. Fraud Suspense - The fraud reviewer will retrieve the case from suspense and review the information submitted by CI and related criminal documentation to inform the examiner of the current status of the case. The fraud reviewer will prepare a memorandum to transmit the case back to the field for civil settlement instructing the examiner of the procedures they must follow to complete the examination. The memo should include details of how the criminal case was completed, such as if the taxpayer pled guilty, was found guilty or the criminal investigation was discontinued.

  2. Grand Jury Suspense - If the examiner who worked the civil examination prior to grand jury initiation was also added to the 6(e) list and privy to grand jury information, that examiner is "tainted" and cannot work the civil disposition case. If the group manager of that examiner was not added to the 6(e) list and was not privy to grand jury information, that manager can have the civil disposition case assigned to his or her group as long as it is not assigned to any examiner who is "tainted" by grand jury information. If the group manager of that examiner was added to the 6(e) list and was privy to grand jury information, that manager is also "tainted" and cannot have the civil disposition returned to his or her group. In such cases, PSP will be consulted to determine which group is to receive the case for civil disposition.

4.8.2.10.3.6.3.2  (06-27-2013)
Case File Not Maintained in Suspense

  1. If no case file has been maintained in suspense (i.e. prosecution case never established on AIMS or grand jury case not on AIMS), the fraud reviewer will send a memorandum with instructions and the CI notification package to PSP who will establish the case, perform case building, and forward it to the appropriate field group. In grand jury cases, the Technical Services memorandum will identify the assigned grand jury examiner (if any) and advise the group that the civil disposition case cannot be assigned to any examiner "tainted" by grand jury information.

4.8.2.10.3.6.3.3  (06-27-2013)
Documentation Needed to Develop the Fraud Penalty

  1. IRM 25.1.6.2, Fraud Handbook, Procedures, provides that upon civil settlement of a prosecution case, the examiner should contact CI to ascertain which criminal statutes the taxpayer was convicted of before attempting to resolve the related civil fraud penalty. The fraud reviewer can obtain this information from CI when the CI closing report is received. The fraud reviewer should forward the following documents to the examiner:

    1. Indictment, information, complaint and/or other court action

    2. Special agent's report (SAR) (administrative fraud cases only)

    3. Plea agreement, if applicable

    4. Court documents related to the prosecution trial, such as judgment and commitment order (J and C), docket summary, etc.

    5. Applicable witness files to support the penalty and adjustments other than any Rule 6(e) information from grand jury proceedings

    6. Other applicable non Rule 6(e) grand jury supporting documents to support the penalty and adjustments

    7. Original returns if in CI's possession

  2. If any applicable documents are not received, the fraud reviewer should contact the special agent or the administrative officer for the special agent in charge (SAC). If they are unable to provide the additional documents, the fraud coordinator should determine if documents are available through PACER.

  3. The fraud reviewer should instruct the examiner that these documents are very important to aid in developing, documenting, and supporting the assertion of the fraud penalty. When a taxpayer is prosecuted or pleads guilty, it is very important to determine if the taxpayer was prosecuted or pled to charges or violations under IRC 7201, Attempt to Evade or Defeat Tax, or IRC 7206, Fraud and False Statements. It is also important to identify the specific tax years for which the taxpayer was prosecuted or pled.

  4. Collateral estoppel means that the taxpayer is not provided any opportunity to be relieved of the civil fraud penalty. Refer to IRM 4.8.2.10.3.8, Fraud and Fraudulent Failure to File Penalty below for further discussion on collateral estoppel. These facts are very important in determining the effort needed and documentation required in sustaining the assertion of the civil fraud penalty and the years to which the penalty is applicable.

4.8.2.10.3.6.3.4  (06-27-2013)
Documentation of Culpable Spouse

  1. The examiner should be instructed that the workpapers need to adequately establish and document whether or not the fraud penalty is to be applied against both spouses for a joint return. If the penalty is only applicable to one spouse, be sure to specify the identity of the culpable spouse in the case file. IRC 6663(c), Imposition of Fraud Penalty, provides that a spouse who is a part to a joint return is liable for the civil fraud penalty unless some part of the underpayment is due to the fraud of such spouse. Just as is true for the target spouse, the Service must show by clear and convincing evidence that at least some part of the underpayment for the taxable year is due to the fraud of the non-target spouse. The Service can do this by developing various kinds of circumstantial evidence, also called "badges of fraud," to support the penalty against the non-target spouse. For example, the non-target spouse may have helped the target spouse conceal assets or she may have received a large cash payment in a bank account, but then she failed to inform the couple's tax return preparer of the deposit. The non-target spouse's knowledge of the target's fraudulent conduct is just one variety of the circumstantial evidence that can be used to support the civil fraud penalty against the non-target spouse. See IRM 20.1.5.14, IRC Section 6663, Civil Fraud Penalty. Non-assertion of the civil fraud penalty against a non-target spouse does not affect the statute of limitations as to the non-target spouse since fraud on the part of the target spouse keeps the statute open as to both spouses on a joint return. The IRC 6663(c) determination is entirely separate from the innocent spouse issue under IRC 6015, Relief from Joint and Several Liability on Joint Return, where a spouse might be relieved of liability for the deficiency and/or penalties if the applicable requirements of IRC 6015(b), (c), or (f) are met. Innocent spouse claims are common in fraud cases. A Form 8857, Request for Innocent Spouse Relief, must be filed before any IRC 6015 innocent spouse relief can be considered by the Service.

4.8.2.10.3.6.3.5  (06-27-2013)
May the Fraud Penalty Be Removed?

  1. If criminal prosecution of a taxpayer has been recommended to the Department of Justice or Assistant US Attorney for any taxable year or period, the examiner should be advised that the civil fraud penalty may be removed by Area Examination only when supported by the written recommendation or concurrence of Area Counsel. See IRM 25.1.6.2 (5).

4.8.2.10.3.7  (06-27-2013)
Conditions of Probation

  1. In 2004, Technical Services was charged with the responsibility of monitoring examination compliance with assessment-related conditions of probation. In addition to Technical Services, Field Examination and Planning and Special Programs (PSP) have probation monitoring responsibilities.

  2. Field Examination, in coordination with Technical Services, is responsible for the following probation monitoring and civil disposition actions:

    1. Upon request, to calculate the amount of tax loss resulting from the criminal offense(s) for which the defendant is convicted for purposes of including the amount in either a plea agreement or a restitution order.

      Note:

      Generally, this is the responsibility of the assigned cooperating examiner. However, in cases with no cooperating examiner assigned, Field Examination may be requested to assist with pre-sentencing computation of tax loss.

    2. To follow up with CI if TC 914 is not reversed on a completed criminal investigation case involving tax or tax-related charges and/or Service-related conditions of probation.

    3. To make a determination whether civil assessments of tax, interest, and/or penalties are appropriate after a defendant is convicted of a tax or tax-related offense, and to make such assessments in accordance with normal examination procedures once CI releases jurisdiction over the case.

    4. To ensure that appropriate examination action is taken on cases requiring filing of additional returns or assessment of additional tax and/or penalties.

    5. To determine whether the fraud penalty should be asserted on prosecution years, relevant conduct years, and related returns.

