4.19.10  Examination General Overview

Manual Transmittal

December 03, 2013

Purpose

(1) This transmits revised IRM 4.19.10, Liability Determination, Examination General Overview.

Scope

This IRM section contains information on Examination general procedures for administrative matters and provides a reference for common issues and related items that might be found on tax returns. Throughout the revisions, there are references to other IRMs which may contain related information needed when working cases.

Material Changes

(1) Editorial changes made throughout this IRM

(2) IRM procedural changes made throughout this IRM

(3) IPU 13U0260 issued 02-01-2013 IRM 4.19.10.4.14 Return Preparer Referrals, Changing AMTAP to Integrity & Verification Operation (IVO)

(4) IPU 13U0260 issued 02-01-2013 IRM 4.19.10.5 Questionable Refunds, Changing AMTAP to Integrity & Verification Operation (IVO)

(5) IPU 13U0564 issued 03-20-2013 IRM 4.19.10.4.9 AIMS Case Control and PSP Transfer Procedures, Adding new OFP codes in para (7)

(6) IRM 4.19.10.1.1 Glossary, Deleting some acronyms from table in para (3)

(7) IRM 4.19.10.1.2 Some Publications Used by Examination, Adding information for Publication 78 in para (1)

(8) IRM 4.19.10.1.3 Some Forms Used by Examination, Deleting Form 13181 in para (1)

(9) IRM 4.19.10.1.5 Examination IRM References, Changed title for IRM 10 in para (1)

(10) IRM 4.19.10.2 Research and Development - Wage and Investment Changed 'Data Capture' to 'Data Collection' in para (1)

(11) IRM 4.19.10.4.1 Identifying Fraud in Correspondence Examination, Updated titles in IRM references in para (5)

(12) IRM 4.19.10.4.2 Responsibilities of the Correspondence Examination Technicians (CET) and the Tax Examiners (TE), Updated IRM section and title in para (1) and grammar adjustments in para (6) and (8)

(13) IRM 4.19.10.4.3 Responsibilities of the Functional Fraud Coordinator (FFC), Grammatical change in para (1) and (4) and update in (5)(b)

(14) IRM 4.19.10.4.4 Responsibilities of the Exam Fraud Coordinator (EFC) - W&I Only, Grammatical changes in para (5) and change to title of IRM reference in para (9)

(15) IRM 4.19.10.4.5 Responsibilities of the Campus Fraud Coordinator (CFC), Grammatical changes throughout and changes to IRM reference title in para (3)(b)

(16) IRM 4.19.10.4.7 Fraud Development Procedures, Grammatical changes throughout and change to title in IRM references in para (10)(a) and (b)

(17) IRM 4.19.10.4.8 Responsibilities of the Fraud Technical Advisor (FTA), Changed title of IRM reference in para (1)

(18) IRM 4.19.10.4.9 AIMS Case Control and PSP Transfer Procedures, Grammatical changes throughout

(19) IRM 4.19.10.4.9.1 Instructions for Completing Form 3185, Transfer of Return, Grammatical changes in para (1), (2) and (5)

(20) IRM 4.19.10.4.9.2 Monitoring the Issuance of Manual Interim Letters on Open Mail Cases in Status 17, Grammatical change in para (1)

(21) IRM 4.19.10.4.10 Program Letters and Actions to Close Case, Grammatical change in para (1)

(22) IRM 4.19.10.4.10.3 90-Day Procedures, Removing 'For official Use Only' in para (3), (4), (5) and (7)

(23) IRM 4.19.10.4.11 Statute Consideration, Removed 'section' from IRC references in para (1) and (2)

(24) IRM 4.19.10.4.13 10-Year Earned Income Tax Credit (EITC) Ban Procedures, Grammatical change in para (4) and (7)

(25) IRM 4.19.10.5 Questionable Refunds, Changed IRM reference in para (1)

(26) IRM 4.19.10.6 Return Preparer Scheme Identification, Grammatical changes throughout

Effect on Other Documents

IRM 4.19.10 dated November 27, 2012 (effective January 1, 2013) is superseded. The following IRM Procedural Updates (IPUs) have been incorporated into this IRM: 13U0260 (issued 02-01-2013) and 13U0564 (issued 03-20-2013).

Audience

This IRM is intended for the use of the SB/SE (Small Business/Self-Employed) and W&I (Wage and Investment) Campus Examination Operations.

Effective Date

(01-01-2014)

Steven C. Klingel
Director, Reporting Compliance
Wage and Investment Division

4.19.10.1  (01-01-2010)
Examination General Overview

  1. Wage and Investment (W&I) Exam Operations and Small Business/Self Employed (SB/SE) Campus Examination support the mission of the Service by maintaining an enforcement presence and encouraging the correct reporting by taxpayers of income, estate, gift, employment, and certain excise taxes in order to instill the highest degree of public confidence in the tax system's integrity, fairness, and efficiency. Both W&I and SB/SE Campus Examination are referred to as either "Examination" , "Campus Examination" , or "Correspondence Examination" .

  2. Examination will

    • Measure the degree of voluntary compliance as reflected on filed returns

    • Reduce noncompliance by identifying and cost-effectively allocating resources to those returns most in need of examination and taxpayer contact

    • Conduct timely and quality examinations of tax returns and make quality contacts to determine the correct tax liability

  3. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. TAS criteria include economic burden, systemic burden, best interest of the taxpayer, and public policy (as determined solely by the National Taxpayer Advocate (NTA)). TAS is responsible for assisting taxpayers who have unresolved problems with the IRS. See IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria, if additional information is required.

  4. This section contains information on Examination general procedures for administrative matters and provides references for common issues and related items that might be found on tax returns.

4.19.10.1.1  (01-01-2014)
Glossary

  1. Some of the IRS acronyms used in Examination are listed below. Others can be found in the Document 6209, IRS Processing Codes and Information.

  2. Find out the meaning of an IRS Acronym electronically at http://rnet.web.irs.gov/other/acronymdb.asp.

  3. The following are not listed in the acronym database:

    Acronym Term/Definition
    ACE Automated Correspondence Exam (Formerly Report Generation Software (RGS)/Batch)
    BLP Batch Leveraging Processing
    CDCC Child Dependent Care Credit
    CESS Correspondence Examination System Support
    CFC Campus Fraud Coordinator
    CPB Corporate Print Business
    FAM Filing Analysis Module
    RCP Research Compliance Project
    UDOC Uniform Definition of a Child

4.19.10.1.2  (01-01-2014)
Some Publications Used by Examination

  1. This list is not all inclusive.

    • Publication 17, Your Federal Income Tax (For Individuals)

    • Publication 78, Cumulative List of Organizations has been incorporated into Exempt Organizations Select Check (EO Select Check), which is now the on-line search tool for finding information on organizations eligible to receive tax-deductible contributions (Pub. 78 data). This is the same data on eligible electronic Pub. 78 web page. Users can rely on EO Select Check to determine whether a charitable contribution to an exempt organization is tax-deductible, just as they could rely on electronic Pub. 78.It is available electronically at http://www.irs.gov

    • Publication 501, Exemptions, Standard Deductions, and Filing Information

    • Publication 503, Child and Dependant Care Expenses

    • Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities

    • Publication 519, U.S. Tax Guide for Aliens

    • Publication 525, Taxable and Nontaxable Income

    • Publication 575, Pension and Annuity Income

    • Publication 555, Community Property

    • Publication 596, Earned Income Credit (EIC)

    • Publication 3498, The Examination Process

    • Publication 3498-A, The Examination Process (Examinations by Mail)

4.19.10.1.3  (01-01-2014)
Some Forms Used by Examination

  1. This list is not all inclusive.

    • Form 886 (Series), Explanations of Items

    • Form 3210, Document Transmittal

    • Form 3198, Special Handling Notice for Examination Case Processing

    • Form 4442, Inquiry Referral

    • Form 4549 / Form 4549-EZ, Income Tax Examination Changes

    • Form 4700, Examination Workpapers

    • Form 5344, Examination Closing Record

    • Form 5345–B, Examination Request Non-ERCS Users

    • Form 5600, Statutory Notice Worksheet

    • Form 11652, Questionnaire and Supporting Documentation Form 1040 Schedule C (Profit or Loss From Business)

4.19.10.1.4  (01-01-2013)
Other IRMs Pertaining to Examination Programs

  1. Other IRM chapters provide information on single topics that pertain to more than one function. Examination employees are responsible for researching and utilizing information contained in all reference materials. The following is a list of IRM chapters and sections pertaining to Examination programs (not all inclusive):

    • IRM 1.4.17, Compliance Managers Guide

    • IRM 1.5, Managing Statistics in a Balanced Measurement System

    • IRM 1.10, Office of the Commissioner of Internal Revenue

    • IRM 4.4, AIMS Processing

    • IRM 4.8.9, Statutory Notices of Deficiency

    • IRM 4.10.12, Frivolous Return Program

    • IRM 4.13, Audit Reconsideration

    • IRM 4.19.16, Claims

    • IRM 4.17, Compliance Initiative Projects

    • IRM 4.20, Examination Collectibility

    • IRM 4.22.5, Campus Compliance Operations Site

    • IRM 4.23, Employment Tax

    • IRM 4.25, Estate and Gift Tax

    • IRM 4.27, Bankruptcy

    • IRM 4.29, Partnership Control System (PCS)

    • IRM 4.31, Pass-Through Entity Handbook

    • IRM 5.1.18, Locating Taxpayers and Their Assets

    • IRM 9.1, Criminal Investigation Mission and Strategies

    • IRM 11.3, Disclosure of Official Information (also see IRM 21.1.3.2, General Disclosure Guidelines)

    • IRM 13, Taxpayer Advocate Service

    • IRM 20.1, Penalty Handbook

    • IRM 20.2, Interest

    • IRM 21.1, Accounts Management and Compliance Services Operations

    • IRM 21.3.7, Processing Third Party Authorizations onto the Centralized Authorization File (CAF)

    • IRM 25.1, Fraud Handbook

    • IRM 25.2, Information and Whistleblower Awards

    • IRM 25.6, Statute of Limitations

    • IRM 25.12, Delinquent Return Refund Hold Program

    • IRM 25.15, Relief from Joint and Several Liability

4.19.10.1.5  (01-01-2014)
Examination IRM References

  1. Examination employees are responsible for researching and utilizing information contained in all reference materials. The following is a list of IRM parts, chapters and sections pertaining to Examination programs (not all-inclusive):

    • IRM 3, Submission Processing

    • IRM 4, Examining Process

    • IRM 8, Appeals

    • IRM 9, Criminal Investigation

    • IRM 10, Security, Privacy and Assurance

    • IRM 21, Customer Account Services

4.19.10.1.6  (01-01-2013)
Correspondence Examination Letters

  1. Letters used for correspondence issues are listed below. These letters are used by both W&I and SB/SE.

  2. Additional information about the originator/owner of each letter can be found by researching the Electronic Publishing web site. Any revisions must be discussed with the BOD originator listed on the Electronic Publishing web site. See list below for applicable Computer Paragraph (CP) notices and letters.

