4.32.2  The Abusive Transactions (AT) Process (Cont. 1)

4.32.2.5 
Case Control/Case Assignment Procedures

4.32.2.5.4 
Transferring Promoter Investigations

4.32.2.5.4.2  (06-08-2012)
PSP ATTI Coordinator Responsibilities

  1. The transferring Area PSP ATTI Coordinator:

    1. Notifies the SB/SE LDC or LB&I Financial Services that the promoter investigation is being transferred to another area office. Notification may be made electronically

    2. Transfers the administrative case file per the area office’s standard case transfer procedures.

    3. Case is updated to Status Code 90 on ERCS and short closed.

  2. The receiving Area PSP ATTI Coordinator:

    1. Ensures that the promoter investigation is established on ERCS.

    2. Assigns the promoter investigation to the field.

4.32.2.5.5  (06-08-2012)
SB/SE Tracking Codes

  1. Once a participant (advisee) list is secured or developed, the list is forwarded to the listkeeper for case-building and assignment of a tracking code. The examiner is advised of the assigned tracking code. See IRM 4.32.2.13, Participant/Investor/Advisee Lists, for more information on participant cases.

  2. Locally defined project or tracking codes cannot be used unless approved in advance by a Divisions' Headquarters since the locally defined codes are not reflected in national reports or tables.

  3. A promoter tracking code generally overrides any other tracking code. If a different tracking code is assigned to a related promoter investigation or participant examination case, contact PSP to update. Group managers should contact the AT listkeeper for advice if there is a conflict in tracking codes.

  4. A tracking code is used on all promoter investigations and related examinations regardless of the area. The tracking code is added to all related cases including any in-process cases.

  5. Use of the same tracking code on all the promoters and participants in a promotion helps the key case examiner compute an estimate of harm to the government. It also allows the case-building unit to coordinate participant examinations.

4.32.2.6  (09-23-2011)
Parallel Investigations

  1. The Internal Revenue Code contains both civil and criminal provisions to address AT promotions. Examiners may conduct civil investigations before, during or after criminal investigations of a promoter.

  2. Parallel investigations are simultaneous, yet separate, civil and criminal investigations of a common individual or entity.

  3. Parallel investigations are not joint investigations. Each operating division conducts a separate investigation. Significant coordination is required throughout the investigation and litigation processes. While regularly scheduled coordination meetings are required, Criminal Investigation (CI) must not direct the examiner’s actions in the civil investigation.

4.32.2.6.1  (06-08-2012)
Policy Statement 4-26

  1. IRM 1.2.13.1.11, Policy Statement 4-26 (Formerly P–4–84), provides guidance on taking civil enforcement action when the subject is also involved in a criminal investigation. This statement, effective October 5, 2005, encourages civil enforcement action in all investigations where the promotion is ongoing and harm to the government is significant. This compliance strategy is intended to stop the promotion quickly, prevent additional loss of tax revenue and foster voluntary compliance by the participants.

  2. If criminal and civil operating divisions cannot agree on how to proceed, Policy Statement 4-26 (P-4-26) describes procedures for resolving the matter. Refer to IRM 4.32.2.6.3.3.3, Resolving Conflicts.

4.32.2.6.2  (06-08-2012)
Commencement of Parallel Investigation

  1. CI is notified of all proposed investigations prior to authorization by the SB/SE LDC or OTSA. CI will determine whether the commencement of a civil investigation will or will not pose a conflict with a criminal investigation. See IRM 4.32.2.3.5, Coordination with Criminal Investigation (CI), for additional discussion.

  2. If CI has an open subject or related investigation or is interested in initiating a criminal investigation, civil and criminal examiners must coordinate the development of evidence to support both the separate and distinct criminal and civil investigations while being mindful of legal requirements and constraints. Communication is essential for a successful parallel investigation.

4.32.2.6.3  (09-23-2011)
Six-Way Conference

  1. A six-way conference is held to determine the appropriate course of action to achieve the IRS’s objective of stopping the AT promotion as quickly as possible. Conference participants should discuss the legal implications and coordination aspects of a parallel investigation.

  2. A six-way conference is required for all investigations where CI has an open investigation or is interested in pursuing an investigation. The conference should be held within 10 days after assignment of the investigation to an examiner.

  3. A pre-conference meeting with the examiner, Collection, and Area Counsel to discuss the investigation and objectives of the six-way conference is advised.