    6. To report any noncompliance with conditions of probation relating to assessment,

    7. To monitor the conditional probation expiration date.

    8. To report to CI whether the Service-related conditions of probation have either been met or not met by the earlier of when the Examination case is closed, or 180 days prior to the probation expiration date.

4.8.2.10.3.7.1  (06-27-2013)
The Conditional Probation Expiration Date

  1. The conditional probation expiration date is the date on which the defendant’s term of probation ends.

  2. Noncompliance with the terms of probation must be reported to the court prior to this date so that the court can order corrective actions to be taken. Accordingly, noncompliance should be reported as soon as it is detected. Additionally, Examination and Collection will report whether the conditions of probation relating to their functions have been met or not met prior to closing their cases.

  3. The conditional probation expiration date is generally calculated as follows:

    1. Starting Date: Date of sentence or court ordered date of surrender

    2. Add: Prison term

    3. Add: Period of supervised release or probation less one day

      Reminder:

      When home confinement is a special condition of supervised release, this does not change the calculation. The period of home confinement is included within the period of supervised release.

4.8.2.10.3.7.2  (06-27-2013)
Responsibilities of Examination to Monitor Service-Related Condition of Probation

  1. While CI, Collection, and Examination share responsibility for monitoring compliance with the conditions of probation relating to the Service, Examination is primarily responsible for ensuring that the appropriate examination actions are taken on completed tax and tax-related criminal investigations and monitoring the conditions of probation that relate to the examination process.

  2. The most common condition of probation relating to the examination process is to cooperate with the Service. Examples of failure to cooperate with the Service in the examination process include the following:

    • Failure to file original or amended returns

    • Filing false or frivolous returns (e.g., return with all zeros)

    • Failure to schedule or appear at scheduled appointments

    • Failure to provide complete records in a timely manner

  3. The examination field territory manager is responsible for informing the special agent in charge (SAC) (or the designated CI probation liaison) of the status of all probation cases in his or her jurisdiction by the earlier of the date the case is closed or 180 days prior to the expiration of the probation period. See IRM 25.1.4.5, Special Conditions of Probation. A copy of the status report to the SAC (or the designated CI probation liaison) is required to be sent to Technical Services fraud coordinator for monitoring purposes.

  4. In cases in which the taxpayer refuses to comply with probation terms relating to the examination process, the field examination territory manager is responsible for immediately notifying the SAC (or designated CI probation liaison) of the noncompliance and for requesting follow-up action by CI through the probation office/courts to enforce the conditions of probation, as appropriate. In cases in which action by CI is requested, Field Examination is responsible for following up with CI regarding actions taken to enforce compliance. Four-way conferences and consultation with a fraud technical advisor should be utilized by Field Examination as appropriate to decide upon and facilitate the most appropriate course of action. In cases in which CI requests enforcement action through the probation office/courts, the examiner should ask CI to provide executed copies of documents submitted by the probation office to the court for the file.

4.8.2.10.3.7.3  (06-27-2013)
Initial Actions by the Technical Services Fraud Coordinator (Examination)

  1. The Technical Services fraud coordinator will take the following actions when notified of a probation case:

    1. Review the Form 13308 and other documents included in the closing package to determine whether civil assessment actions are required.

    2. Complete Form 13308, page 3, Item 10(a) and forward a copy via fax or secured e-mail to CI and the Advisory probation liaison.

    3. If additional information is required, request it from CI.

      Note:

      If it can be determined based upon the information received that the case should be referred to the field, the referral should not be delayed while waiting for the additional information. Once received, the additional information will be forwarded to the appropriate location.

    4. Research AIMS and IDRS. If a case file was previously placed in fraud or grand jury suspense, the civil file will be reviewed and associated with the closing package.

    5. If the TC 914 has not been released, coordinate with CI to have it released.

    6. Collateral records will be established to monitor and control cases with conditions of probation. A collateral record will be established only on the initial year of the case.

  2. In cases involving a successful prosecution or if the criminal prosecution of the taxpayer had been recommended by CI to grand jury, the case should be forwarded to the field for civil settlement.

    Note:

    If the Technical Services fraud coordinator determines that insufficient information exists to support the development of the civil issues, a decision not to forward the case to the field can only be made after obtaining Area Counsel approval. See IRM 25.1.6.2 (5) (requiring written Area Counsel recommendation or concurrence for non-assertion of the appropriate civil fraud penalty) and IRM 4.20.2.2 (5)c, General Collectibility Considerations, (prohibiting scope limitation based on collectibility in cases involving indications of criminal fraud).

  3. For cases in which CI has withdrawn or DOJ/AUSA has declined to prosecute (entry made in Item 3(b) on Form 13308), the Technical Services fraud coordinator must make a decision on whether to send a case to the field. While the IRM 25.1.6.2 (5) requirement for Area Counsel approval applies to any case referred by CI for prosecution, the fact that the case was discontinued or declined is significant.

  4. Form 13308, Item 10(a), will be completed by the Technical Services fraud coordinator and a copy returned via secured e-mail to the SAC (or the designated CI probation liaison) on any case for which a determination is made that no civil assessment action is warranted.

  5. The statute date of each tax year at issue will be verified by the Technical Services fraud coordinator and if the case is controlled on ERCS/AIMS, ERCS/AIMS will be updated if necessary to reflect the most appropriate civil statute. Prior execution of Form 10498-B, Intent to Commence Civil Action - statute protection notwithstanding, the correct civil statute for each tax year must be redetermined and a determination made regarding the best course of action to protect the government's interest with respect to assessment in light of the release of jurisdiction over the case by CI. The applicability of the three-year statute under IRC 6501(a), the six-year statute under IRC 6501(e), special purpose alpha statutes applicable in certain limited situations (for example, IRC 6501(c)(8), failure to notify Secretary of foreign transfers, "YY" /"AB" in the case of pre-sentencing closing agreements, etc.), and "open for fraud only" under IRC 6501(c) will be properly considered. See IRM 25.6.23.6.6.1 in conjunction with IRM Exhibit 25.6.23-3.

  6. The Technical Services fraud coordinator is responsible for securing a statute extension, securing Technical Services territory manager approval to allow the statute to expire, or having a statutory notice of deficiency issued as appropriate on imminent statute tax years.

  7. If civil action is warranted, the Technical Services fraud coordinator will prepare a memorandum containing specific instructions for civil disposition of the case to the appropriate examination group or PSP.