    • CP 19, Examination Unallowable Items Notice, Balance Due

    • CP 20, Audit/Unallowable Items Notice, Overpayment

    • CP 72, Exam Frivolous Filer Notice

    • CP 75, taxpayer inquiry, exam initial contact letter – EIC refund frozen

    • CP 75A, taxpayer inquiry, exam initial contact letter – no refund frozen

    • CP 75C, taxpayer inquiry, EITC Recertification

    • CP 75 D, EITC Exam Initial Contact Letter, EIC -Entire Refund Frozen

    • CP 87A, duplicate EITC/dependent, duplicate primary to dependent, duplicate primary to primary (soft notice)

    • CP 87B, duplicate EITC/dependent claiming himself or herself (soft notice)

    • CP 87C, duplicate dependent with income greater than the standard deduction (soft notice)

    • CP 87D, duplicate dependent who filed joint (soft notice)

    • CP 85A, filing status rules EITC (soft notice)

    • CP 85B, qualifying child rules EITC (soft notice)

    • CP 85C, Schedule C filters EITC (soft notice)

    • Letter 105-C, claim disallowance

    • Letter 106-C, claim partially disallowed

    • Letter 525, proposed letter of change to return and appeal rights general 30 day letter

    • Letter 528 (SC), letter to transfer taxpayer(s) return as requested

    • Letter 530 (SC), no change for unallowable program and taxpayer has a refund remaining letter advising taxpayer of no change examination

    • Letter 531, general statutory Notice of Deficiency (TEFRA-Non-TEFRA)

    • Letter 539, reply to taxpayer when two or more returns are combined into one multiple-filers 30 day letter

    • Letter 545, reply to taxpayer when return filed is recomputed as joint contact letter- multiple filer

    • Letter 555, reply to taxpayer after statutory notice has been issued

    • Letter 566 (CG), initial contact notifying taxpayer of examination and requesting additional supporting documentation

    • Letter 566-B (CG), request for supporting documentation with report proposing change

    • Letter 566-B-EZ (SC), simplified Service Center ICL/30 day combo letter

    • Letter 566-D (SC), additional information Form 1040X

    • Letter 566-E (SC), initial contact letter for Questionable Refund Program (QRP)

    • Letter 566-H, initial contact letter for Questionable Refund Program backlog cases

    • Letter 569 (SC), letter of claim disallowance

    • Letter 570 (SC), claim allowed in full

    • Letter 590 (SC), no change and books and records examined

    • Letter 692 (SC), reply to request for reconsideration of findings

    • Letter 693 (SC), reply to taxpayer's request for reconsideration of assessment

    • Letter 718 (SC), self-employment tax quiz letter

    • Letter 907, request for statute extension

    • Letter 916 C, Claim Incomplete for Processing; No Consideration

    • Letter 928, follow-up for statute extension

    • Letter 937, transmittal letter for power of attorney

    • Letter 1024 (SC), after consideration return accepted as filed.

    • Letter 1024-A (SC), letter advising of acceptance of return after further consideration.

    • Letter 1226 (SC), correction programs other than unallowable items when books and records have not been examined closing letter no change

    • Letter 1384 (SC), notice of deficiency (bankruptcy)

    • Letter 1654 (SC), reply to taxpayer who requests case be transferred to an Area Office

    • Letter 1862 (SC), computed tax and penalties based on information available (SFR)

    • Letter 2083 (SC), cover letter for Form 4549-A.

    • Letter 2194 (SC), alternative minimum tax proposal letter

    • Letter 2246 (SC), sending taxpayer Form 4549/ Form 4549-EZ with adjustments and penalties (TEFRA) cover letter for Form 1902-C and Form 1902-B

    • Letter 3164 (SC), third party contact

    • Letter 3175-C, letter used by SB/SE Exam to respond to frivolous filer who send frivolous correspondence to IRS

    • Letter 3176-C, frivolous information letter update request

    • Letter 3219 (SC), statutory notice of deficiency

    • Letter 3279, final determination partial allowance IRC 6015(b) or (c)

    • Letter 3338-C, audit reconsideration acknowledgment letter

    • Letter 3339-C, audit reconsideration additional substantiation letter

    • Letter 3340-C, audit reconsideration denial letter

    • Letter 3454 (SC), initial contact for discretionary programs - married filing joint

    • Letter 3454-A (SC), initial contact for discretionary programs - single

    • Letter 3500, interim letter to correspondence from taxpayer (replaces 2834)

    • Letter 3501 (SC/CG), second interim letter to correspondence from taxpayer (replaces 2835)

    • Letter 3540, letter proposing the addition of alimony Income

    • Letter 3540-A, initial letter inquiring about unreported alimony Income

    • Letter 3541, letter proposing the disallowance of an alimony deduction

    • Letter 3541-A, initial letter asking for verification on alimony deduction

    • Letter 3581 (SC/CG), no change closing letter (SB/SE)

    • Letter 3624, NRP correspondence exam letter

    • Letter 4306, Reply to Closed Correspondence Examination Mail

    • Letter 4391, non examined non-filer

    • Letter 4392, combat zone examination closed

  3. All versions of Campus Correspondence Examination letters must have the approval of the Office of Taxpayer Correspondence (OTC) before any changes can be made. All letter headers will contain:

    • Taxpayer Identification Number

    • Form

    • Year

    • Person to Contact Name

    • Contact Person Identification Number

    • Contact Telephone Number

    • Contact Fax Number

    • Contact Hours

  4. The correspondence letters can be prepared by the clerical staff or tax examiners/Correspondence Examination Technicians (CET).

  5. Extension routed phone numbers must be included on all replies to taxpayer correspondence that are not included in the corporate call environment.

  6. Letters mailed on cases from the Campus Correspondence Examination inventory will include the appropriate BOD corporate toll free number, "Tax Examiner" as person to contact and the site specific identification number. Any attachments sent with the letters will include the same contact information, such as the Form 4549, etc.

  7. Work papers will include the tax examiner's name and standard employee identifier (SEID). The SEID must precede the examiner's remarks in the "Conclusion" section.

4.19.10.1.6.1  (01-01-2013)
Standard Suspense Periods for Correspondence Examination

  1. The following tables (Discretionary Case Suspense and EITC Case Suspense) indicate the required suspense periods for all cases being worked in Correspondence Examination and the earliest day for the mailing of the next letter. The tables apply to both manually issued letters and those issued through the Automated Correspondence Exam (ACE) System (formerly RGS Batch.).

    Case Suspense Table
    Letter/Notice being issued AIMS/CEAS letter status ACE (RGS/ BATCH) Suspense Period Manual mailing/closing allowed on: Letter/Notice being issued: days = the days from the previous letter date
    EIC - Initial Contact Letter (ICL) without report 10 30 days day 31
    • ACE – day 42

    • Manual – No earlier than day 31

    Non EIC - Initial Contact Letter (ICL) without report 10 45 days day 46
    • ACE - Day 63

    • Manual-No Earlier than day 46

    30 day letter with report 22 45 days day 46
    • ACE – day 63

    • Manual – No earlier than day 46

    15 Day letter with report (i.e., Letter 692) 23 or 25 30 days day 31
    • ACE – day 42

    • Manual – No earlier than day 31

    Statutory Notice of Deficiency (Within USA) – Certified Mail 24 105 days day 106 N/A
    Statutory Notice of Deficiency (Outside of USA) – Registered Mail 24 165 days day 166 N/A

  2. Generally, a manually prepared letter/notice may be mailed on the 16th day after the taxpayer’s reply due date. Specifically, letters that the taxpayers are given 30 days to respond, the subsequent letter may not be mailed earlier than the 46 days. The only exceptions to this are the Letter 692 and the EITC Initial Contact Letter (ICL). The manually prepared Statutory Notice of Deficiency may be mailed no earlier than the 31st day following a Letter 692. The EITC 30 day letter with report may be mailed no earlier than the 31st day following the ICL.

  3. A letter cannot be transmitted (triggered) to a Consolidated Print Site (CPS) until the ACE suspense period has expired.

4.19.10.2  (01-01-2014)
Research and Development – Wage and Investment

  1. The W&I Headquarters Reporting Compliance Discretionary Examination (Non-EITC) Group will coordinate with W&I Campus Operations Managers all research and development programs/projects within W&I regarding trends, schemes or ideas desired to assist in determining research items. Research and development issues may be developed into tests or studies, in conjunction with the Research organization. Campuses participating in Research tests or studies will be asked to capture data for Research analysis via data collection instruments (DCI).

  2. W&I Headquarters will control the source and selection of research and development returns. W&I is using the Compliance Data Environment (CDE), an automated process, to identify the workload. The development of filters will be done at the national level.

  3. All Research project returns will be established on AIMS using the Source Code and Project Code designated by the Headquarters Reporting Compliance Discretionary Examination Analyst.

4.19.10.2.1  (01-01-2010)
Research and Development – Small Business/Self-Employed

  1. Research and Development (R&D) may be initiated by local or Headquarters Personnel. The program goal is to improve compliance through a more timely identification and resolution of emerging issues. Recognizing and preventing the next tax scheme from proliferating is an efficient use of limited resources. Tax schemes are promoted through seminars, advertisements, publications and the internet. While the internet has fueled the growth of many new and old schemes, they also spread by word of mouth. As one taxpayer succeeds in avoiding tax, the scheme takes hold and grows exponentially. While the loss of revenue to the Treasury is substantial, there are also economic and social effects on the taxpayers who become involved in tax schemes. The taxpayer faces not only an income tax deficiency, but also interest, penalties and possible criminal sanctions. While many of those involved in tax schemes simply oppose taxes, the group also includes vulnerable individuals who have been duped by skilled promoters.

  2. Program goals are accomplished as follows:

    1. Screening a sample of returns on the front end as they are filed.

    2. Resolving identified problems at the lowest level as follows:

      Multi-functional Approach
      • Taxpayer education

      • Form revision

      • Processing changes

      • Projects identified for targeted areas to measure the extent of non-compliance and establish technical positions and legal precedence

  3. Compliance team personnel are expected to be innovative in their approach to identifying sources of returns with high potential for abuse or non-compliance. Secure and screen those returns, and recommend corrective actions.

  4. CDE is a security-certified, menu driven computer system that contains a combination of the transcribed return transaction files and selected entity information. IMF (Individual Master File) includes Form 1040, Form 1040-A, Form 1040-EZ, and Form 1040-NR. BMF (Business Master File) includes Form 990-C, Form 1041, Form 1065, Form 1120, and Form 1120-S. In addition, CDE contains fields calculated especially for the CDE data, such as Activity Codes, Business Operating Division (BOD) Codes, Cash-T, Gross Profit Percentage, Market Segment Code, perfected NAICS (North American Industry Classification System) Code, Total Revenue, and others.

  5. Refer to the CDE website for additional information.

4.19.10.2.2  (01-01-2010)
Communication Compliance Team Forum SB/SE

  1. Periodic meetings may be held for Campus Compliance Team Coordinators and National Representatives to ensure uniform operation of the program, to share information and expertise, and to develop national strategies for accomplishing program goals.

  2. The Headquarters Examination Analyst will maintain a roster containing the names, telephone numbers, voice mail service (VMS) numbers, fax numbers, and addresses of all Compliance Team Coordinators. This roster will be updated promptly. The Headquarters Examination Analyst should be notified promptly of all changes.

  3. On a quarterly basis, the Campus Compliance Team Coordinators will forward a report to the Headquarters Examination Analyst on the status of all projects/initiatives in process as well as those in developmental stages. The Headquarters Examination Analyst will compile and distribute to all Coordinators and to the W&I Reporting Compliance Analyst a complete report of all projects/initiatives in process and in developmental stages.

  4. It is imperative that an open line of communication between Compliance Teams at the campuses and SB/SE Headquarters, continues to be the primary goal to have an efficient and effective early detection compliance program.

4.19.10.2.3  (01-01-2010)
Source of Returns SB/SE

  1. SB/SE Compliance Team personnel are expected to be innovative in looking for sources of returns where high potential for abuse or non-compliance may exist. Liaisons with other campus functional areas should be used for assistance in identifying returns and employing methods from which projected conclusions can be drawn.

  2. Contact the campus CDE Coordinator when Compliance Team members identify programs containing specific selection criteria which can be matched against the Returns Transaction File data base records files.

  3. CDE provides the capability to do market segmentation and issue identification with clear cross-functional benefits for SB/SE. SB/SE Campuses have a CDE database for each area office served. CDE is accessed on-line through the Employee User Portal (EUP). The data is updated monthly and includes the current year plus three previous years. CDE has stringent operating restrictions to ensure the security of the data and that taxpayer privacy is not compromised.

  4. CDE may be used to retrieve specific taxpayer data; e.g., a three year spread of a taxpayer's returns, including a Cash-T (cash transaction) analysis. This information may be used for case building or return selection decisions. A CDE facsimile may be used in lieu of the original return, much like RTVUE (IMF Taxpayer Data File) print.

  5. CDE may be used to research a market segment to identify samples of returns to determine the level of non-compliance and to decide whether a formal Compliance Initiative Project (CIP) should be started.

  6. No compliance initiative, examination action, taxpayer educational effort, etc., should be started on specific taxpayers identified using CDE, without the approval of a specific Compliance Initiative Project. The Compliance Initiative documentation should clearly define the selection criteria used.

  7. A discretionary source of returns for SB/SE can be made available through the Monitor Run Report (ATSO1). This report is produced locally at each Campus against the GMF16, which is a copy of the GMF15 (Campuses good tape which goes to ECM-MCC where it posts to the Master File) and is retained locally. The Monitor Run program produces charge outs (not AIMS) and a summary report of returns containing Schedule C, Profit or Loss From Business and/or Schedule F, Profit or Loss From Farming with specified criteria. Returns will be pulled and forwarded along with the charge outs to the Compliance Team Coordinator for further evaluation and examination potential.