4.32.2.6.3.1  (06-08-2012)
Conference Participants

  1. The following individuals should participate in the six-way conference:

    • Examiner

    • Group/Team manager

    • Area Counsel

    • Special agent

    • Supervisory special agent

    • Criminal Tax (CT) Counsel

  2. If there is an Assistant United States Attorney (AUSA) or DOJ attorney assigned to the criminal investigation, that attorney should participate. If that attorney cannot participate, it is imperative that he or she is fully apprised of the nature of the discussion and decisions made with respect to the coordination of the civil and criminal investigations.

  3. Territory managers, a representative from Collection, and an AT senior program analyst (SPA) may also participate as appropriate.

4.32.2.6.3.2  (06-08-2012)
Discussion Topics During Six-Way Conference

  1. The goal of a parallel investigation is to ensure the IRS effectively uses all available enforcement tools, both civil and criminal, to achieve maximum compliance and stop the AT promotion.

  2. Discuss and evaluate potential conflicts and establish a plan of action to handle them.

  3. During the conference, each operating division should share all non-grand jury information about the promotion. The discussion should include:

    1. Identification of the subject(s) or entities of the investigations.

    2. The types of evidence available and the source of such evidence.

    3. Information known with respect to participants.

    4. The tax theories or positions of each respective investigation.

    5. Any limitation on CI sharing information with the civil side because of Rule 6(e) regarding grand jury secrecy.

    6. The importance of the civil side disclosing all information and documents to CI.

  4. See Exhibit 4.32.2-5, Six-Way Conference Discussion Job Aid, which is also available on MySB/SE, Parallel Investigations. This document may be used during the six-way conference. This job aid is intended to be used as a guide to help facilitate the discussion. It should be modified as appropriate, and may be used to document the outcome of the meeting.

  5. The following factors are considered in determining whether or when the IRS should proceed with a parallel investigation:

    1. Scope and size of the promotion in terms of potential loss of tax revenue, geographic location, number of promoters, participants or returns involved.

    2. Rate of growth and extent of marketing, particularly for internet promotions.

    3. Potential for civil injunction.

    4. Deterrence value of civil versus criminal actions.

    5. Potential impact on criminal investigation.

    6. Efficient and effective use of resources.

    7. Amount of time to complete the civil or criminal investigations.

    8. Ongoing or planned undercover operations or search warrants.

    9. Identification, potential examination, and deterrence of promotion participants.

  6. At the conclusion of the six-way conference, determinations should be made with respect to:

    1. Concurrence on commencement of a parallel investigation.

    2. Any proposed restrictions as to the extent or timing of the civil investigation.

    3. Contacts with investigation subjects and witnesses.

    4. Compliance actions with respect to identified participants.

    5. Sharing of all non-grand jury materials.

    6. Ongoing civil or criminal coordination.

4.32.2.6.3.3  (09-23-2011)
Outcomes of Six-Way Conference

  1. The six-way conference may result in several different outcomes:

    • Conduct a parallel investigation.

    • Temporarily delay any overt steps of the civil investigation (e.g., do not contact the promoter or third parties).

    • Commence only a civil investigation.

    • Proceed with only a criminal investigation.

4.32.2.6.3.3.1  (09-23-2011)
Delay of Civil Action

  1. Delay of overt civil actions should only occur in investigations where CI shows that civil enforcement would seriously harm or impair the criminal investigation.

  2. Suspension of overt civil action should be limited to a short time frame to allow CI to complete a specific task (e.g., undercover activity or search warrant). When the agreed-upon period for suspending overt civil action expires, another six-way conference should be held to discuss whether the suspension should continue and, if so, for how long.

  3. Field compliance and CI should agree on extensions of time beyond the originally agreed time frames. If there is no agreement among field compliance and CI, see IRM 4.32.2.6.3.3.3, Resolving Conflicts.

  4. If an agreement is made to temporarily delay the civil investigation, the investigation may be suspended at the group level until civil actions can proceed. The examiner should carry out any actions that are not prohibited by the suspension. Allowable actions may include conducting internal and public information research, review of non-grand jury records in CI’s possession, securing or developing a participant list, gathering information from participant audits and preparing injunction referral reports. If there is no further action that the examiner can carry out until the suspension is lifted, then the case should be suspended in the group by updating the case to Status Code 16 on ERCS. This is an indicator to anyone analyzing the group’s inventory that there are no further actions possible until CI removes the suspension. This is the only allowable use of Status Code 16.

  5. Compliance actions with respect to participants who are not subjects or potential subjects of the criminal investigation, should not be delayed. Examiners must coordinate with CI in securing participant information to ensure no inappropriate contact with CI witnesses occurs while timely civil examinations are conducted with respect to participants. The government’s interests need to be protected whether the participant is a witness or not.