4.8.2.10.3.7.4  (06-27-2013)
Technical Services Memorandum Regarding Civil Action

  1. As warranted, the instructions prepared by the Technical Services fraud coordinator should include a discussion of the following:

    1. Name of cooperating examiner (if any) and group number;

    2. Results of criminal case (conviction/plea, charges, year(s));

    3. If the case was under grand jury investigation, a reminder to review IRM 25.1.5.5, Civil Case Resolution, so examiners and group managers who had access to grand jury information would not be assigned to the case for civil disposition, and only non-grand jury information is used for civil disposition;

    4. Civil statutes;

    5. Fraud Penalty (applicability of collateral estoppel per IRM 25.1.6.4, Collateral Estoppel, need to prove fraud under IRC 6663 to preserve assessment statute of limitations, IRM 25.1.6.2 (5) requirement for counsel approval if fraud penalty is dropped on a case referred to Department of Justice by CI);

    6. Status of subsequent years (requirement to consider, comment upon, and include in examination as warranted);

    7. Special conditions of probation (See IRM 25.1.4.5);

    8. Related Returns;

    9. Applicability of fraud penalty to non-target spouse (IRC 6663(c));

    10. Applicability of fraud penalty to non-target spouse should Form 8857, Request for Innocent Spouse Relief, be filed (IRC 6015);

    11. Collectibility consideration (IRM 4.20.2.2 (5)c)

    12. Instructions for completing Form 13308, pages 3 and 4, Items b through k as applicable, and for routing a completed copy to the SAC (or designated CI probation liaison), and the Technical Services fraud coordinator;

    13. Availability of fraud technical advisor (FTA) to assist with civil fraud penalty development/write-up, if needed; and

    14. Closure through Technical Services.

4.8.2.10.3.7.5  (06-27-2013)
Routing of Case From Technical Services

  1. For non-grand jury cases already controlled on ERCS/AIMS:

    1. Aging reason codes are to be updated in accordance with aging reason codes listed in IRM 4.8.2.10.3.7.7, Aging Reason Codes for Technical Services, PSP, and Field Examination, below.

    2. AIMS Freeze Code "P" , Civil Dispositions, approved for use on a case involving probation and civil disposition (grand jury and administrative), must be placed on the case to ensure it is returned to the Technical Services fraud coordinator prior to AIMS being updated to Status Code 90. This is due to probation monitoring requirements and IRM 25.1.6.2 (5) requirement for Area Counsel’s approval of non-assertion of the applicable fraud penalty.

    3. If Service-related conditions of probation exist, a copy of the Technical Services fraud coordinator memorandum will be sent to the appropriate field examination territory manager.

    4. A copy of the civil disposition memo and the CI closing package will be maintained by the Technical Services fraud coordinator in a dummy file and forwarded to the Advisory probation liaison to inform Collection of the forwarding of a civil disposition case to Field Examination.

    5. The case is to be sent directly to the group in Status 17.

  2. For grand jury cases already controlled on ERCS/AIMS, the Technical Services fraud coordinator will determine whether or not the cooperating examiner’s group manager (if any) was included on the 6(e) list. A cooperating examiner cannot work the civil case if he or she was privy to grand jury information while serving as cooperating examiner. Therefore, the civil case cannot be assigned to the cooperating grand jury examiner. If the cooperating grand jury examiner’s manager was included on the 6(e) list and privy to grand jury investigation, the case cannot be returned to that group for civil disposition. In such cases, the Technical Services fraud coordinator will consult with PSP to determine which group is to receive the case for civil disposition. Once the receiving group is identified:

    1. Update aging reason codes as appropriate.

    2. AIMS Freeze Code "P" , Civil Dispositions, approved for use on cases involving probation and civil disposition (grand jury and administrative), must be placed on the case to ensure it is returned to the Technical Services fraud coordinator, prior to AIMS being updated to Status Code 90. This is due to probation monitoring requirements and IRM 25.1.6.2 (5) requirement for Area Counsel’s approval of non-assertion of the applicable fraud penalty.

    3. If Service-related conditions of probation exist, a copy of the Technical Services fraud coordinator memorandum will be sent to the appropriate field examination territory manager.

    4. A copy of the civil disposition memo and the CI closing package will be maintained by the Technical Services fraud coordinator in a dummy file and forwarded to the Advisory probation liaison to inform Collection of the forwarding of a civil disposition case to Field Examination.

    5. The case is to be sent directly to the group in Status Code 17.

4.8.2.10.3.7.6  (06-27-2013)
Responsibilities of Planning and Special Programs (PSP)

  1. Because probation monitoring is a shared responsibility between Technical Services, PSP, and Field Examination, the Technical Services fraud coordinator must be familiar with PSP’s role in probation monitoring, as outlined below.

  2. Planning and Special Programs (PSP) is responsible for taking the following actions with respect to civil disposition case files received from Technical Services:

    1. Establish ERCS/AIMS control and input the appropriate AIMS Freeze Code "P" , Civil Dispositions.

    2. Input the appropriate aging reason code.

    3. Issue instructions to the group to update the joint investigation year(s) to Status Code 17 once started unless fraud is no longer at issue.

    4. Send a copy of the Technical Services instructions memorandum to the appropriate field territory manager if there are Service-related conditions of probation (due to the IRM 25.1.4.5 (4) requirement that the field examination territory manager respond to CI regarding the taxpayer’s compliance with the terms of probation).

    5. Update the case to Status Code 10 and forward the case file (including CI closing report package, Technical Services instructions memorandum, and PSP instructions to the group) to the appropriate examination group.

    Note:

    Temporary location of incarceration does not constitute a new address. Unless it is clear that the taxpayer has a new permanent out-of-area address and that no information must be secured from the post of duty of the special agent prior to transfer, the case should be sent to the post of duty of the special agent for coordination with CI and initial contact. If PSP transfers a civil disposition case requiring the AIMS "P" freeze out of area, the case must be established on AIMS and the AIMS "P" freeze must be input prior to transfer. PSP will send a copy of Form 3185, Transfer of Return, to Technical Services for necessary coordination with the Technical Services coordinator in the receiving area.

  3. If the PSP coordinator disagrees that a case should be forwarded to the field, the reasons for disagreement should be documented. The case should then be discussed with the Technical Services fraud coordinator.

  4. If, after discussion and consideration of IRM 25.1.6.2 (5) requiring Counsel’s concurrence and IRM 4.20.2.2 (5) Item c, prohibiting the limitation of scope due to collectibility, PSP disagrees with Technical Service's determination that the case must be sent to the field, it is PSP's responsibility to obtain the required counsel approval not to pursue the case. Once counsel concurs that no civil action is warranted, the case file will be returned to Technical Services. Item 10(e) of the CI closing report will be completed by the Technical Services fraud coordinator and a copy returned via secured e-mail to CI and the Advisory probation liaison.

  5. Upon request, the PSP coordinator is responsible for providing to the Technical Services fraud coordinator the number of the appropriate group to receive a grand jury case already on ERCS/AIMS and charged to Technical Services when the originating group is prohibited from working the civil disposition portion of the case.

4.8.2.10.3.7.7  (06-27-2013)
Aging Reason Codes for Technical Services, PSP, and Field Examination

  1. Aging reason codes have been approved for use on cases involving conditions of probation and civil disposition (grand jury and administrative). These aging reason codes will be utilized by Technical Services, PSP, and Field Examination as follows:

    • Aging Reason Code 16 - Conditions of Probation Cases

    • Aging Reason Code 17 - Grand Jury Cases Returned for Civil Disposition (without conditions of probation)

    • Aging Reason Code 18 - Administrative Cases Returned for Civil Disposition (without conditions of probation)

4.8.2.10.3.7.8  (06-27-2013)
Civil Disposition and Probation Responsibilities of Field Examination

  1. Because probation monitoring is a shared responsibility between Technical Services, PSP, and Field Examination, the Technical Services fraud coordinator must be familiar with Field Examination’s role in probation monitoring, as outlined below.