4.19.10.2.4  (01-01-2010)
SB/SE Campus Compliance Projects

  1. If recurring significant errors of the same type are identified by one or more SB/SE Campus Compliance Teams, and it is determined that they should be addressed through examinations, projects are implemented to measure the extent of the non-compliance and determine whether an approved Examination program project is warranted.

  2. Return selection methods are used that will provide the best estimates of noncompliance and that can be duplicated at the least cost if a program project is eventually implemented.

  3. The SB/SE Headquarters Examination Analyst provides assistance for developing the methodology for project approval. Decisions can be made as to either working selected returns in Correspondence Examination or at the Area Offices, depending on the complexity and the availability of resources. Each return selected for examination is identified with a technical explanation of the tax issue.

  4. A classification check sheet is prepared for non-project returns with potential non-compliance. Returns are established on AIMS using Source Code 20, Campus Examination Local Classification, and a locally defined Project Code 0500–0575.

4.19.10.2.5  (01-01-2011)
SB/SE Compliance Initiative Project (CIP) Procedures

  1. Compliance Initiative Project procedures are followed when groups of returns with the same areas of potential non-compliance are selected and forwarded for examination in a project, either in the Campus or Area Office.

  2. Compliance Initiative Project (CIP) refers to and replaces all IGP and Compliance 2000 projects. CIPs are characterized by the use of internal and external data to identify and quantify areas of noncompliance. They usually will involve a study, survey, or other analysis of a group of individuals such as those involved in a specific economic activity, undertaken to identify, measure, or analyze compliance with the tax laws. CIPs are often multi functional in their approach. Any project using taxpayer identifying data is a CIP research activity. CIPs do not include routine business operations. CIPs must be approved prior to compliance contact with taxpayers.

  3. A CIP Form must be prepared for all Compliance Initiative Projects. If the number of taxpayers involved is less than 50, Form 13502, Compliance Initiative Project Authorization - Part One must be prepared. If more than 50 taxpayers are involved, a Form 13498, Compliance Initiative Project Authorization - Part Two, must be prepared. A copy of the CIP Form must be forwarded to the Headquarters CIP Analyst. See IRM 4.17.4.3, Part One CIP Authorization Request and IRM 4.17.4.4, Part Two CIP Authorization Request. CIPs should contain authorization information, background information, and any research used to identify taxpayers. Part I CIPs require the concurrence signatures of the Project Coordinator’s Territory Manager (TM), Disclosure (only if third party data is gathered on individual taxpayers) and the HQ Analyst. The final approval is the Operating Unit Area Director (or PSP TM if designated). Part II CIPs require the concurrence signatures of the Project Coordinator’s Territory Manager, Disclosure (only if third party data is gathered on individual taxpayers), Communication Liaison and Disclosure, PSP TM, Examination Return Selection (ERS) Program Manager, HQ CIP Analyst, and any other impacted stakeholders. The final approval is the Operating Unit’s Area Director and the Director of Exam Planning and Delivery.

  4. CIP procedures do not apply to routine business operations. Routine business operations are structured activities commonly conducted in day-to-day operations in which taxpayers are specifically identified. No CIP documentation is prepared.

  5. See IRM 4.17, Compliance Initiative Projects for detailed information and procedures.

4.19.10.2.6  (01-01-2010)
SB/SE Reporting Requirements Project Returns

  1. The SB/SE Campus Compliance Team Coordinator ensures that a tax issue explanation is prepared for each project return selected for examination.

  2. Establish each return selected for examination on AIMS using Source Code 11, SB/SE Campus Examination Compliance Team Studies, Tests and Research, with an appropriate locally Defined 0500–0575 Project Code, which will be communicated to the Headquarters Examination Analyst for monitoring purposes.

  3. The SB/SE Campus Examination Compliance Team Coordinator can request to establish a specific Project Code in those instances where similar type project returns are being identified, selected and examined at multiple Campuses. In those instances, the SB/SE Headquarters Examination Analyst will secure a specific Project Code (0800 – 0899) and or Tracking Code to be used with that inventory.

4.19.10.3  (01-01-2010)
Disclosure

  1. One of the cornerstones of the American tax system is confidentiality. The taxpayers must feel secure in sharing private and detailed financial information with the government. As such, all employees have a responsibility to ensure that the privacy and confidentiality of tax records are given the highest degree of security. In addition, as detailed in IRM 4.19.13.2.7, Standard 7 — Case Administration, Disclosure is one of the key elements under the Case Administration Auditing Standards.

  2. All employees must be familiar with the basic information available in IRM 21.1.3.1, Overview, Accounts Management and Compliance Services Operations. More detailed information is always available in IRM 11.3, Disclosure of Official Information, and from your local Disclosure Officer.

  3. Before disclosing any tax information, you must be sure you are speaking with the taxpayer or authorized representative. See the Taxpayer Authentication guidelines in IRM 21.1.3.2, General Disclosure Guidelines. Also, before leaving any messages on a taxpayer's answering machine, review IRM 11.3.2.6.1, Leaving Information on Answering Machines/Voice Mail. Fax procedures contained in IRM 11.3.1.11, Facsimile Transmission of Tax Information, must be reviewed prior to faxing confidential information to the taxpayer.

4.19.10.4  (01-01-2013)
Fraud Referrals

  1. The primary objective of the National Fraud Program is to foster voluntary compliance through the recommendation of a criminal investigation and/or civil penalties. SB/SE and W&I Campus Examination Operations have a program which includes assertion of the civil fraud penalty and imposition of the 10-year ban on Earned Income Tax Credit (EITC).

  2. The objective of the Campus Fraud Program is to:

    1. Identify cases with potential fraud.

    2. Develop fraud with guidance from the Fraud Technical Advisor (FTA).

    3. Transfer potential fraud cases to the field for initial or further development. The transfer of potential fraud cases to the field for initial or further development ONLY occurs if it is beyond the scope and ability of the campus examination operation. The transfer of any case in the campus fraud program to the field MUST be approved by the assigned FTA.

    4. Refer potential criminal fraud cases to Criminal Investigation (CI) for criminal investigation consideration.

    5. Pursue assertion of the civil fraud penalty and/or impose the 10 year ban on EITC.

    Note:

    In the W&I campuses, assertion of the civil fraud penalty is centralized in Austin. The other four campuses will continue to follow the fraud program guidelines as outlined in subsequent sections of this IRM.

  3. The forms used to develop and refer cases with potential fraud are as follows:

    1. Form 13549, Campus Fraud Lead Sheet

    2. Form 11661, Fraud Development Recommendation - Examination; and

    3. Form 2797, Referral report of Potential Criminal Fraud Cases.

  4. Various contacts are available for assistance and guidance for this program:

    1. The various campus operations should contact the applicable Functional Fraud Coordinator (FFC), if available.

    2. The FFC should contact the Campus Fraud Coordinator (CFC) / Exam Fraud Coordinator (EFC).

    3. The CFC/EFC should discuss any case questions with the assigned Fraud Technical Advisor (FTA).

    4. The CFC/EFC should discuss any questions regarding procedures, policy or other issues with the analyst within Headquarters, Exam Policy.

4.19.10.4.1  (01-01-2014)
Identifying Fraud in Correspondence Examination

  1. During the course of an examination, information may be obtained which indicates that taxpayers may have or are attempting to understate their tax liability through fraudulent means. Although only a small percentage of cases are fraudulent, it is necessary to detect and report any potential fraudulent activities. The following list identifies examples of indicators of fraud that are most likely to be found in a campus environment (this list is not all inclusive and may involve a promoter/return preparer see IRM 4.19.10.4.14, Return Preparer Referrals):

    • Omission of income,

    • Apparent false itemized deductions,

    • Apparent altered Documents,

    • Apparent false adjustments to income,

    • Apparent false Form W-2/Form 1099, etc. used to claim EITC and other refundable credits,

    • Apparent false Schedule C, Profit or Loss From Business, used to claim EITC and other refundable credits,

    • Apparent Identity theft or sale/use of TIN if perpetrator can be identified,

    • Apparent false basis and type of assets,

    • Apparent false transaction date for asset disposition,

    • Apparent false statements made by taxpayer,

    • Apparent false exemptions, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Apparent use of decedent's SSN,

    • Apparent false business, rental or farm expenses,

    • Apparent overstatement of Federal withholdings,

    • Apparent false refundable credits, and

    • Amended return or claim for refund with any of the above.

    Note:

    Examiners and fraud coordinators need to conduct research if the case is from the Questionable Refund Program (QRP) inventory referrals from Accounts Management Taxpayer Assurance Program (AM TAP). See IRM 4.19.10.4.3, Responsibilities of the Functional Fraud Coordinator (FFC), for additional procedures.

  2. If fraud is suspected, the case will be referred to the Functional Fraud Coordinator (FFC), if one exists, or the Campus Fraud Coordinator/Exam Fraud Coordinator (CFC/EFC) depending upon the structure of the fraud program.

  3. The case will then be developed by the CFC/EFC in conjunction with the Fraud Technical Advisor (FTA) to determine if affirmative acts (i.e., deceit, subterfuge, camouflage, concealment ) of fraud exist. The Service must prove that the taxpayer acted deliberately and knowingly with the specific intent to violate the law.

  4. If preparer/promoter involvement is identified, a referral should be made in accordance with the procedures in IRM 4.19.10.6, Return Preparer Scheme Identification.

  5. Refer to IRM 25.1.2, Recognizing and Developing Fraud, and IRM 25.1.14, Campus Examination Fraud Procedures, for additional information.

    Note:

    Any potential fraud referrals coming from CI or AM TAP such as Questionable Refund Program (QRP), Return Preparer Program (RPP) or Return Preparer Analysis Tool (RPAT) should be coordinated through the HQ Analysts who will contact CI HQ and the referring Scheme Development Center (SDC).

4.19.10.4.2  (01-01-2014)
Responsibilities of the Correspondence Examination Technicians (CET) and the Tax Examiners (TE)

  1. Correspondence Examination Technicians/Tax Examiners (CET/TE) must familiarize themselves with indicators of fraud. See IRM 4.19.10.4.1, Identifying Fraud in Correspondence Examination, and IRM 25.1.2, Recognizing and Developing Fraud.

  2. Identify indicators of fraud during the examination process. This may occur:

    1. based upon pre-examination analysis

    2. upon determination that the same issue or scheme exists in other tax examiner's inventory

    3. based upon initial taxpayer response and/or document submission in response to Initial Contact Letter (ICL)

    4. based upon taxpayer response and/or document submission in response to the issuance of a 30-day letter

    5. based upon taxpayer response/document submission to the issuance of a Statutory Notice of Deficiency (or 90-day letter)

  3. Maintain an accurate case record that reflects all statuses/actions taken, documents received and conversations with the taxpayer, representative, return preparer and third parties.

  4. Document all actions and statements made by the taxpayer, return preparer, representative and third parties. Documentation is critical in the referral and development of fraud. Do not mark up or write on the documents provided by any of the above. The TEs and other employees involved in various steps of case development should maintain, when possible, contemporaneous and detailed narrative of taxpayer contact. This may be the most important portion of the case development.

  5. Follow the existing Auditing Standards and preparation of workpapers as defined in IRM 4.19.13, General Case Development and Resolution.

  6. Discuss the indicators of fraud with the team manager/lead. If the team manager/lead concurs, complete sections one and two (Information and Indicators of Fraud) of Form 13549, Campus Fraud Lead Sheet, detailing the taxpayer's suspicious actions/apparent altered or false documents received and the specific indicators of fraud identified. See Exhibit 4.19.10-1, Campus Fraud Lead Sheet, for a completed sample of Form 13549.

  7. Secure the Team Manager's/Lead's initials with the date signed and forward Form 13549 to the FFC, if one exists, or directly to the CFC/EFC depending upon the fraud program structure for fraud development consideration.

  8. In SB/SE, Exam cases will be updated to status 38, Suspense Other, when the manager /lead approves Form 13549. See IRM 4.19.10.4.9(5), AIMS Case Control and PSP Transfer Procedures.

  9. If taxpayer responds during status 22, 30-day letter, in such manner to indicate fraud, CET/TE will expedite the referral process (do not change status code); but RGS may need to be updated to prevent automatic issuance of the 90-day Statutory Notice of Deficiency.