4.32.2.6.3.3.2  (06-08-2012)
No Civil Action Determination

  1. In SB/SE promoter investigations, if a decision is made to proceed only with a criminal investigation, the promoter administrative file is returned to the SB/SE LDC through the local PSP ATTI Coordinator. See IRM 4.32.2.8.3, Discontinuation.

  2. In LB&I, any decision not to open an investigation that was approved by the LB&I TTSPC must be communicated to the Industry Director, Financial Services, with a copy to OTSA. The Industry Director, Financial Services, makes the final determination regarding the investigation.

4.32.2.6.3.3.3  (06-08-2012)
Resolving Conflicts

  1. A key objective of a promoter investigation is to stop the promotion expeditiously, preventing additional loss of tax revenue to the government. The existence of a criminal investigation should not automatically delay a civil investigation.

  2. If at any point during the civil investigation, a decision is made to limit, delay, or not proceed with the civil investigation, or CI discontinues their investigation, examiners must advise Area Counsel, the SB/SE LDC or Industry Director, Financial Services.

  3. Examiners should seek assistance in resolving parallel investigation issues from Area Counsel, the SB/SE LDC, or Industry Director, Financial Services both at the inception of the investigation and throughout the investigation process.

  4. It is not appropriate to delay a civil investigation unless CI can demonstrate that the civil investigation will harm or impair the criminal investigation. Examples include a planned undercover operation or imminent search warrant. See IRM 1.2.13.1.11, Policy Statement P-4-26.

  5. If CI requests a suspension or extended delay, the examiner or group manager should contact the LDC SPA responsible for parallel investigations prior to agreeing to a suspension or delay in the civil investigation. The SPA will help determine if the request for suspension of civil actions is appropriate.

  6. If an agreement cannot be reached between the civil and criminal divisions of IRS and DOJ/US Attorney’s Office (USAO) (if referral has been made), Policy Statement P-4-26 directs that the matter is to be elevated for resolution. Elevation is through the respective chains of command of CI and the civil examination.

  7. The examiner and the special agent will prepare separate memoranda for the appropriate territory manager (TM) and special agent in charge (SAC). The memoranda should summarize the facts of the investigation, the investigation status, the projected plan of action and the reason(s) the civil investigation should proceed or not proceed without delay. The special agent memo should also address the potential harm to the criminal investigation if the civil investigation proceeds.

  8. The steps of the elevation process are as follows:

    1. TM and SAC meet to discuss resolution of any civil or criminal conflicts.

    2. If the TM and SAC are unable to reach an agreement, the TM immediately prepares a memorandum (with LDC SPA assistance) describing the nature of the conflict and reasons CI believes civil actions will harm the criminal investigation. The memo is provided to CI to officially document the civil position.

    3. CI should provide a response within 5 days. As mandated in P-4-26 (13), the SAC must prepare a memo at the same time, officially documenting CI’s position. See IRM 1.2.13.1.11.

    4. If an agreement still is not reached, the SB/SE Examination Area Director or LB&I Director of Field Operations (DFO) will attempt to resolve the issue with the CI Director of Field Operations (DFO).

    5. If agreement is still not reached, the next elevation level involves the SB/SE Director, Abusive Transactions and Technical Issues and the CI Director, Global Financial Crimes.

    6. The Deputy Commissioner, Services and Enforcement, has final authority for determining the appropriate resolution.

  9. There is a job aid available. See Exhibit 4.32.2-6, Elevation of Parallel Investigation - Record of Actions. The Parallel Elevation Record of Action job aid can also be found on MySB/SE, Parallel Investigations.

4.32.2.6.4  (09-23-2011)
Quarterly Coordination Meetings (Six-Way Conferences)

  1. Civil and criminal examiners must regularly communicate regarding their investigative efforts, but CI should not direct civil actions. Investigation status meetings are required to be held every quarter until the civil proceedings are complete.

  2. The purpose of the quarterly investigation status meeting is to communicate investigation developments and facilitate information sharing between the civil and criminal divisions.

  3. Participants in the status meeting should include the examiner, special agent, their respective managers, and the respective Area and CT Counsel. If a civil or criminal matter has been referred to DOJ, the assigned DOJ attorney should participate in these investigation status meetings. It is critical that the DOJ attorney assigned to the criminal investigation be fully aware of all civil actions, developments and evidence throughout the investigation process.