  2. Upon receipt of a civil disposition case with a "P freeze" on AIMS, the receiving group manager will note and monitor the due date for the response to the SAC regarding status of compliance with conditions of probation.

  3. The assigned examiner will consider the civil disposition requirements of the case and take appropriate examination actions with respect to the prosecution years, relevant conduct years, and subsequent years of the taxpayer.

  4. If the examination results in determination that insufficient evidence exists to support the civil fraud penalty under IRC 6663 or IRC 6651(f), Failure to File Tax Return or to Pay Tax, or to support an assessment on a case referred to the Department of Justice, it is the group's responsibility to secure the required counsel approval to close the case without assertion of the civil fraud penalty.

  5. IRC 6694, Understatement of Taxpayer's Liability by Tax Return Preparer, preparer penalty assessments are the civil counterpart to criminal charges against tax preparers for fraudulent return preparation and must be addressed in preparer cases. Refer to IRM 20.1.6.3.15, Statute of Limitations - IRC 6694, for information on statutes for preparer penalty cases.

  6. If, after examination, the statute of limitations is determined to have expired, a Form 3999, Notice of Statute Expiration, is required if the tax year at issue was open in examination as of the date of statute expiration. See Exhibit 4.8.2-6, Statute Protection Job Aide - Form 3999s.

  7. The field examination territory manager is responsible for informing the special agent in charge (SAC) (or designated CI probation liaison) of the status of all probation cases in his or her jurisdiction by the earlier of the date the case is closed or 180 days prior to the expiration of the probation period (IRM 25.1.4.5). This requirement is in addition to the requirement to report any noncompliance that is identified during the probation period. A copy of the status report to the SAC is required to be sent to Technical Services for monitoring purposes.

  8. In cases in which the taxpayer refuses to comply with probation terms relating to the examination process, the field examination territory manager is responsible for notifying the SAC (or designated CI probation liaison) of noncompliance and for requesting follow-up action by CI through the probation office/courts to enforce the conditions of probation, as appropriate.

  9. In cases in which action by CI is requested, Field Examination is responsible for following up with CI regarding actions taken to enforce compliance. Four-way conferences and consultation with a fraud technical advisor should be utilized by Field Examination as appropriate to decide upon and facilitate the most appropriate course of action.

  10. All tax years of a civil disposition case with AIMS Freeze Code "P" regardless of disposal code and all civil disposition preparer penalty cases must be closed to Technical Services in Status Code 21. The "Civil Disposition of Joint Investigation - AIMS Freeze Code P" block of Form 3198 must be checked to ensure proper routing.

4.8.2.10.3.7.9  (06-27-2013)
Responsibilities of Technical Services (Examination) to Monitor Conditions of Probation

  1. In coordination with CI and Advisory, the Technical Services fraud coordinator will monitor all cases with conditions of probation relating to the Service. In order to carry out this responsibility, the Technical Services fraud coordinator will take the following actions:

    1. Each case involving Service-related conditions of probation will be controlled for monitoring purposes. The condition probation expiration date, terms of probation, examination group responsible for civil disposition, and status of the case with respect to required response to CI will be maintained by the Technical Services fraud coordinator.

    2. The Technical Services fraud coordinator will be responsible for maintaining a hardcopy probation monitoring "dummy" file for each taxpayer on probation. The hardcopy "dummy" file will contain a copy of the Technical Services civil disposition memo and instructions to PSP or the group, the document(s) from CI listing conditions of probation, a copy of the group’s response to Item 10.j. page 4 of the CI closing report, the response from the field examination territory manager to CI regarding the taxpayer’s compliance or noncompliance, written contacts with the group related to probation monitoring, information provided by Advisory, and PACER research, as applicable.

    3. A spreadsheet will be used to monitor probation cases and to reconcile information with CI and Advisory. The Technical Services fraud coordinator will be responsible for maintaining the spreadsheet.

    4. Upon receipt of the copy of the field examination territory manager’s response to CI regarding the taxpayer’s compliance or noncompliance with the terms of probation, the Technical Services fraud coordinator will update the probation monitoring spreadsheet, place a copy of the response in the hardcopy "dummy" probation file, and forward a copy of the Examination response to the Advisory probation liaison.

    5. Probation cases arriving in Technical Services due to the presence of a Technical Services AIMS freeze code "P" will be reviewed to ensure:
      (1) CI has been notified of compliance or noncompliance with the terms of probation if any,
      (2) The Technical Services probation monitoring system has been updated, and
      (3) A copy of the response to CI has been secured.

    6. The Technical Services fraud coordinator will take necessary action to secure a copy of the response to CI by the field examination territory manager if no copy can be located in the civil case file or the hardcopy "dummy" probation file maintained in Technical Services.

    7. The Technical Services fraud coordinator will monitor the probation spreadsheet monthly and determine which cases are approaching the probation expiration date. At approximately seven months prior to the expiration of the term of probation, the Technical Services fraud coordinator will contact the group manager assigned the case to request a copy of the response to CI by no later than six months prior to the expiration of the term of probation.

  2. The hardcopy dummy probation file should be retained until the later of the condition of probation (COP) expiration date or the last required COP/civil disposition-related action by Technical Services. For example, the file should be retained if the case is still open in the field.

4.8.2.10.3.7.10  (06-27-2013)
Technical Services Closing Actions

  1. Upon closure of the examination case to Technical Services, coordination with the Advisory probation liaison is necessary in order to provide assessment information. The Technical Services fraud coordinator is responsible for providing assessment information to the Advisory probation liaison and for placing a copy of it in the hardcopy dummy probation file.

  2. The information transmitted to the Advisory probation liaison will clearly indicate whether or not a tax assessment has been made, the amount thereof and for which tax periods.

    1. On agreed cases, the Technical Services fraud coordinator will monitor this type of case until the assessment posts. After the assessment posts, the coordinator will notify the CI probation liaison and the Advisory probation liaison, via e-mail, that the assessment posted. The coordinators monitoring responsibility will end upon notification.

    2. On unagreed statutory notice of deficiency cases that are not petitioned, the Technical Services fraud coordinator will monitor this type of case until the assessment posts. After the assessment posts, the coordinator will notify the CI Probation Liaison and the Advisory probation liaison, via e-mail, that the assessment posted. The coordinators monitoring responsibility will end upon notification.

    3. On unagreed protested cases and petitioned statutory notice of deficiency cases, the Technical Services fraud coordinator will notify via e-mail Appeals, CI Probation Liaison and the Advisory probation liaison that the COP case has been forwarded to Appeals. The e-mail will contain a transmittal memo from the Technical Services coordinator to Appeals. The memo will include the identifying information of the COP case, the CI Probation Liaison, CI Field Office, and the Advisory probation liaison contact. The coordinator's monitoring responsibility will end upon this notification and the transmittal of the case to Appeals (case updated to Status Code 81). The coordinator is not responsible for monitoring this type of disposition until assessment.

4.8.2.10.3.8  (06-27-2013)
Fraud and Fraudulent Failure to File Penalty

  1. The following discusses the burden of proof and collateral estoppel, as well as other miscellaneous items, as they relate to the fraud penalty and the fraudulent failure to file penalty.