  10. If taxpayer responds during status 24, 90-Day, in such a manner to indicate fraud, CET/TE will expedite the referral process (do not change status code), but RGS may need to be updated to ensure the prevention of the tax and/or penalty assessment as a result of the automatic default of the 90-day, Statutory Notice of Deficiency.

  11. CET should research identity theft indicators on AIMS and IDRS. Refer to IRM 10.5.3, Identity Protection Program, and IRM 4.19.13.25, Identity Theft.

4.19.10.4.3  (01-01-2014)
Responsibilities of the Functional Fraud Coordinator (FFC)

  1. The Functional Fraud Coordinator (FFC) positions are in the Automated Under Reporter (AUR), Examination functions and if applicable, in Classification and/or Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) Units in the SB/SE Campuses and the AUR function only in the W&I Campuses.

  2. Serve as point of contact for the tax examiner and/or team lead, for assistance with potential fraud referrals in their function.

  3. Review Form 13549, received from the tax examiners and/or team leads, to determine if sufficient indicators of fraud exist.

  4. Ensure that Form 13549 is properly completed by CET/TE and approved by the team manager/lead.

  5. Conduct preliminary research:

    1. Research IDRS (IMFOL, RTVUE, and IRPTR, if available) for the prior and subsequent years to determine if the same issues (pattern) or other fraud related matters exist for case development;

    2. Research IDRS for QRP indicator (Integrity & Verification Operation (IVO), CI or Exam involvement). See IRM 4.19.14.8.2, QRP Source Code and Project Codes. If transaction code (TC) 971 with action code (AC) 136, 134, 099 or 617 are present in the current, prior or subsequent years, do not refer the case unless false, or altered documents are present; and

    3. Document the research on Form 13549, Section IV, Developmental Actions.

    Note:

    Research IDRS and AIMS for identity theft indicators on the account. Refer to IRM 10.5.3, Identity Protection Program, and IRM 4.19.13.25, Identity Theft.

  6. Submission errors requiring the FFC to return to submitter for correction and re-submission, before preliminary research can be completed by the FFC:

    1. The CET/TE didn't complete sections one and two (Information and Indicators of Fraud) of the Form 13549 detailing the taxpayer's suspicious actions/apparent altered of false documents received and the specific indicators of fraud identified. See IRM 4.19.10.4.2(6). The FFC will return the Form 13549 to the CET/TE to insert the missing information. After the missing information is inserted, the CET/TE will resubmit the referral to the FFC.

    2. The team's manager/lead didn't initial and date section five (Activity Record) of the Form 13549. See IRM 4.19.10.4.2 (7). The FFC will return the Form 13549 to the team's manager/lead to initial and date section five of the form. After section five is initialed and dated, the team's manager/lead will resubmit the referral to the FFC.

    3. The SB/SE Exam case wasn't updated to status 38, Suspense Other. See IRM 4.19.10.4.2(8). The FFC will return the case to SB/SE Exam Team for modification. After the case has been updated to status 38, the SB/SE Exam Team will send the referral back to the FFC.

  7. Preliminary research on the year submitted is not required in the following situations. If the FFC determines there was merit to the referral but for these administrative timeframes and actions, fraud development is impractical; the FFC should determine if the same issues exist on subsequent year(s). If so, the FFC should provide the CFC/EFC the information to determine if the CFC/EFC would pursue fraud development on the subsequent year(s). If the CFC/EFC approves, the applicable case information in the declined year's files must be copied and provided for the subsequent year(s) case development.

    1. If the taxpayer responds during the status 24 period, with what appears to be false or altered documents, the case should immediately be discussed with the team lead and CFC/EFC. The FTA should be contacted and a prompt decision made regarding the case. The issuance of a STAT Notice/L3219 does not preclude subsequent fraud development; but it does create some additional considerations.

    2. The Assessment Statute Expiration Date (ASED) of the SB/SE Exam case is less than one year. The FFC will decline the referral and return it to the SB/SE Exam team.

  8. Preliminary research on the year submitted is not required in situations where after the preliminary review of the SB/SE Exam case file, the FFC determines that there is insufficient evidence for fraud development. For example, the SB/SE Exam case file didn't contain false or altered documents that could be refuted by a third party contact. The FFC will decline the referral and return it to the SB/SE Exam team. The FFC should provide feedback as to the reasoning for the declination as to provide the referring tax examiner an understanding as to the reason the case could not be subsequently developed for fraud.

  9. If identity theft is suspected, discuss the case with the CFC/EFC and refer the case only if the perpetrator is identified.

  10. Make a determination to accept or decline the fraud lead and complete Section V, Activity Record, of Form 13549 within 10 business days of receipt:

    1. If the referral is accepted, the completed form and the case file will be forwarded to the CFC/EFC for fraud development consideration. If the case is being transferred from AUR, the FFC will close the case from the AUR system and annotate on Form 13549 that the case has been accepted for examination. No tax and/or credit adjustments should be made by AUR. The AUR discrepancy will be addressed as part of the examination.

    2. If the referral is declined for fraud development, the FFC must provide a written explanation for the declination in Section VI, Explanation for Declination of Form 13549 and return a copy of the completed form and the case to the CET/TE through the team manager/lead.

  11. Complete the Campus Fraud Monitoring Report - Taxpayer Identification Section and Functional Fraud Coordinator Section.

  12. Place the most current Form 13549 in the case file and retain a copy of the form for 3 years.

  13. If the FFC receives a "status 242 referral" and he/she concurs with fraud potential, referral to the CFC/EFC must be expedited.

  14. See IRM 25.1.14, Campus Examination Fraud Procedures, for additional procedures and those concerning the responsibilities of the FTA.

4.19.10.4.4  (01-01-2014)
Responsibilities of the Exam Fraud Coordinator (EFC) - W&I Only

  1. Review Form 13549 received from the AUR FFC or directly from the CET/TE to determine if sufficient indicators of fraud exist.

  2. Ensure that Form 13549 is properly completed and approved by the initiator's manager or FFC.

  3. Conduct research:

    1. As prescribed in IRM 4.19.10.4.3(5) Responsibilities of the Functional Fraud Coordinator (FFC),

    2. On the Currency Banking Retrieval System (CBRS) and Accurint, etc. (if available), and

    3. Document the results on Form 13549, Section IV, Developmental Actions.

  4. If identity theft is present, proceed only if the perpetrator is identified.

  5. Make a determination to accept or decline Form 13549 within 21 business days of receipt. This includes contacting the FTA within 10 business days after determining that the fraud lead has potential fraud development.

    1. If the referral is accepted, the EFC will contact the FTA to discuss fraud development consideration, or

    2. If the referral is declined, the reason for the declination will be entered in Section VI, Explanation for Declination of Form 13549 and the case file returned to the FFC (if involved in the referral process) or the CET/TE through the team manager/lead.

    3. EFC will update Exam cases to EGC 5024 upon receipt and if declined, move them back to prior Corr Exam EGC.

  6. The Austin EFC will also follow the procedures contained in IRM 4.19.10.4.5, Responsibilities of the Campus Fraud Coordinator (CFC), and IRM 4.19.10.4.7, Fraud Development Procedures.

  7. Follow the table below:

    Referral Process
    If And Then
    The referral originated in a W&I Exam/AUR function other than Austin The FTA concurs that the case can be developed for fraud in Correspondence Examination The EFC will:
    1. Complete Form 11661, with the facts of the case and results of the research.

    2. Secure FTA recommendation to transfer case to Austin Exam via Form 11661.

    3. Transfer the case to Austin Exam via the Job Aid on SERP, W&I Fraud Case Transfer Procedures.

    The referral originated in the Austin Exam/AUR function The FTA concurs that the case can be developed for fraud in Correspondence Exam The Austin EFC will:
    1. Complete Form 11661 with the facts of the case and results of the research.

    2. Secure FTA recommendation to update case on AIMS to Status 17 via Form 11661.

    3. Follow the procedures in IRM 4.19.10.4.7, Fraud Development Procedures, for development of case and assertion of the civil fraud penalty/imposition of the 10-year EITC ban.

    The referral originated in any W&I Campus Exam The FTA concurs that the case should be developed by Area Office Examination The EFC will:
    1. Complete Form 11661 with the facts of the case and results of the research.

    2. Secure FTA recommendation to transfer the case to the field via Form 11661.

    3. Follow the transfer procedures in IRM 4.19.10.4.9, AIMS Case Control and PSP Transfer Procedures.

    The referral originated in any W&I Campus Exam The FTA concurs that the case should be referred to CI for criminal investigation consideration The EFC will:
    1. Complete Form 11661 and Form 2797, with the facts of the case and results of the research.

    2. Secure FTA recommendation to update case on AIMS to Status 17.

    3. Transfer case to CI per IRM 25.1.3, Criminal Referrals.

    Note:

    If the potential fraud referral transferred for fraud development is declined in Austin, then the case will be sent to Austin Corr Exam to be worked. The case will not be returned to originating campus. See IRM 4.19.10.4.7, Fraud Development Procedures, and Job Aid on SERP, W&I Fraud Case Transfer Procedures.

  8. Complete the Campus Fraud Monitoring Report - The Taxpayer Identification Section, the Exam Fraud Coordinator Section and the Fraud Technical Advisor Recommendation Section.

  9. See IRM 25.1.14, Campus Examination Fraud Procedures, for additional procedures and those concerning the responsibilities of the FTA.

4.19.10.4.5  (01-01-2014)
Responsibilities of the Campus Fraud Coordinator (CFC)

  1. Follow the procedures prescribed in IRM 4.19.10.4.4, Responsibilities of Exam Fraud Coordinator (1) through (5).

  2. If the CFC declines the fraud referral; then he/ she will:

    1. Annotate the reason for declination on Form 13549, Section VI, Reason for Declination,

    2. Update the Campus Fraud Monitoring Report, and

    3. Return the completed Form 13549 to the CFCs manager. The CFC should suggest the examiner consider applying the Negligence Penalty and the Two-Year Ban if EITC is involved by making the appropriate notations on the returning Form 13549.

  3. Upon acceptance of the fraud lead by the CFC; he/she will:

    1. Contact the FTA to review the case file and discuss the indicators of fraud;

    2. Prepare Form 11661, if the FTA concurs that the indicators of fraud warrant fraud development; 1) Forward the completed Form 11661 to the FTA for recommendation approved via signature, to develop fraud in the Campus or transfer to the field for fraud development; 2) Update the case on AIMS to status code 17 (fraud development) upon receipt of a signed Form 11661, 3) Update the AIMS group organizational code to the applicable exam group code assigned to the campus fraud coordinator. The development of the case and the fraud penalty is the responsibility of the CFC, and 4) Proceed with the agreed upon "Plan of Action" (audit steps required to develop fraud) prepared by the FTA. See IRM 25.1.2.2(5), Fraud Development Procedures, and IRM 4.19.10.4.7, Fraud Development Procedures.

    3. Update the Campus Fraud Monitoring Report; and

    4. Notate all actions taken on Form 13549 and return a copy of the completed form to the CET/TE through the FFC and/or the team manager/lead. This should clearly indicate the acceptance of the fraud referral and the applicable status and organization code of the case is being updated to.

  4. During the fraud development process, Counsel or the FTA may determine that sufficient evidence does not exist to sustain the civil fraud penalty. If so, the case will be returned to the prior status code and the CFC should continue with the examination. The CFC should appropriately consider the alternative position by applying the Negligence Penalty and the Two-Year Ban if EITC is involved.

  5. Additional duties and responsibilities of the CFC include:

    1. Developing the civil fraud penalty issue when affirmative acts of fraud are established, including the 10 Year EITC Ban, if applicable.

    2. Coordinating the civil fraud penalty case/10-year EITC Ban with the FTAs and Counsel.

    3. Preparing and issuing the 30-day letter.

    4. Composing the language for the Form 886-A Overview, explanation of adjustments for the fraud issue(s).

    5. Computing and/or reviewing the civil fraud and/or fraudulent failure to file penalty computations.

    6. Assisting and/or preparing the Statutory Notice of Deficiency containing the Civil Fraud (10-Year EITC Ban) and/or Fraudulent Failure to File Penalties; and ensuring the proper alternative positions are specified in the 90-day letter package.

    7. Coordinating with Counsel for the penalty development at the 30-day letter stage for W&I Campuses and the 90-day letter stage for SB/SE campuses.

    8. Preparing Form 2797 and referring case to CI if affirmative acts of fraud are established and criminal criteria are met.