  4. Use of special investigative techniques, such as undercover operations or the active pursuit of a search warrant should be communicated to the civil operating division. The timing of actions in the civil examination, investigation or proceeding may affect special agent safety during a special investigative technique or the execution of a search warrant. Therefore, close coordination and communication is necessary when CI utilizes these techniques. Any decisions on how and when to proceed should be weighed in the favor of special agent safety concerns.

  5. Any concerns or objections raised during the investigation process should be resolved by consultation among the civil and criminal investigators and their supervisors, and Area and CT Counsel. When the promoter has been referred civilly or criminally, DOJ must be included in the decision-making process. See IRM 4.32.2.6.3.3.3, Resolving Conflicts.

4.32.2.6.5  (09-23-2011)
Coordination of Tax Positions

  1. Civil and criminal examiners and their respective Area Counsel should carefully consider whether any tax theories or positions taken in their respective investigations (civil injunction and criminal prosecution) and related participant examinations are inconsistent. However, CI may not direct civil actions in promoter investigations or participant examinations.

4.32.2.6.6  (09-23-2011)
Interviews

  1. Examiners must advise the special agent assigned to the criminal investigation prior to contacting the promoter or witnesses.

  2. Generally, CI informs promoters of their Fifth Amendment rights before the examiner initiates contact or conducts an interview. Examiners should explain to the promoter at each meeting that they are conducting a civil investigation but the information provided will be shared with CI.

  3. If a promoter under investigation inquires about criminal implications or whether the promoter is the subject of a criminal investigation before CI has contacted the promoter, examiners must be careful to provide accurate information and never mislead or misrepresent the facts to the promoter.

  4. When interviewing a subject or witnesses, examiners and special agents should clearly explain the purpose of their respective investigations, their roles in the investigations, and the potential impact of cooperation by the subject.

  5. Examiners must not mislead the promoter regarding the existence of a criminal investigation nor conduct a criminal investigation under the guise of the civil investigation. See United States v. Tweel, 550 F.2d 297 (5th Cir. 1977). Refer to IRM 25.1, Fraud Handbook, for further information.

  6. There is no specific prohibition on conducting joint interviews of promoters. However, examiners and special agents must clearly identify themselves and their roles at these meetings and prepare a joint memorandum of the interview. Examiners should keep a copy of their interview notes and provide the original notes to the special agent.

  7. On occasion, CI may request that no contact be made with a promoter. IRC 6700 and IRC 6701 do not mandate an initial appointment letter be sent or interview of the promoter conducted, so examiners can proceed with the development of the civil investigation without contacting the promoter. Area Counsel should be involved in any decision to conduct an investigation without contacting a promoter.

  8. IRC 7602(c)(3)(C) provides for an exception to the third party notification requirements. Accordingly, if CI requests no civil contact with a promoter, the third party notification letter (Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations) is not required. See IRM 4.32.2.7.3.2, Third Party Contacts.

4.32.2.6.7  (06-08-2012)
Information Sharing

  1. Sharing information among examiners, special agents, and government attorneys assigned to the investigation is a key ingredient in developing civil and criminal investigations simultaneously and efficiently.

  2. Examiners should work with Area Counsel to gather from CI the evidence from the Criminal Investigation file to demonstrate material violations of the elements of the applicable code sections.

  3. Special agents should develop as much evidence as practical administratively before using the grand jury process. This can be done through summonses, search warrants, witness interviews and undercover operations and allows CI to share information with the civil operating division.

  4. A grand jury investigation in a parallel investigation does not prohibit a civil investigation; however, Federal Rule of Criminal Procedure 6(e) does limit the use of grand jury materials to the enforcement of criminal law.

  5. Information sharing between civil and criminal functions is appropriate unless prohibited under grand jury secrecy rules of Rule 6(e) of the Federal Rules of Criminal Procedures and disclosure provisions of IRC 6103, Confidentiality and Disclosure of Returns and Return Information. Judicial districts and appellate courts have diverse rulings on what constitutes grand jury information. The grand jury process may never be used to perfect a civil investigation. Refer to IRM 9.3.1.4.1, Grand Jury Secrecy (Federal Rules of Criminal Procedure Rule 6), and Chief Counsel Directives Manual (CCDM) 38.2.2, Review of Criminal Tax Cases -Grand Jury Procedures, for further information about the grand jury secrecy rules of Rule 6(e).

  6. Examiners are permitted access to all non-grand jury information obtained during the criminal investigation. Generally, not all records obtained in the criminal investigation are grand jury materials. Records that constitute "matters occurring before the grand jury" depends upon the law of the particular judicial circuit. Examiners should consult with Area Counsel and the LDC SPA responsible for parallel investigations with questions related to access to records in grand jury cases.