4.8.2.10.3.8.1  (06-27-2013)
Burden of Proof

  1. In tax fraud cases, the burden of proof is on the government. IRM 25.1.1.2.2, Requirements of Proof, lists the requirements of the government’s burden of proof.

  2. Burden of proof is the obligation to offer evidence that the court or jury could reasonably believe in support of a contention.

    1. In criminal fraud cases, the government must present sufficient evidence to prove guilt beyond a reasonable doubt.

    2. In civil fraud cases, the government must prove fraud by clear and convincing evidence. Clear and convincing evidence is evidence showing that the thing to be proved is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence, but less than beyond a reasonable doubt. This is a higher degree of proof than is required for many issues of a technical nature.

  3. The reviewer must review the case file to ascertain whether the imposition of the fraud penalty is supported by evidence in the file. Any necessary evidence (non-grand jury) from the criminal file should be included in the civil file.

  4. The fraudulent failure to file penalty under IRC 6651(f) must be supported by evidence in the file. The mere fact the taxpayer failed to file a return does not constitute sufficient evidence to sustain the fraudulent failure to file penalty. Overt acts of evasion must be identified and supported by the evidence included in the case file.

  5. IRM 25.1.7.8 (6), Civil Closure, sets forth some overt acts that constitute evidence of intent supporting the assertion of the IRC 6651(f), Fraudulent Failure to File Penalty.

4.8.2.10.3.8.1.1  (06-27-2013)
IRM 25.1.1.2.1 - Definitions - General

  1. The compliance employee must be familiar with the following legal terms in order to understand the requirements of proof:

    1. Burden of Proof is the obligation to offer evidence that the court or jury could reasonably believe in support of a contention. In tax fraud cases, the burden of proof is on the government.

    2. Proof is the establishment by evidence of a requisite degree of belief concerning a fact in the mind of the trier of fact or the court. Proof is the logically sufficient reason for assenting to the truth of a proposition advanced. In its judicial sense, it is a term of wide import and encompasses everything that may be adduced at a trial, within the legal rules, for the purpose of producing a conviction in the mind of judge or jury.

    3. Evidence is data admissible at trial and presented to a court or jury in proof of the facts in issue and which may include the testimony of witnesses, records, documents, or objects. Evidence is distinguished from proof in that proof is the result or effect of evidence, while evidence is the medium or means by which a fact is proved or disproved.

    4. Direct Evidence is evidence in form of testimony from a witness who actually saw, heard, or touched the subject of questioning. Evidence, which is believed, proves existence of fact in issue without inference, presumption, or reference to any supporting evidence. Direct evidence is distinguished from circumstantial "indirect" evidence.

    5. Circumstantial Evidence is evidence based on inference and not personal observation. It is also called "indirect" evidence.

    6. Presumption (of law) is a rule of law that courts and judges will draw a particular inference from a particular fact, or from particular evidence, unless and until the truth of such inference is disproved.

    7. Inference is a logical conclusion from given facts.

    8. Preponderance of Evidence is evidence that will incline an impartial mind to one side rather than the other so as to remove the cause from the realm of speculation. It does not relate merely to the quantity of evidence. Simply stated, evidence which is more convincing than the evidence offered in opposition.

    9. Reasonable Doubt is a doubt founded upon a consideration of all the evidence and must be based on reason. Beyond a reasonable doubt does not mean to a moral certainty or beyond a mere possible doubt or an imaginary doubt. It is such a doubt as would deter a reasonably prudent man or woman from acting or deciding in the more important matters involved in his or her own affairs.

    10. Willful Intent to Defraud is an intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be properly owing.

    11. Clear and Convincing Evidence is evidence showing that the thing to be proved is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.

4.8.2.10.3.8.1.2  (06-27-2013)
Access to Direct Evidence

  1. Tax crimes are often acts of individual greed and, therefore, very little "direct evidence" is usually available. Depending on the facts and circumstances of each investigation, the subject's correct taxable income may be established by "direct" or several "indirect" methods of proof, usually using circumstantial or "indirect" evidence. See IRM 9.5.9.2, Introduction.

4.8.2.10.3.8.2  (06-27-2013)
Collateral Estoppel

  1. IRM 25.1.6.2 (5) provides that, if a criminal prosecution of a taxpayer has been recommended by CI to the Department of Justice, the civil fraud penalty or fraudulent failure to file penalty may be removed only upon written recommendation or concurrence by Area Counsel. This rule applies also in the case of any related taxpayer involved in the same transaction and to any other year or period for which criminal prosecution is recommended. See the discussion below and IRM 25.1.6.4, Collateral Estoppel, for more in-depth information.

  2. If a non-filer is prosecuted and convicted under IRC 7203, Willful Failure to File Return, Supply Information, or Pay Tax, willful failure to file a federal return, he is collaterally estopped from denying liability under IRC 6651(a), the delinquency penalty. He is not collaterally estopped from denying liability under the civil fraud penalty per IRC 6663 or the fraudulent failure to file penalty per IRC 6651(f).

  3. Collateral estoppel is a legal doctrine that prevents a taxpayer, who has been previously convicted of criminal tax evasion under IRC 7201, from asserting a defense to the civil fraud penalty. Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of re-litigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979). The courts routinely look to the presence of several factors in applying collateral estoppel. The issue for which estoppel is being sought must have been necessary in reaching the original decision (see Parklane case cited above), the party to be estopped had a full and fair opportunity to litigate the issue in the original suit - (Montana v. United States, 440 U.S. 147, 154 (1979)), and the issue must have been part of a valid and final judgment. (Ashe v. Swenson, 397 U.S. 436, 443 (1970)). The doctrine of collateral estoppel applies only to the years for which the taxpayer has been convicted. Intent must be established for non-conviction years.

  4. Collateral estoppel is an affirmative defense. Because the examiner bears the burden of proof with respect to fraud, the facts and evidence supporting the assertion of the fraud penalty must also be thoroughly developed. Thus, for cases involving both conviction and non-conviction years, it is essential to adequately develop all facts supporting the fraud penalty for the non-conviction years. Even though collateral estoppel applies to the conviction year(s) or the year(s) covered by the plea, the proper development and discussion of the factual evidence of fraud in the year or years covered by estoppel is essential for the purpose of establishing a pattern of relevant conduct consistent with the arguments for the assertion of the IRC 6663 penalty for the years not covered by collateral estoppel. Thus, in this case, it is necessary to show a pattern of tax omission and the facts evidencing fraud should be thoroughly developed for all years. The examiner assigned to the case should refer to IRM Exhibit 35.11.1-17, Answer—Collateral Estoppel—Generally, IRM Exhibit 35.11.1-22, Answer—Affirmative Allegations: Fraud—Collateral Estoppel As To Tax Year, and Williams v. Commissioner, T.C. Memo. 1991-521.

4.8.2.10.3.8.3  (06-27-2013)
Fraud Imposed on Both Spouses

  1. If the fraud penalty is being imposed against each spouse, the case must be evaluated to determine whether there is sufficient evidence to meet the government’s burden of proof with respect to the fraud penalty, against each spouse. If the fraud penalty is well developed against one spouse, but not the other, and the report does not indicate that the penalty is to apply only against one, contact the examiner who conducted the civil audit to determine whether the penalty was meant to be applied against one or both.