    9. Maintaining copies of the file including Form 13549, Form 11661, and Form 2797 for a retention period of 3 years.

    10. Evaluating audit reconsideration requests of the civil fraud penalty which had been asserted by the campus.

    11. Coordination and/or delivery of the fraud training for new campus employees; as well as, annual fraud awareness for Continuing Professional Educational (CPE).

    12. Serving as the point of contact with the applicable Headquarters(HQ) Analysts.

    13. Monitoring, updating and ensuring accuracy of the Campus Fraud Monitoring Report. This includes the comparison to the National Fraud report reflecting FTA approved FORM 11661s to ensure the campus fraud monitoring database is in agreement with cases under approved fraud development; as well as the status of these fraud cases.

    14. Working the AIMS Status Workload Report that is generated for Status 17, in the appropriate Employee Group Code for the Campus Fraud Coordinator EGC.

    15. Timely respond to the Headquarter Analyst regarding the required quarterly update/correction to the shared sharepoint access to the Campus Fraud Monitoring Report.

    16. Provide an updated/corrected campus fraud program staffing chart to the Headquarter analyst when any changes are made.

4.19.10.4.6  (01-01-2013)
Status 22 (30-Day) Referrals

  1. The CFC/EFC will coordinate with the FTA and Counsel to discuss the subsequent course of action when the taxpayer is suspected of submitting false or altered documentation after the issuance of the Statutory Notice of Deficiency. This occurs when the case is in Status 24 (90-day).

    Note:

    These actions are applicable when the first indication of fraud and/or submission of altered documents occurs ONLY after the issuance of the 90-day letter. The tax examiner generally should not issue a 90-day statutory notice on the case with suspected fraud potential prior to preparing the Form 13459, discussion with the team lead, and submission to the CFC/EFC/FFC.

  2. When the case is still in Status 24 (90-Day), the CFC/EFC will inform Counsel that the taxpayer is suspected of submitting false or altered documentation and whether the civil fraud penalty should be pursued. Counsel should be consulted on a case-by-case basis and IRM 4.8.9, Statutory Notices of Deficiency, guidelines must be followed to ensure that the notice accurately reflects the Service's position, should the case proceed to Tax Court.

  3. If the taxpayer's actions are serious enough to warrant a criminal investigation referral, counsel must be informed immediately.

4.19.10.4.6.1  (01-01-2013)
Status 24 (90-Day) Referrals

  1. The CFC/EFC will coordinate with the FTA and Counsel to discuss that the case is still in Status 24 (90-Day). The CFC/EFC will inform Counsel that the taxpayer is suspected of submitting false or altered documentation and whether the civil fraud penalty should be pursued. Counsel should be consulted on a case-by-case basis and IRM 4.8.9, Statutory Notices of Deficiency, guidelines must be followed to ensure that the notice accurately reflects the Service's position should the case proceed to Tax Court.

  2. If the taxpayer's actions are serious enough to warrant a criminal investigation referral, counsel must be informed immediately.

4.19.10.4.7  (01-01-2014)
Fraud Development Procedures

  1. The following procedures apply to the CFCs and the Austin EFC.

  2. When indicators (signs) of fraud are discovered, the compliance employee will initiate a discussion with his/her group manager. If the group manager concurs that there are indicators of fraud warranting fraud development, the compliance employee will contact the FTA assigned to that area. The CFC/EFC will evaluate referrals submitted on Form 13549, and discuss the cases with the FTA. Timely and appropriate actions are very important when potential fraud is an issue.

  3. If the compliance employee, group manager and FTA agree that the potential for fraud exists, the CFC/EFC will prepare Form 11661 and forward the completed form to the CFC/EFC's group manager for approval.

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. Form 11661 is used to document the FTAs involvement and place a case in Status 17, fraud development status. A case should not be placed into or out of Status 17, without consulting the FTA. If a disagreement exists on whether a case should or should not be in Status 17, the ultimate decision rests with the EFC/CFCs group manager.

  6. The CFC/EFC's group manager will review the Form 11661 and indicate approval by entering his/her name and date, and electronically forward the completed form to the FTA for consideration.

  7. If the FTA concurs with fraud development, the FTA will sign and date the Form 11661 and return it to the CFC/EFC and the CFC/EFC's group manager. A copy of the form should be placed in the Examination work papers and retained by the FTA.

  8. If a case is being placed in fraud development status 17, an agreed upon "plan of action" (plan) must be prepared by the FTA. The plan should:

    1. Provide audit steps required to establish affirmative acts (proof) of fraud;

    2. Be the joint effort of the CFC, the group manager and the FTA;

    3. Guide the case to its appropriate conclusion in a timely manner;

    4. Specify any direct assistance the FTA will provide. The role of the FTA can be more advisory or consultive in nature; and

    5. Be in writing and documented with a copy of the initial plan, with those containing follow up dates and items placed in the workpapers and a copy retained by the FTA.

  9. The CFC/EFC will place the case in fraud development status and request a copy of the original tax return(s), only if the FTA and/or Counsel request the original return be secured. Usually the case can be developed based upon the existing tax return facismile or document. The CFC/EFC will then update the case on AIMS to Status 17. The CFC/EFC will then proceed with the plan until affirmative acts of fraud are established or a determination is made that the potential for fraud no longer exists. Cycle time is excluded from the monthly aging reports to management (Month At a Glance Report) as long as the case is in fraud development status 17.

    Note:

    Timely action is required on all cases that are in fraud development status. Warning: The CFC/EFC or the group manager should never obtain advice from CI for a specific case under examination/collection activity. When approved for fraud development, the case is assigned to the CFC and EFC (in Austin for W&I). The referring tax examiner is not responsible for subsequent action(s) on the case. However, Austin EFC should provide a quarterly update of the status of the case if requested by the referring EFC.

  10. If affirmative acts of fraud are established:

    1. The CFC/EFC will suspend the examination and immediately notify the group manager and the FTA;

    2. The FTA will generally recommend a referral to CI, if criminal criteria are met (see IRM 25.1.3, Criminal Referrals); and/or

    3. The FTA will generally recommend assertion of the civil fraud penalty and/or the fraudulent failure to file penalty, and/or imposition of the 10-year EITC ban. See IRM 25.1.6, Civil Fraud.

  11. If the potential for fraud no longer exists:

    1. A determination that fraud is no longer an issue will be made by agreement between the CFC/EFC, the group manager, and the FTA. If an agreement cannot be reached, the group manager will make the final decision; and

    2. The CFC will retain possession and control, of the case and be responsible for the completion of the examination when it has been determined there no longer exist fraud potential. The case is returned to the prior status code and the CFC will continue the examination. The CFC should appropriately consider the alternative position by applying the Negligence Penalty and the Two-Year Ban, if EITC is involved.

    3. In W&I, the EFC will return the case to Correspondence Examination prior status code to continue examination. The EFC should indicate to Correspondence Examination, to appropriately consider the alternative position by applying the Negligence Penalty and the Two-Year Ban, if EITC is involved.

  12. A case will stay in fraud development status while there is active involvement in an ongoing audit or the FTA recommends one of the following actions:

    1. Return to prior status code, if it is determined that the potential for fraud no longer exists with the reasons and the decision to return the case to the prior AIMS status code, documented on Form 11661.

    2. Transfer the case to the field for further fraud development via Form 11661, only if FTA concurs on the transfer to the field.

    3. Assert the civil fraud penalty and/or the fraudulent failure to file penalty, and/ or impose the 10-year EITC ban via Form 11661.

      Note:

      The FTA will also use Form 11661 to transfer the case to the field for initial fraud development, or transfer to the Austin Campus for initial fraud development (W&I Campus action). However, the ultimate decision with respect to these actions rests with the campus CFC/EFC's group manager.

4.19.10.4.8  (01-01-2014)
Responsibilities of the Fraud Technical Advisor (FTA)

  1. See IRM 25.1.14, Campus Examination Fraud Procedures.

4.19.10.4.9  (01-01-2014)
AIMS Case Control and PSP Transfer Procedures

  1. If the case is not already AIMS controlled, it will be established in EGC 5024 in the W&I campuses upon acceptance by EFC and the appropriate Employee Group Code for the Campus Fraud Coordinator, in the SB/SE campuses. These respective EGCs are designated to be used for the establishment of AIMS controls for previously non-controlled cases within the campus fraud program, such as referrals from AUR.

    Note:

    Cases accepted into the Campus Fraud Program should have 13 months remaining on the statute. Any exceptions to this should be discussed with Counsel and the CFC/EFC's group manager.

  2. In W&I, if a case is already open on AIMS, the accepted case will be updated first to EGC 5024 upon acceptance by EFC, and transferred to the Austin Campus, if approved by FTA. Refer to the Job Aid on SERP, W&I Fraud Case Transfer Procedures.

  3. In the SB/SE campuses, if the case was already under AIMS control, it will remain in the original EGC. Upon acceptance by the CFC and FTA into the fraud program, it will then be updated to the applicable EGC of CFC. The CFC becomes responsible for the examination, development of the fraud issue, issuance of the RAR and Form 886A, etc. If accepted by the CFC/FTA, it will be then be updated to the applicable EGC of the examiner working the case.

  4. When applicable, prior and subsequent year returns will be opened for exam. Current exam procedures will be followed.

  5. In SB/SE campuses, a case in the referral process will be updated to Status 38 until it is:

    1. declined and returned to its prior status, or

    2. accepted by CFC/FTA and updated to Status 17.

  6. Accepted AUR referrals will be established on AIMS using SC 85 and the designated campus EGC. The case will be worked following current exam procedures.

  7. Use the following organization function program (OFP) Code when working a fraud case:

    1. 93420 for W&I Non-EITC Fraud Referrals or 93620 for W&I EITC Fraud Referrals, and

    2. For non-fraud case work, use the appropriate OFP that corresponds to the project code

    3. 710, 730, 740, or 790–91892 for SB/SE fraud development work other than performed by a FFC or CFC

    4. 640–91424 for FFCs reviewing initial fraud referrals to SB/SE

    5. 730 or 740–91891 for SB/SE CFCs only.

  8. All cases having the FTAs approval for fraud development will use project code:

    1. 0076, Discretionary or

    2. 0691, EITC Fraud

  9. Cases approved for fraud development/examination by the FTA will reflect:

    1. Status 17 if in fraud development/examination within the campus (all SB/SE campuses and Austin only), and

    2. Status 07 if being transferred to an Area PSP office.

  10. If the case is selected for Area Office Examination, it will be transferred from the Campus PBC and EGC to the receiving Area PSP office.

  11. Cases being transferred to an Area PSP Office will use an AIMS Aging Reason Code (ARC):

    1. ARC 06 - case originated in campus and has fraud potential, per FTA concurrence, and

    2. ARC 07 - case originated in the campus, was considered in the campus fraud program, but with FTA concurrence has Large, Unusual and Questionable (LUQ) items without initial fraud potential, requiring Area office exam.

  12. Cases being transferred to an Area Office with the FTA’s concurrence regarding fraud potential will be done using pro-forma Form 3185, Transfer of Return, and cover memo(s), see Exhibit 4.19.10-2, W&I PSP Fraud Memo, and Exhibit 4.19.10-3, SB/SE PSP Fraud Memo . This will alert the Area PSP office that the case has already been started at the campus and taxpayer contact may have been made. In addition it reflects that the FTA concurs with fraud potential and believes further development is needed at the Area office level. Pertinent PSP Transfer documents are listed in paragraph 14. For completing Form 3185, refer to IRM 4.19.10.4.9.1, Instructions for Completing Form 3185, Transfer of Returns. The CFC is responsible for monitoring the acceptance of the case by the AREA PSP Office. Refer to IRM 4.19.10.4.9.1(9), Instructions for Completing Form 3185 - Transfer of Return.

  13. For additional information on AIMS transfer procedures, contact your Campus AIMS Coordinators and refer to IRM 4.4.33, AIMS Processing Handbook - Transfers.

  14. PSP Transfer documents:

    • Completed Form 3185,

    • W&I PSP Fraud Memo.doc (see Exhibit 4.19.10-2), or

    • SB/SE PSP Fraud Memo.doc (see Exhibit 4.19.10-3).

4.19.10.4.9.1  (01-01-2014)
Instructions for Completing Form 3185, Transfer of Return

  1. This pro-forma Form 3185 will be used for cases with fraud potential that have the approval of both the CFC/EFC and the FTA for transfer to the area office.

  2. All cases transferred to the area office must be transferred into the respective Area PSP office.

  3. A standardized comment must be included on Form 3185 to ensure consistent treatment, see (7) below. All other portions of the Form 3185, other than receipt and acknowledgment, must be completed by the CFC/EFC. Be sure to check the box on Form 3185, indicating that the exam has been started.

  4. The Form 3185 must include the name of a campus contact person and telephone number so that the case can be handled expeditiously, if any questions arise. The PSP will complete the received, verified, and acknowledged sections. In addition, the case being transferred must have a minimum of 13 months remaining on the statute prior to transfer.

  5. Follow AIMS procedures described in IRM 4.19.10.4.9, AIMS Case Control and PSP Transfer Procedures. Where directed by the FTA, the return(s) should be secured, prior to transfer. Most often, the transfer can be made with the applicable return facismile used in the Correspondence Exam. When establishing the return on AIMS, it should first be established in the originating campus PBC with the appropriate Employee Group Code for the Campus Fraud Coordinator, EGC in SB/SE, or EGC 5024 (W&I). This procedure will allow proper tracking of the case. Once the 424 drops off, update the AIMS control to the Area Office’s PBC where the case is being transferred with the appropriate transfer EGC.

  6. A PSP transfer memo (see Exhibit 4.19.10-2 (W&I) and Exhibit 4.19.10-3 (SB/SE)) must be used in conjunction with the Form 3185.

  7. The package should include the following:

    • Form 3185 with fraud language in the Comments box:"The attached case has considerable fraud potential. The SB/SE FTA and the CFC/EFC concur that fraud development is better suited for Area exam assignment. (See attached Form 11661)" ,

    • PSP Transfer Documents,

    • Form 11661 with FTA recommendation for transfer to the Field Office for fraud development,

    • Form 13549 with CFC/EFC approval for transfer to the Field Office for fraud development,

    • Research used to develop the issues, and

    • Return(s) properly identified for the suspected issues, and

    • Completed Form 3210.

  8. It is important for the receiving Area PSP office to understand the importance of the case transfer. To avoid confusion, a fraud case will not be sent out with regular transfers. It must be sent to the attention of the Fraud Coordinator for the specific PSP where the case is being transferred. Follow transfer procedures per IRM 4.19.10.4.9, AIMS Case Control and PSP Transfer Procedures, and IRM 4.4.33, AIMS Processing Handbook, Transfers.

  9. The Area PSP is requested to notify the transferring campus within 10 business days regarding the decision to accept the case. It is the CFC/EFC’s responsibility to monitor this transfer and ensure the PSP communicates their decision within 10 business days. If the campus has not received acceptance communication, the CFC/EFC must ensure contact is made with the Area PSP office to secure their decision.

    Note:

    It is recommended the CFC/EFC utilize the originator's copy of the Form 3210 to monitor the case acceptance by the Area PSP; and/or to notate the CFC/EFC's follow-up phone calls and e-mails to ensure timely response by the Area PSP office. In addition, the CFC/EFC should ensure the timely receipt of acknowledged Form 3210s from the Area PSP office.

  10. If the Area PSP declines the case, the CFC/EFC must secure the case upon it’s return. A follow-up discussion will then be held with the FTA to determine what portion of fraud development may be suitable for campus development.

4.19.10.4.9.2  (01-01-2013)
Monitoring the Issuance of Manual Interim Letters on Open Mail Cases in Status 17

  1. W&I Fraud Cases transferred to the Austin Campus and SB/SE campus fraud cases, will be subject to monitoring procedures used to ensure a response is initiated to taxpayers within 30 days of receipt of correspondence. Once the CFC/EFC places a case in Status 17 (Fraud Development), it loses its automation. Therefore, cases must be monitored to ensure that interim letters are manually sent to the taxpayer in accordance with IRM 4.19.13.10, Monitoring Overaged Replies. All such activity must be properly documented in the case activity history.

    1. Letter 2645C, Interim Letter, must be sent within 30 days from the correspondence received date (CRD), advising the taxpayer that we received his/her request and that we will be responding within 45 days.

    2. If subsequent letters are required, Letter 2644C, Second Interim Response, is sent to advise the taxpayer that he or she will be hearing from us within 35 days.

4.19.10.4.10  (01-01-2014)
Program Letters and Actions to Close Case

  1. For any cases requiring transfer to another campus or other examination location (i.e., W&I cases transferred to Austin Exam), issue Letter 86C, Referring Taxpayer Inquiry/Forms to Another Office, to taxpayer. If any prior contact has occurred with the taxpayer or correspondence received from the taxpayer, the transfer notification procedures are required. For W&I cases, see Job Aid on SERP, W&I Fraud Case Transfer Procedures.

    Note:

    A case cannot be transferred to Area Field Exam if the refund remains frozen. See IRM 4.19.13.14, Transfers to Area Office Examination or Appeals Office, for additional procedures.

  2. On open fraud cases, Interim Letters and Action 61 guidelines apply. See IRM 4.19.13.2.6, Standard 6-Timely Actions, and IRM 4.19.3.20.1.5, Action 61/Policy Statement, P-6-12.

  3. When a case is accepted into the Fraud Program, the CFC/EFC will issue the appropriate letters; follow normal examination procedures per IRM 4.19.13.1, Standard Procedures; and observe suspense periods per IRM 4.19.10.1.6.1, Standard Suspense Periods for Correspondence Examination.

  4. The CFC/EFC will enclose, as applicable:

    • Publication 1, Your Rights as a Taxpayer;

    • Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree;

    • Publication 4134, Low Income Taxpayer Clinic List;

    • Form 886-H-EIC, Supporting Documents for Taxpayers Claiming EIC on the Basis of a Qualifying Child(ren);

    • Any other enclosures normally sent to the taxpayer (refer to IRM 4.19.10.1.6, Correspondence Examination Letters, and

    • Letter 566(CG), Service Center ICL Letter, Letter 525, General 30-day Letter, Letter 692, Request for Consideration of Additional Findings, and Letter 3219, Notice of Deficiency.

4.19.10.4.10.1  (01-01-2013)
Initial Contact Letter (ICL) Procedures

  1. After initial research has been completed, a Letter 566(CG)Service Center ICL Letter, will be issued to the taxpayer requesting an explanation of the alleged fraud issue in question. Both IDRS and RGS controls will be updated to reflect the ICL status:

    Initial Contact Letter Status
    If Then
    The taxpayer responds and the information is sufficient to support the taxpayer’s position

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Close the AIMS Database (DC02) via RGS on Form 5344, Examination Closing Record, and close any IDRS controls.

    • The CFC/EFC will update the Campus Fraud Monitoring Report to reflect the closing of the case.

    The taxpayer responds claiming identity theft, refer to IRM 4.19.13.25, Identity Theft.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    • The CFC/EFC should consider a conference with the FTA to discuss subsequent actions.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Update IDRS and RGS controls to reflect the purge status.

    The taxpayer does not respond Confer with the FTA and Counsel and prepare the 30-day package. See IRM 4.19.10.4.10.2, 30-Day Letter Procedures

4.19.10.4.10.2  (01-01-2013)
30-Day Letter Procedures

  1. The CFC/EFC will determine if the 30-day letter should be issued based upon the taxpayer’s response or lack thereof, as well as the documented research and any third party information:

    30-Day Letter Process
    If Then
    The CFC/EFC determines a 30 day letter should be issued
    • Secure recommendation from FTA on assertion of the civil fraud penalty.

    • The CFC/EFC will prepare a 30- day package consisting of:

      1. overview of the case similar to 90-day Overview, see Exhibit 4.19.10-4, Form 886-A 90-Day Overview;

      2. appropriate Letter and

      3. Form 4549, Income Tax Examination Changes

        Note:

        The FTA will assist with the write-up, if needed.

    • Before issuance of the 30 day letter, the CFC/EFC and the group manager will sign off on the case file/ workpapers to confirm agreement with the issuance of the 30 day letter including the Civil Fraud Penalty/10-Year EITC Ban.

    • The FTA will review the 30-day package prior to issuance to the taxpayer. Also, Counsel will review all W&I 30-day packages and the 30-day packages in some SB/SE Campuses.

    • Letter 525 will be issued to the taxpayer.

    • Update AIMS and RGS to proper status.

    The CFC/EFC and the FTA determines the 30 day letter is not yet warranted or that intent has not been established and the case is in Status 17
    • The CFC/EFC will update the Campus Fraud Monitoring Report,

    • Form 13549 will be annotated and returned to the originating FFC/Manager/Lead for feedback purposes,

    • AIMS and RGS will be updated to reflect the forwarding of the case to Correspondence Exam in order to complete the examination,

    • The CFC/EFC may recommend /consider asserting the 2-year EITC Ban, or other penalties, if warranted,

    • In W&I, if the case was transferred to Austin, the case will not be returned to originating campus, the case will be sent to Austin Corr. Exam to continue the examination.

    • In SB/SE, the CFC will complete the examination and issue the 30-day letter when applicable.

  2. If the case involves a joint return, the letter(s) must question each spouse’s degree of knowledge regarding the examination issues.

  3. Based upon the taxpayer’s response, further research and development may be required. Refer to IRM 4.19.13.9, Taxpayer Replies, and IRM 4.19.13.27, Campus Exam Closing Actions:

    30-Day Letter Reply Procedures
    If Then
    The information is unacceptable or is only partially acceptable
    • Issue follow-up Letter 692 with Form 4549 and a clear explanation of the issues via Form 886-A or Form 886-H - (Refer to list of forms 886-H for specific issues) required or still needed.

    • Allow the taxpayer time to reply.

    • Update the AIMS / RGS case status as needed.

    The information is sufficient to support the taxpayer’s position
    • See IRM 4.19.13.27, Campus Exam Closing Actions

    • Close any IDRS controls

    • Update the Campus Fraud Monitoring Report.

    The taxpayer agrees with the report (signed Form 4549)
    • See IRM 4.19.13.27, Campus Exam Closing Actions.

    • Close any IDRS controls.

    • Update the Campus Fraud Monitoring Report.

    The taxpayer does not respond and the suspense period expired See IRM 4.19.10.4.10.3, 90-Day Procedures, below.

4.19.10.4.10.3  (01-01-2014)
90-Day Procedures

  1. If the 90 day letter (Letter 3219) is to be issued, an overview of the Civil Fraud Penalty will be written and saved as part of the RGS/CEAS case file on Form 886-A (See Exhibit 4.19.10-4, Form 886-A 90-Day Overview).

  2. On jointly filed returns, the Overview must address the culpability of each spouse. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. An explanation of the Civil Fraud Penalty/10-Year EITC Ban, along with the amount of the penalty, will be included in the Other Information Section of Form 4549.

  4. The CFC/EFC will obtain group manager's concurrence with the issuance of the 90 day letter, which includes the Civil Fraud Penalty/10-Year EITC Ban.

  5. The CFC/EFC, with the assistance of the FTA, will prepare the Form 886-A , outlining the Government’s alternative position (e.g., the negligence penalty in lieu of the civil fraud penalty).

  6. The 90-day letter will be reviewed by the FTA for accuracy, prior to being sent to Area Counsel.

  7. The original case file will be forwarded to Area Counsel for approval; a photocopy will be maintained until Area Counsel returns the case.

    Note:

    Area Counsel must approve ALL Statutory Notices which include the Civil Fraud Penalty, the 10-Year EITC Ban and the Fraudulent Failure to File Penalty.

  8. The case will be updated on IDRS and RGS to the designated controls to reflect the 90-day Area Counsel review status.

  9. The 90-day package includes the following:

    • Letter 3219 (SC/CG), Notice of Deficiency;

    • Form 3198, Special Handling Notice for Examination Case Processing ;

    • Form 4549, Income Tax Examination Changes;

    • Form 5564-A, Notice of Deficiency-Waiver;

    • RGS Schedules and worksheets;

    • Explanation of the fraud issue via Form 886-A;

    • Explanation of the Civil Fraud Penalty (IRC 6663), the Fraudulent Failure to File penalty (IRC 6651(f)) and/or the 10-Year EITC Ban (IRC 32(k)) via Form 886-A;

    • Alternative Position proposed via Form 886-A (e.g., Accuracy Related Penalty(s) (IRC 6662(a)) or Delinquency Penalty (IRC 6651(a));

    • Overview of the case via Form 886-A;

    • Evidence of fraud (altered and/or false documents; original correct documents; notes of conversations with taxpayer; all correspondence received from taxpayer; etc.); and

    • Original tax return(s) for the tax year(s) under examination, as requested by Counsel.