  2. IRC 6663(c) provides that, "In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse."

  3. This means that fraud must be established separately against each spouse, when a joint return is filed, or asserted only against the spouse for which fraud is established. In the case of a joint return, unless each spouse has been convicted or has had a plea accepted under IRC 7201, there should be a separate fraud write up for each spouse and clear and convincing evidence of fraud on the part of each spouse. If the acts of only one spouse are found to be fraudulent, the special instructions found in IRM 4.8.9.16.3, Open Criminal Cases, should be followed. In this case, separate notices will be issued to the two spouses. The notice of the culpable spouse will include the fraud penalty. The notice to the non-culpable spouse will not include the fraud penalty.

4.8.2.10.3.8.4  (06-27-2013)
Fraudulent Failure to File Penalty

  1. While the fraudulent failure to file penalty under IRC 6651(f) mirrors, in many ways, the civil fraud penalty under IRC 6663, the administration and assessment of the two penalties is different.

  2. IRC 6665(a), Additions to the Tax and Additional Amounts, Applicable rules, provides that many additions to tax are treated as tax and that they are assessed in the same manner as taxes. IRC 6665(b), however, provides that the portion of the penalty under IRC 6651 which is not attributable to a deficiency, that is, the portion attributable to tax shown due on a return which was filed late, is not assessed in accordance with deficiency proceedings. Therefore, no notice of deficiency is issued and no opportunity to petition tax court prior to assessment is afforded.

  3. If IRC 6651(f) penalty is attributable to the tax shown on a return filed late, the Service should assess the penalty immediately in the same manner as the IRC 6651(a) delinquency penalty with the approval of Area Counsel since the penalty is not calculated upon a deficiency. The reviewer should solicit Area Counsel advice even if IRC 7201 is applicable. The taxpayer should be provided an opportunity to agree or disagree and provided his or her appeal rights. The reviewer must monitor the statute for assessment purposes. If the penalty is not assessed within the three-year statute, the assessment of the penalty will be barred.

  4. If the late filed return is incorrect, the IRC 6651(f) penalty attributable to the tax shown on the return as filed, is assessed immediately, while the portion of the IRC 6651(f) penalty attributable to a deficiency determined, would be subject to deficiency procedures and included on the statutory notice of deficiency.

4.8.2.10.3.8.5  (06-27-2013)
Coordination With Other Penalties

  1. The accuracy-related penalties under IRC 6662, Imposition of Accuracy-Related Penalty on Underpayments, cannot be asserted on the same portion of the underpayment on which the fraud penalty under IRC 6663 is asserted. If, however, a portion of an underpayment is due to fraud, the fraud penalty may apply to that portion of the underpayment, and the accuracy-related penalty to part or all of the balance of the underpayment.

  2. Although the fraud penalty under IRC 6663 applies only to a return filed by the taxpayer, if a return is filed delinquently, and there is an underpayment relating to that delinquent return, the fraud penalty under IRC 6663 may apply, along with the failure to file penalty under IRC 6651(a)(1).

  3. If adjustments are made to a return which was filed late, due to fraud, there is nothing prohibiting the imposition of the fraud penalty under IRC 6663 along with the fraudulent failure to file penalty under IRC 6651(f). IRC 6651(f) based upon the tax reflected on the fraudulent delinquent return and IRC 6663 based upon the deficiency. Although there is no specific prohibition against asserting penalties under both IRC 6651(f) and IRC 6663, caution should be used when considering this action. The court is not likely to sustain the assertion of both penalties unless compelling facts support the Service's position. Accordingly, consult Area Counsel before asserting both of these penalties on the same return.

  4. The estimated tax penalty under IRC 6654, Failure by Individual to Pay Estimated Income Tax, may be asserted in conjunction with the fraudulent failure to file penalty under IRC 6651(f). The estimated tax penalty is based upon the tax reflected on the fraudulent delinquent return but not any additional adjustments.

4.8.2.10.4  (06-27-2013)
Bankruptcy Suspense

  1. A bankruptcy case is commenced by the filing of a petition in U.S. Bankruptcy Court pursuant to the Bankruptcy Code.

  2. The Bankruptcy Code allows individuals, partnerships, corporations, and limited liability companies to file for debt relief by way of filing a bankruptcy petition with the U.S. Bankruptcy Court.

    1. The Bankruptcy Code, with amendments, can be found in Title 11 of the United States Code.

    2. The Bankruptcy Reform Act of 1994 (BRA 94) and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made significant changes to the Bankruptcy Code.

  3. The Bankruptcy Code provides the law under which bankruptcy proceedings are commenced, administered, and closed. Bankruptcy law is the prevailing authority when a taxpayer files bankruptcy. Bankruptcy laws are separate from tax laws, and coordination is necessary to comply with both.

  4. Insolvency, a Collection function of the Small Business/Self Employed Operating Division of the Service, is responsible for administering that coordination.

  5. Refer to Exhibit 4.8.2-10, Assessment and Suspension Summary, for a summary of assessment and suspension rules under the Bankruptcy Code, as revised over the years.

4.8.2.10.4.1  (06-27-2013)
Overview

  1. A Technical Services bankruptcy coordinator is responsible for coordinating with and fielding questions from many people inside and outside the Service to ensure timely and accurate assessment of taxpayers who have filed for bankruptcy protection. They are responsible for managing examination case inventory and assisting others who manage cases impacted by bankruptcy.

  2. Because bankruptcy is a specialized field it is important that the Technical Services bankruptcy coordinator have a working knowledge of bankruptcy terminology. IRM Exhibit 5.9.1-1, Glossary of Common Insolvency Terms, contains a list of bankruptcy definitions and concepts.

4.8.2.10.4.1.1  (06-27-2013)
Sources

  1. Cases are received in Technical Services from various parts of the organization. The primary sources of bankruptcy cases are field and office compliance groups. Technical Services may also receive litigation cases from Campus Correspondence Examination, Automated Underreporter Program, TEFRA Suspense, and Appeals.

4.8.2.10.4.1.2  (06-27-2013)
Origination

  1. A bankruptcy case is typically commenced when a debtor files a petition for debt relief with the U.S. Bankruptcy Court. Bankruptcy provides individuals, partnerships, and corporations a way to satisfy their creditors when they are insolvent.

  2. Federal law found in Title 11 of the United States Code is commonly known as the Bankruptcy Code. The law has two primary objectives:

    1. To provide debtors with a fresh start by providing certain debt relief, and

    2. To establish an orderly and equitable system of financial reorganization or liquidation.

4.8.2.10.4.1.3  (06-27-2013)
Bankruptcy Estate

  1. A bankruptcy estate is created upon the commencement of the bankruptcy case. It generally consists of all of the debtor’s legal or equitable interests in any property at the time the case is filed, plus property acquired by the estate after the petition is filed.

    Note:

    The estate may also include a non-debtor spouse’s community property interests.

  2. The bankruptcy estate is only a separate taxable entity in Chapter 7 or 11 cases of an individual.

  3. In Chapter 13 cases, and Chapter 11 cases of individuals filed on or after October 17, 2005, certain assets acquired by the debtor post-petition are included in the estate.