4.19.10.4.10.4  (06-29-2011)
Withholding Only Cases

  1. Following section applies to returns that are referred to Fraud Program with suspected altered or false Form W-2 and/or Form 1099 with inflated or false withholding amounts.

  2. Refer to Penalty Handbook IRM 20.1.5.2.4, Definitions, for what constitutes an underpayment. Per IRC 6664(a) and Treas. Reg. 1.6664–2(a), an underpayment is defined as the amount by which any tax imposed, exceeds the excess of:

    1. The sum of the amount of tax shown on the return, plus

    2. Amounts not shown that were previously assessed (or collected without assessment), over

    3. The amount of rebates made.

      Note:

      In calculating the amount of an underpayment, adjustments to refundable credits or prepayment credits for withholding or estimated tax are included in the amount shown as the tax by the taxpayer on his return. On May 30, 2012, the Office of Chief Counsel reconsidered its previous advice with regard to the application of the accuracy-related penalty in the situation where the Service does not pay a refund or approve a credit to the taxpayer when he claims a refundable credit to which he is not entitled. “In many cases involving this fact pattern, there will be no ‘underpayment’, as that term is defined in section 6664. Without an underpayment there can be no liability for the accuracy-related penalty.” See example in CC:PA:01:GSemasek, POSTS-119273-12 (p. 1), and IRM Exhibit 20.1.5-1.

    4. See IRM Exhibit 20.1.5-1, Calculation of an Underpayment, for an example of a calculation of an underpayment.

  3. Follow the third party procedures to verify/document that the information provided by the taxpayer is fraudulent.

  4. Refer to IRM 4.8.9.16.8, Notices with Prepayment Credit Adjustments, for assessment. The assessment for the over claimed withholding must be made prior to issuance of the 90 Day Letter. Inform the taxpayer that disallowance of the withholding credit is not subject to deficiency procedures. An assessment must be made (TC 290) for the amount of the overstated withholding credit. Per IRM 3.14.1.6.7.2, Category B ERRF Resolution, and IRM 21.4.5.4, Erroneous Refund Categories and Procedures, a TC 290 results in a legal assessment that allows the IRS to correct the overstated credits using the provisions of IRC 6201(a)(3). The assessment amount should not include any amount of income tax withholding actually withheld from the taxpayer’s wages. The IRS only makes this assessment for amounts of erroneous withholding claimed by the taxpayer on the return. If the taxpayer files an invalid return, refer to the procedures in IRM 4.10.12.7.6, Backing off Accounts on Invalid Returns, as applicable.

  5. Upon Counsel review and concurrence of the civil fraud penalty assertion, update the workpapers with the following: Area Counsel determined that since the only adjustment on this case is in regard to withholding, per IRM 4.8.9.16.8, Notices with Prepayment Credit Adjustments, will be followed.

  6. To compute the penalty, follow the guidelines below, also refer to IRM 4.8.9.16, Special Issues, for additional information:

    1. Run tax computation as though no special circumstances exist and notate Civil Fraud and Delinquency Penalty amounts.

    2. Edit issues to remove the Civil Fraud Penalty.

    3. On all issues other than withholding, both fraud and non-fraud, adjust the "per Exam" amount to eliminate the adjustment amount.

    4. If return was subject to the Delinquency Penalty, "access return related penalties" and un-check the "delinquent return and delinquency" boxes (be sure to notate figures in FTP/FTF fields).

    5. Run another tax computation and verify that the only balance due is the withholding issue and that no Civil Fraud or Delinquency Penalties (if applicable) are present.

    6. Run Form 5344 to generate a TC 300 for zero with a TC 807 to reduce the withholding, use DC-08 and leave the agreement date blank (until known). Per IRM 4.8.9, Statutory Notice of Deficiency, attach a Form 3198 and Form 4549. When preparing the Form 4549 to attach, in the tax computation window, clear the other information section and if there is a Delinquency Penalty involved, uncheck the "6406(g) box" so the automatic paragraph does not generate.

    7. Once the approval to issue the 90-day Letter is received from Counsel, re-input the proper Exam amount in each of the issues and in the withholding issue, make the Exam amount the “per return” amount so there is no adjustment amount.

    8. For delinquent returns, access "return related penalties" and re-check the "delinquent return and delinquency" boxes and re-input the figures, notated earlier, in the FTP/FTF fields.

    9. Create the Civil Fraud Penalty manually in "return related penalties" and create a Form 886-A to show the computation of the Civil Fraud Penalty.

    10. In Tax Computation/Other Information box, type the following: "Please note that the overstated federal withholding has been reduced by $--------.00. Your account was adjusted on Month, Day, Year. It has been determined that this adjustment was due to fraud. Consequently, a penalty in an amount equal to 75% of such overstated Federal withholding has been asserted pursuant to IRC 6663. The amount of the penalty is $------.00 and is reflected in this notice. The penalty asserted in this notice is the only issue subject to appeal rights. The additional balance due for the federal withholding adjustment will be issued under separate cover" .

    11. If withholding is the only issue, interest will not compute on the Civil Fraud Penalty and must be manually computed. This is done by using Total Interest/Estimated Interest option on the RGS tree. Click on the tax period. Input the amount of the Civil Fraud Penalty, beginning date and ending date. Click "+/-" to compute.

    12. Run the Form 4549 and save it to case file documents. If interest has been computed manually, changes have to be made to the adobe file (to add the manually computed interest) as follows: Tools/Advanced Editing/Text Field Tool/double click in the area to be edited/pop up window, select the General Tab/uncheck the read only box/close/click on the "hand" tool on the tool bar/change the fields.

    13. If withholding is the only issue, a "How to pay your taxes" page must be edited from a previously generated Form 4549 in order to correct the date (this page does not generate when there is no deficiency in tax being asserted on the new notice).

    14. Once Area Counsel has approved the 90-Day Letter, the adjustment for the overclaimed withholding will be input and the 90-day letter will be issued for the Civil Fraud Penalty only. Also include an explanation that the withholding adjustment has already been made to the account and a notice is being provided to advise them of their appeal rights regarding the Civil Fraud Penalty. The Form 3210 sending the case to Area Counsel should include the following: "Per IRM 4.8.9.16.8(3), Notices with Prepayment Credit Adjustments, the assessment for the over claimed withholding must be made prior to the issuance of the 90 Day Letter. Once this adjustment is made, the 90 Day Letter will be issued for the Civil Fraud Penalty only."

    15. Refer to IRM 4.8.9.16.8, Notices with Prepayment Credit Adjustments, for instructions regarding reducing the over claimed withholding.

    16. When the case is returned as approved from Area Counsel, recompute the interest to the expiration date of the notice and re-print the interest report. The Form 4549 will have to be manually updated to include the revised interest amounts.

4.19.10.4.11  (01-01-2014)
Statute Consideration

  1. General assessment period - The normal assessment statute expiration date (ASED) is three years from the due date or three years from the date the original (valid) return was filed, whichever is later. See IRC 6501(a).

  2. Special assessment periods:

    1. Fraudulent return - There is no period of limitations on assessment for a false or fraudulent return with intent to evade tax. See IRC 6501(c).

    2. 25% Omission - The period of limitations is extended to six years, if the taxpayer omits:

      More than 25% of the gross income reported on the original income tax return;

      More than 25% of the tax reported on the original excise tax return; or

      Includable items in excess of 25% of the gross estate reported on the original estate tax return. See IRC 6501(e).

  3. See IRM 25.6, Statute of Limitations, for the procedures used to control the ASED.

4.19.10.4.12  (01-01-2013)
Third Party Notification Procedures

  1. See IRM 4.16.1.4.5, Third Party Contacts and IRM 4.11.57, Third Party Contacts.

4.19.10.4.13  (01-01-2014)
10-Year Earned Income Tax Credit (EITC) Ban Procedures

  1. IRC 32(k) provides that no EITC shall be allowed for a period of ten years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of the credit was due to fraud:

    • if the established affirmative acts of fraud are directly related to the EITC; and

    • A determination that the EITC adjustment was due to fraud was made in a Notice of Deficiency.

  2. The CFC/Austin EFC will secure the FTA’s recommendation to impose the 10-year EITC ban via Form 11661Fraud Development Recommendation - Examination. The CFC/Austin EFC will complete the Form and electronically send it to the FTA. The FTA will complete Section 7, FTA Recommendation, indicating "Assert CFP/FFTFP, impose 10-year EITC Ban" and electronically return the form to the CFC/Austin EFC.

  3. The case file must contain sufficient write-up and documentary evidence needed to document the affirmative acts of fraud.

  4. Although the 10-year EITC Ban can be imposed without the actual assertion of the civil fraud penalty; it is extremely rare. The CFP and the 10-year EITC Ban should be applied together. Prior to assertion of the 10-Year EITC Ban without the Civil Fraud Penalty, agreement must be secured from both the FTA and the applicable HQ Analyst.

  5. If the disallowance of the EITC was not due to fraud, but instead a result of the taxpayer’s reckless and intentional disregard of the rules and regulations, IRC 32(k)(1)(B)(ii) applies, denying the credit for a period of two taxable years after the most recent taxable year in which there was a final determination.

  6. These sanctions are in addition to any other penalty imposed under present law.

  7. The 2-Year EITC Ban and the accuracy related penalty with respect to the taxpayer's intentional disregard of the rules and regulations, should be considered as an alternative position.

  8. A Priority Code 6 must be input on Form 5344, Examination Closing Record, to impose 10-year EITC Ban. If the "A" freeze is present; the examiner must use priority code 7 to impose the ban, on the Form 5344. Refer to IRM 4.19.14.6.1, EITC 2/10 Year Ban. Also, see IRM section 20.1.5.2.1, Penalty Handbook - Two and Ten Year Bans on Claiming the Earned Income Tax Credit (EITC).

  9. Case development - EITC information can be obtained by using IDRS/CFOL command codes:

    • RTVUE

    • DDBOL

    • DDBKD

    • Numident (MFTRA-U)

      Note:

      This can be obtained on-line.

    • ENMOD

    • DUPOL

4.19.10.4.14  (02-01-2013)
Return Preparer Referrals

  1. If the CFC/EFC receives a case with fraud potential that was prepared by a return preparer, the case will be referred to the W&I or SB/SE HQ Analyst for scheme identification. The CFC/EFC will conduct the following return preparer research prior to referring the case:

    • RPVUE information on the preparer: name, address, EIN/SSN/Practitioner Identification Number (PTIN), and any identifying numbers, volume of returns prepared for prior, current and subsequent year, percentage of refund rate, issues found such as EITC, First Time Home Buyers Credit (FTHBC);

    • Accurint; and

    • EFDS/Workload Management System (WMS) for any scheme information identified by Integrity & Verification Operation (IVO).

  2. Refer to IRM 4.19.10.6, Return Preparer Scheme Identification, to refer the case to the W&I or SB/SE HQ Analyst. The EFC/W&I Return Preparer Coordinator (RPC) needs to coordinate with the W&I HQ analysts prior to referring the case to other functions for penalty consideration.

  3. Upon acceptance of the case by another function, the CFC/EFC will notate the disposition and the date of disposition of the referral on the Campus Fraud Monitoring Report and Form 11661.

4.19.10.5  (01-01-2014)
Questionable Refunds

  1. The scanning, verification process and stopping of refunds, are conducted by the Accounts Management Taxpayer Assurance Program (Integrity & Verification Operation (IVO)) and is outlined in their IRM 25.25, Revenue Protection.

  2. The QRDT will:

    1. Be located in each campus.

    2. Identify questionable refund prior to issuance whenever possible with minimum impact on processing timeliness.

    3. Prevent issuance of refund checks to multiple and fraudulent filers.

    4. Review questionable returns identified in other functional areas.

    5. Alert campus personnel to questionable refund indicators.

  3. Report questionable returns that indicate any multiple and/or fraudulent refund schemes discovered during classification/screening immediately to a manager for referral to QRDT. These include:

    1. Tax Return Form number

    2. Tax Year

    3. Type of Form W-2, Wage and Tax Statement (manual, typed, computer)

    4. Employer's name and complete address

    5. Taxpayer's name and complete address

    6. Address to which refund is to be sent

    7. Amount of refund

4.19.10.6  (01-01-2014)
Return Preparer Scheme Identification

  1. Return preparer schemes may be identified within any Examination Operation workload and by any method (i.e., correspondence examination, classification, etc.).

  2. A return preparer scheme may be identified as a suspect pattern of non-compliant issues which have similar characteristics and appear on three or more original tax returns or amended returns.

    1. Example One: When classifying Form 1040-X, Amended U.S. Individual Income Tax Returns, the same language appears in Line C, Explanation of Changes, on three or more amended returns. The explanation for the issue/tax change is suspect or egregious and the impact on tax may be large or small.

    2. Example Two: Three or more taxpayers have been examined and adjusted by Correspondence Examination, whose original tax returns have been completed by the same preparer. The examination revealed the same types of deductions, expenses or credits with similar dollar amounts were claimed by all or most of the taxpayers and/or similar/same documents were provided by the taxpayers as substantiation.

  3. Preparer Scheme Referral Process

    1. Examination Operations will refer the following information to the Campus Fraud Coordinator (CFC) if the scheme, as described in (2) above, was identified in an SB/SE Campus or by the Return Preparer Coordinator (RPC) if the scheme, as described in (2) above, was identified in a W&I Campus:

      Information to be provided to the CFC
      • Preparer name and/or business name

      • Preparer TIN and/or EIN

      • Scheme issues identified

      • Affected Tax Years

      • Any statute of limitations (SOL/ASED) concerns

      • Number of open/in-process taxpayer cases

      • Adjusted Gross Income (AGI) of each open/in-process case

      • Number of closed taxpayer cases

      • Examination results (Dollars/Hour and Dollars/Return)

      • Project Code and Source Code from which the affected returns generated, if known

      • Provide remarks/comments/additional information which establishes the non-compliant or negligent behavior of the preparer

    2. The CFC or RPC will review the preparer scheme documentation to determine if the information warrants referral to the appropriate Headquarter Analyst.

  4. If the CFC or RPC determines the preparer scheme has merit for further development/action, a preparer scheme spreadsheet will be prepared containing the information referenced in (3) (a) above, and will be forwarded by the third Wednesday of each month to:

    1. The Examination Return and Selection (ERS) Analyst responsible for the Return Preparer Program if the scheme was identified in an SB/SE Campus.

    2. The EITC or Discretionary Analyst responsible for CI Referrals/Return Preparers, depending on scheme issues, if the scheme was identified in a W&I Campus.

    3. The SB/SE and W&I HQ analysts will then present the preparer scheme information package and a completed Form 13649, Multi-Case Inventory Referral (formerly Referral for SB/SE Campus Correspondence Examination), to the SB/SE HQ ERS analyst to determine further actions.

  5. If the CFC or RPC determines the preparer scheme should not be referred to the appropriate HQ Analyst for further development/action, the CFC or RPC will return the preparer scheme information package to the Examination Operation with a written explanation for declination.

4.19.10.6.1  (01-01-2010)
Return Preparer Penalties

  1. Generally, Campus Examination Operation personnel do not develop or assert penalties against tax return preparers. However, there may be instances where campus employees may be directed to do so. In that event, the following information and procedures will apply.

  2. Refer to IRM 20.1, Penalty Handbook, for additional information.

  3. A number of penalties apply to tax return preparers. Any person who prepares a tax return or claim for refund for compensation or who employs one or more persons to prepare for compensation, any return of tax, or claim for refund is considered to be a tax return preparer.

  4. Absent reasonable cause and good faith, preparers incur a penalty if:

    1. Any part of the understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits,

    2. The preparer of the return or claim knew (or reasonably should have known) of such position, and

    3. Such position was not disclosed or was frivolous.

  5. A penalty is charged for understating a taxpayer's tax liability when the understatement was due to willfulness or any reckless or intentional disregard of rules and regulations.

  6. Examiners will flag cases where there are indications of possible income tax preparer violations by use of Form 3198, Special Handling Notice for Examination Case Processing, and forward to the Examination Return Preparer Coordinator (RPC) for review and forwarding to Area Office RPCs.

4.19.10.6.2  (01-01-2010)
Office of Professional Responsibility

  1. The Office of Professional Responsibility (OPR) establishes, communicates and enforces the rules of professional conduct applicable to tax professionals as defined by Treasury Department Circular 230. OPR may propose disciplinary action against a practitioner for noncompliance issues associated with their personal or business tax returns.

  2. Make a referral to the Office of Professional Responsibility if the non-filer is a tax practitioner (attorney, certified public accountant, enrolled agent, or enrolled actuary). Forward copies of delinquent returns of tax practitioners through supervisory channels to the:

    Internal Revenue Service
    Office of Professional Responsibility
    1111 Constitution Avenue, N. W.
    SE:OPR, Rm. 7238
    Washington, DC 20224

  3. Furnish the following information indicating::

    1. Whether or not penalties have been proposed or invoked.

    2. Whether there has been a fraud referral or a referral for criminal investigation.

    3. The name and telephone number of a contact person.

  4. Sanctions for failure to file will be administered by the Headquarters, Office of Professional Responsibility.

4.19.10.7  (01-01-2011)
Master File Tax (MFT) Code 31

  1. In January 2001, a Master File process was implemented which allows for the processing of a split spousal account on the Master File rather than creating and subsequently posting the account to the Non-Master File (NMF). These adjustments often result from Innocent Spouse, Offer-In-Compromise, Petitioning/Non-Petitioning and Bankruptcy issues. The split account will appear as an MFT 31 module on IDRS as well as the Master File and will be "linked" to the MFT 30 account.

  2. See IRM 25.15.15, Mirror Modules for Requests for Relief From Joint and Several Liability, for procedures on creating a MFT 31 account for an Innocent Spouse Case. For instructions on establishing MFT 31 accounts for petitioning and non-petitioning spouses for Exam audits, refer to IRM 21.6.8, Split Spousal Assessments (MFT 31).

  3. Refer to IRM 4.19.13.19, Bankruptcy, for instances when a MFT 31 should be created on bankruptcy modules.

Exhibit 4.19.10-1 
Campus Fraud Lead Sheet

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Exhibit 4.19.10-2 
W&I PSP Fraud Memo

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Exhibit 4.19.10-3 
SB/SE PSP Fraud Memo

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Exhibit 4.19.10-4 
Form 886-A 90-Day Overview

The following explains the nature of fraudulent information received from a taxpayer under audit. This is to be used with the 90-Day letter.

EXAMPLE OF OVERVIEW TO BE USED WITH 90-DAY LETTER:

Overview
Jane Doane (taxpayer) submitted altered and fictitious documents as support for an earned income tax credit (EITC), child tax credit, head of household (HOH) filing status and dependency exemptions for the 2007 tax year.

ISSUE:
Is assertion of the Civil Fraud Penalty under Internal Revenue Code (IRC) section 6663 applicable?

FACTS:
The taxpayer provided correspondence dated March 30, 2009, as support for EITC, child tax credit, HOH filing status and dependency exemptions claimed on her 2007 Federal income tax return . The correspondence consisted of the following:

  1. A birth certificate (Exhibit 1) for Baby Jane Doane (XXX-XX-2345) D/O/B: June 13, 1994; the mother listed on this form was Jane Doane, which appears to have been altered. Internal research identifies Jane Snead as the mother of Baby Jane Doane.

  2. A letter from the New York City Human Resources Administration Administrator/Commissioner that appeared to be altered (Exhibit 2). Third party contact was made to verify the validity of the statement. Mr. Robert Johnson responded (Exhibit 3) by indicating the letter was a forgery based on the fact that the Commissioner does not respond to individual requests and HRA uses a regular font as opposed to various types of font on all business correspondence.

  3. A letter from Louisa Sayre, M.D.P.C. dated 03/24/2009 that appears to have been altered (Exhibit 4). Third party contact was made to the office of Dr. Sayre, requesting authentication of the letter submitted by the taxpayer. Dr. Sayre responded via fax dated July 7, 2009 (Exhibit 5). Dr. Sayre’s fax states that Baby Jane Doane was a patient at her office in 2003, but that she did not have any record of the child being seen between 2004 and 2008. Dr. Sayre also indicated that the letterhead used was not the official office letterhead and the stamp at the bottom of the letter had not been used in her office since 2003. Additionally, Dr. Sayre verified that the person who signed the letter stopped working in the office in 2003.

  4. A letter from the from the New York City Housing Authority along with a transcript of rent history (Exhibit 6) that appears to be altered. Third party contact was made to Patricia Jackson, assistant manager of the department, requesting verification of the validity of the letter and the transcript of rent history. A response was received via fax on August 10, 2009 (Exhibit 7), stating that the documentation was not from their department. Patricia Jackson stated that the housing official who signed the letter had been transferred to another location in 2003. Moreover, the address shown on the letter is not the correct address; there is no record of Jane Doane or Baby Jane Doane residing within the development; the letterhead used is not the City Housing Authority’s letterhead and the stamp used at the bottom of the letter is not the stamp used by their office. The ledger submitted by Jane Doane was also determined to be false the transcripts issued by the department prints the date as well as time in military format. The transcript received did not include this feature.

LAW:
In order for the civil fraud penalty to be asserted pursuant to IRC Section 6663, the Government must prove by clear and convincing evidence that: (1) there was an underpayment of tax due for the year at issue; and (2) at least a portion of that underpayment is attributable to fraud. Also, the taxpayer will be banned from claiming EITC for ten years if the EITC adjustment was due to fraud (IRC section 7454(a); Rule 142(b)).

  1. Underpayment of Tax:
    In this case, there is an underpayment of tax due for the 2007 tax year. The underpayment of tax is attributable to the taxpayer’s ineligibility to claim EITC, the child tax credit, the dependency exemption and HOH filing status.

  2. Fraud:
    To prove fraud, the Government must show the taxpayer(s) intent to evade taxes which he knew to be due and owing. The Government must produce some affirmative act (action to mislead or conceal) of fraud.

The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Since direct proof of taxpayer intent is rarely available, fraud may be proven by circumstantial evidence that will support a finding of fraudulent intent. Also, proof of fraud for one year will not sustain the Government’s burden of proving fraud in another year.

In this case, both oral and written testimony from third parties confirm the taxpayer is not eligible to claim EITC, child tax credit, the dependency exemption and HOH filing status. The act of altering and falsifying documentation to achieve these tax benefits and/or refundable credits has established the taxpayer’s intent to avoid the correct reporting of taxes.

ARGUMENT:
The Government has proven that clear and convincing evidence of fraud exists based on the fact that:

  1. Jane Doane is not the natural parent of Baby Jane Doane.

  2. Jane Doane did not provide a residence for more than 6 months of the tax year for Baby Jane Doane.

  3. Jane Doane did not support Baby Jane Doane.

  4. Jane Doane falsified documentation to qualify for tax benefits and refundable credits that she was not entitled to claim. By altering/falsifying these documents, Jane Doane committed affirmative acts of fraud that demonstrate her intent to deceive the government.

TAXPAYER’S POSITION:
None. The taxpayer failed to respond to a request for information regarding the documentation received on March 30, 2009.

GOVERNMENT’S POSITION:
The taxpayer has not provided a defense to the application of this penalty. Thus, assertion of the civil fraud penalty and imposition of the 10-year EITC ban is in order.

CULPABILITY OF EACH SPOUSE:
Address on jointly filed returns by determining the culpability of each spouse. “As questioned in the 30 Day Letter, the culpability of each spouse could not be determined as he/she never responded.” On all other returns, annotate “Not applicable, taxpayer did not file a joint return.”

CONCLUSION:
As stated in the above analysis, clear and convincing evidence of fraud is due to the fact that:

  1. There was an underpayment of tax due for the taxable year at issue;

  2. At least a portion of the underpayment is attributable to fraud; and

  3. The EITC adjustment was due to fraud.

Thus, assertion of the Civil Fraud Penalty under IRC Section 6663 and imposition of the ten-year EITC ban under IRC section 32(k) are applicable.

ALTERNATIVE POSITION:
(Include following paragraph on all cases) In the alternative, it has been determined that the underpayment of tax ($_______); for the 2007 tax year is due to negligence or disregard of rules and regulations. Thus, the 20% accuracy related penalty is being asserted under the provisions of IRC section 6662(b)(1).

(Include following paragraph if EITC is involved) In the alternative, the underpayment constitutes a substantial understatement of income tax under the provision of IRC section 6662(b)(2). Thus, the two-year EITC ban is being imposed under the provision of IRC section 32(k). The twoyear ban will prohibit you from claiming EITC for the next two years.

Note:

The Overview references Exhibits 1 through 7, these are for illustrative purposes only, there are no actual documents attached as exhibits.


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