4.8.2.10.4.2  (06-27-2013)
Types of Bankruptcy

  1. The following are types of Bankruptcy:

    • Chapter 7, Liquidations and Chapter 11 Liquidations

    • Chapter 9, Governmental Unit Adjustment of Debts

    • Chapter 11, Reorganization, (which could include a liquidation of the debtor's assets)

    • Chapter 11, Small Business Case

    • Chapter 12, Adjustment of Debts (Family Farmers and Fisherman)

    • Chapter 13, Adjustment of Debts (Individual with Regular Income)

    • Chapter 15, Ancillary and Other Cross Border Cases

4.8.2.10.4.2.1  (06-27-2013)
Chapter 7 Liquidations and Chapter 11 Liquidations

  1. Liquidation is the act of reducing tangible and intangible assets to cash. All Chapter 7 cases involve the liquidation of the debtor's assets, to the extent there are some available for creditors. Many business liquidations are accomplished through a Chapter 11 liquidation, where the Chapter 11 plan provides for the liquidation of the debtor's assets. A business could be liquidated in Chapter 7 or Chapter 11 if there is no hope of continuing business operations and/or paying debts. The bankruptcy petition may be filed voluntarily or involuntarily. An involuntary bankruptcy petition is filed by the creditors on behalf of the debtor. In all Chapter 7 cases, a trustee is appointed.

  2. For individuals, the liquidation is limited to non-exempt assets. A discharge in a liquidation case is available only to individuals.

4.8.2.10.4.2.2  (06-27-2013)
Chapter 9 - Governmental Unit Adjustment of Debts

  1. Chapter 9 is a bankruptcy proceeding for a governmental unit. In order to qualify as a Chapter 9 debtor, an entity must, among other things: be a municipality, be authorized to be a debtor by state law, be insolvent or unable to meet its debts as they mature, and desire to affect a plan to adjust such debts. Chapter 9 cases are very rare.

4.8.2.10.4.2.3  (06-27-2013)
Chapter 11 - Reorganization

  1. Chapter 11 is a bankruptcy proceeding in which an individual, business, or other entity may be allowed to reorganize rather than liquidate. A reorganization is accomplished through the confirmation of a Chapter 11 plan by the bankruptcy court. The plan is binding on the debtor and all creditors. Reorganization plans typically provide for payments to creditors over a number of years. A Chapter 11 plan can provide for the liquidation as well as the reorganization of the debtor.

  2. There is a presumption in Chapter 11 cases that the debtor will remain in possession of its assets, but a trustee can be appointed by the bankruptcy court for cause. If a trustee has not been appointed, the debtor is referred to as the "Debtor in Possession" (DIP). The DIP has the rights and many of the duties of a bankruptcy trustee.

  3. A large percentage of Chapter 11 bankruptcies eventually end in liquidation.

  4. In Chapter 11 cases of individuals filed on or after October 17, 2005, property of the estate also includes post-petition earnings from the services performed by the debtor and the debtor does not receive a discharge until payments under the plan are completed.

4.8.2.10.4.2.4  (06-27-2013)
Chapter 11 - Small Business Case

  1. A small business case is a proceeding where the debtor’s liabilities do not exceed $2,343,300 and no active creditor’s committee exists. Many, if not most, Chapter 11 cases will fall within this definition.

  2. The debt limitation must be adjusted every three years under 11 USC 104 to reflect the Consumer Price Index.

4.8.2.10.4.2.5  (06-27-2013)
Chapter 12 - Adjustment of Debts (Family Farmers and Fisherman)

  1. A Chapter 12 bankruptcy is designed to enable a debtor who is a family farmer or family fisherman to reorganize rather than liquidate its operation. Chapter 12 cases resemble in part both a Chapter 11 and Chapter 13 cases.

4.8.2.10.4.2.6  (06-27-2013)
Chapter 13 - Adjustment of Debts

  1. Only an individual with regular income can be a debtor under Chapter 13. A payment plan is confirmed whereby the debtor makes payments to the Chapter 13 trustee, who makes disbursements to creditors according to the plan. The duration of the plan is generally 3 to 5 years.

4.8.2.10.4.2.7  (06-27-2013)
Chapter 15 - Ancillary and Cross-Border Cases

  1. A Chapter 15 proceeding may be commenced when a foreign court or foreign representative seeks assistance in the United States in connection with a foreign proceeding.

4.8.2.10.4.3  (06-27-2013)
Automatic Stay

  1. Understanding the operation of the automatic stay is the first step to understanding how bankruptcy impacts a taxpayer's tax debt.

4.8.2.10.4.3.1  (06-27-2013)
Definitions

  1. Automatic-Stay: The "automatic stay" arises by operation of law when a bankruptcy petition is filed. It prohibits certain acts against the debtor, the debtor’s property, and property of the estate. Since the automatic stay provision was amended in 1994 and again in 2005, the scope of the automatic stay depends on when the bankruptcy petition was filed.

  2. Income Tax Periods:

    1. The "petition date" is the date the bankruptcy petition was filed with the bankruptcy court.

    2. An income tax period is the calendar or fiscal period covered by a tax return. It does not depend upon when the return was filed or due. The period covered by the income tax return determines whether a liability is a pre-petition or post-petition. The Bankruptcy Code treats pre-petition and post-petition liabilities differently.

    3. Pre-petition income tax debts are income taxes for periods that ended before the bankruptcy petition was filed.

    4. A post-petition income tax debt is for an income tax period that ends on or after the bankruptcy petition date. For determining whether a tax is pre-petition or post-petition, it does not matter whether the return was due, or the tax was assessed, before or after the petition date.

    Example:

    A 2006 income tax return (balance due) has a year ending December 31, 2006. Taxpayer filed a bankruptcy petition on December 30, 2006. The tax return was filed by and assessed on April 17, 2007. The tax liability for 2006 is considered a post-petition tax liability.

    Example:

    A 2006 income tax return (balance due) has a year ending December 31, 2006. The bankruptcy petition was filed February 8, 2007. The tax return was filed by and assessed by April 17, 2007. The tax liability for 2006 is considered a pre-petition tax liability.

    Example:

    A 2006 income tax return (balance due) has a year ending December 31, 2006. The bankruptcy petition was filed February 8, 2007. The tax return was filed on and assessed on May 30, 2007. The tax liability for 2006 is considered to be a pre-petition tax liability.

  3. Discharge: A permanent injunction against the collection of a discharged debt as a personal liability of the debtor. Not all debts are subject to a bankruptcy discharge. Generally, a discharge is granted to an:

    1. Individual debtor’s Chapter 7 case, 60 days after the date set for the first meeting of creditors;

    2. Individual Chapter 11 filed before October 17, 2005, or Chapter 11 cases of non-individuals when the case is confirmed;

    3. Individual Chapter 11 filed on or after October 17, 2005, upon completion of the plan; BAPCPA, or

    4. Individual Chapters 12 and 13 when the plan is completed, typically within 3 to 5 years.

  4. Dismissal: A term used when a bankruptcy proceeding is terminated prematurely by the court. Debts are not forgiven and the debtor does not receive a discharge. While the bankruptcy estates of individuals in Chapter 7 and 11 cases are separate taxable entities, the bankruptcy estate will not be treated as a separate taxable entity if the case is dismissed. Upon dismissal, the debtor is no longer protected by the automatic stay.

  5. Denial of Discharge: A determination by the bankruptcy court that the debtor is not entitled to receive a bankruptcy discharge. The court order is recorded in the docket history.

  6. Closed: Refers to a court order closing the bankruptcy case. It is recorded in the docket history.

4.8.2.10.4.3.2  (06-27-2013)
Automatic Stay - BAPCPA, Petitions Filed on or After October 17, 2005

  1. The filing of a bankruptcy petition under Chapters 7, 11, 12, and 13 gives rise to an automatic stay effective as of the bankruptcy petition date. The stay generally prohibits the commencement or continuation of collection activities against the debtor, the debtor’s property, and property of the estate (subject to certain exceptions). It also prohibits the commencement or continuation of certain tax court cases.

  2. For bankruptcy cases filed on or after October 17, 2005, there is no stay against assessments (that was repealed in 1994). Also, for these cases the automatic stay does not apply to the commencement or continuation of a United States Tax Court proceeding to determine an individual’s post-petition income tax period liability. Therefore, an individual who files a bankruptcy petition under BAPCPA is now permitted to file a tax court petition for post-petition income tax periods over which the tax court may preside, without violating the automatic stay.

    Caution:

    It is important to determine whether the automatic stay will directly or indirectly toll the ASED to make sure that deficiencies are assessed timely. The automatic stay has no effect on post-petition income tax periods.

  3. Even for bankruptcy cases filed on or after October 17, 2005, the stay applies to both pre- and post-petition liabilities of corporations, as long as the liabilities can be determined by the bankruptcy court.

    Note:

    Under BAPCPA, the ASED on unagreed individual pre-petition income tax period liabilities will be suspended if a statutory notice of deficiency is issued. The ASED on unagreed corporate pre- and post-petition income tax liabilities will be suspended.

  4. The automatic stay commences upon the filing of a bankruptcy petition. The stay against the commencement or continuation of a tax court proceeding continues until the earliest of the following:

    1. The time the bankruptcy case is dismissed a case may be dismissed voluntarily by the debtor or involuntarily for "cause."

    2. The time the case is closed by the bankruptcy court (all chapters), or

    3. The time a discharge is granted or denied (except for corporations in Chapter 7 cases, which never receive a discharge).

  5. The time of discharge is as follows:

    Bankruptcy Chapter Discharge Time
    7 Corporations – A corporation does not receive a discharge in Chapter 7, so the discharge is neither granted nor denied.
    Individuals – Ordinarily, a discharge is granted about 3 months after the petition date. The Chapter 7 discharge is automatic if no objections are filed.
    11 For Chapter 11 cases of individuals filed on or after October 17, 2005, the debtor generally receive a discharge after completion of payments under the plan. In all other Chapter 11 cases, the discharge is generally granted upon confirmation of the plan. However, a corporation that is liquidating in Chapter 11 may not be granted a discharge. Check with Associate Area Counsel to see if the automatic stay terminated upon plan confirmation, and the ASED begins to run.
    Corporations – A business entity that files Chapter 11 typically tries to reorganize, not liquidate. However, it is not uncommon for a Chapter 11 plan to provide for the liquidation of the debtor corporation. A corporation in a liquidating case does not receive a discharge.
    13 For Chapter 13 cases a discharge is granted upon completion of the debtor’s plan, ordinarily 3 to 5 years after the petition is filed.

4.8.2.10.4.3.3  (06-27-2013)
Automatic Stay - BAPCPA, Serial Bankruptcy Filings on or After October 17, 2005

  1. For bankruptcy filings on or after October 17, 2005 (Bankruptcy Abuse Prevention Consumer Protection Act of 2005 (BAPCPA)), Bankruptcy Code 362(c)(3) and (c)(4) prevent the automatic stay from remaining in effect, or coming into effect at all, in certain cases where the debtor has recently been a debtor in bankruptcy.

  2. Under these provisions, generally if an individual (or joint individuals) files a Chapter 7, 11, or 13 case, AND if the same individual (or joint individuals) was in a single or joint bankruptcy case within the preceding 1-year period (12 month period preceding), AND the first case was dismissed, THEN the subsequent bankruptcy is presumed abusive, and the automatic stay will terminate 30 days after the second petition was filed, UNLESS within that 30-day period:

    1. A motion is made by a "party in interest" (e.g., the debtor or a creditor) to extend the stay, and

    2. The "party in interest" demonstrates by clear and convincing evidence that the filing of the second case is in good faith.

    Caution:

    Court records may not reflect the automatic stay has been extended within 30 days from the filing of the petition. Allow extra time for the court record to be updated. Contact area counsel if there is any question about whether the stay terminated. Also, if the first bankruptcy case was dismissed after the second bankruptcy case was filed, it is not clear whether the stay would terminate after 30 days. Consult counsel for a determination of whether the stay terminated.

  3. Bankruptcy Code 362(c)(4) further limits serial filings. Generally, the stay will not go into effect if the individual debtor had two or more cases pending within the previous 1-year period that were dismissed. At the request of a "party in interest," the court shall promptly enter an order confirming that there is no automatic stay. The court may agree to order the automatic stay to take effect at the request of the debtor or "party of interest." If the court grants an automatic stay, it becomes effective on the day of the court order, not the petition date.

    Exception:

    When a Chapter 7 case is dismissed under section 707(b) of the Bankruptcy Code and converted to a Chapter 13, the automatic stay in the new Chapter 13 will not terminate in 30 days. An order in the court record is not necessary to indicate the continuation of the automatic stay.

  4. A "party in interest," such as the Service, may request the court issue an order confirming the automatic stay is terminated.

    Important: Direct any inquiry to confirm whether the automatic stay is in effect to Area Counsel.

4.8.2.10.4.3.4  (06-27-2013)
Automatic Stay - Bankruptcy Reform Act, Petitions Filed On or After October 22, 1994 and Before October 17, 2005

  1. The filing of a bankruptcy petition under Chapters 7, 11, 12, or 13 gives rise to an automatic stay effective as of the bankruptcy petition date. The stay generally prohibits any collection action against the debtor, the debtor’s property, and property of the estate (subject to certain exceptions).

  2. For bankruptcy cases filed on or after October 22, 1994, the stay does not prohibit the making of a tax assessment.

    Note:

    While the stay does not directly prohibit the making of an assessment, it may indirectly stay the making of an assessment because the stay prohibits the commencement or continuation any tax court case concerning the debtor (an exception regarding post-petition liabilities of individuals was added in 2005). The ASED on unagreed individual pre- and post-petition income tax period liabilities may be suspended indirectly once a statutory notice of deficiency is issued because the stay against the commencement of the tax court case tolls the time to file the tax court case, which tolls the ASED.

  3. There are no serial filer exceptions to the stay for bankruptcy cases filed on or after October 22, 1994, and before October 17, 2005.

  4. The automatic stay commences upon the filing of a bankruptcy petition. See IRM 4.8.2.10.4.3.2(4) and (5) above for the time frames of the stay.


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