  7. IRC 6103 permits the disclosure of tax information between civil and criminal functions to the extent permitted by IRC 6103(h) as long as there is a "need to know" to accomplish official duties relating to tax administration, and there are no grand jury prohibitions.

  8. In grand jury investigations, concurrence of the DOJ attorney assigned to the criminal investigation must be secured prior to releasing or allowing civil examiners access to any records in CI’s possession to avoid inadvertent release of grand jury information. Examiners should contact Area Counsel and the LDC SPA responsible for parallel investigations if the DOJ attorney will not allow access or release records that are not grand jury materials.

  9. IRC 6103(h)(2) allows disclosure to DOJ attorneys as long as a referral to DOJ has been made by either the civil or criminal divisions. However, grand jury information cannot be shared with a civil DOJ attorney unless a Rule 6(e) order has been secured from the court.

  10. Examiners must provide CI access to all available information in the civil examination and attorney files. Sharing information should be an ongoing process throughout the parallel investigation to avoid unnecessary delays. Criminal attorneys have a mandatory obligation to disclose certain information to criminal defendants. This includes documents, interview notes and any other information obtained in the civil investigation. See Brady v. Maryland, 373 U.S. 83 (1963), Giglio v. United States, 405 U.S. 150 (1972) and Jencks Act, Demands for Production of Statements and Reports of Witnesses (18 USC § 3500).

4.32.2.6.8  (06-08-2012)
Undercover Operations and Search Warrants

  1. Any overt civil actions are temporarily stayed if CI is conducting an undercover operation or developing probable cause to execute a search warrant in the near future. Benefits of an undercover action or search warrant should be weighed against the need to enjoin a promoter quickly.

  2. Information obtained through a search warrant is generally not grand jury information. Search warrant information obtained during the grand jury process can be made available to civil examiners if no grand jury information was included in the affidavit for the search warrant. Although not yet addressed by the courts, if grand jury information is included in the affidavit, the materials seized during the search may be disclosed even if the affidavit is not subject to disclosure. If the affidavit supporting the warrant has been sealed by the court, sharing of the information seized in the search with civil examiners or attorneys may result in the unsealing of the affidavit. Examiners should seek the guidance of Area Counsel for direction in these circumstances.

  3. Use of search warrant and undercover evidence must be approved by the assigned DOJ attorney. Requests should be coordinated with CI, Area Counsel, and DOJ. Examiners should consult with Area Counsel and the LDC SPA responsible for parallel investigations with questions or issues related to release of this information.

4.32.2.6.9  (09-23-2011)
Administrative Summons

  1. IRC 7602(d) does not allow a summons to be issued or enforced with respect to any person if a Justice Department referral is in effect with respect to such person.

  2. A referral is defined as an IRS recommendation of a grand jury investigation or criminal prosecution of the taxpayer or a criminal investigation request initiated by DOJ pursuant to IRC 6103(h)(3)(B).

  3. IRC 7602(d)(3) specifies that each taxable period and type of tax be treated separately for purposes of determining what constitutes a referral. Administrative civil summonses are generally permitted with respect to taxable periods for other types of tax not included in a criminal investigation referral.

  4. An IRC 6700 or IRC 6701 penalty, while deemed to be a tax pursuant to IRC 6671, is not included in the criminal referral for a grand jury investigation with respect to the promoter’s income tax liabilities.

  5. Treas. Reg. 301.7602-1(c)(4)(ii), Example (5) describes the issuance of an administrative summons, related to a promoter investigation, where DOJ referred the case for a grand jury investigation with respect to the promoter’s income tax liability. In this example, a summons is allowed in conjunction with the promoter investigation because the IRC 6700 penalty is not the same as the promoter’s income tax liability included in the criminal referral for a grand jury investigation.

  6. If CI has made a criminal referral to DOJ and the referral involves a conspiracy theory, widespread false return preparation or interference with administration of the tax laws, then seek Area Counsel’s advice prior to the examiner issuing a summons with respect to the civil promoter investigation.

  7. If an administrative summons in a civil promoter investigation is proposed and CI has made a referral to DOJ for grand jury investigation or criminal prosecution, examiners must discuss this matter with Area Counsel and CT Counsel along with any DOJ attorney assigned to the investigation before issuing a summons. See IRM 4.32.2.7.5, Summonses.

4.32.2.6.10  (06-08-2012)
Assessment of Penalties

  1. Assessment of promoter and preparer penalties must be delayed until completion of the criminal investigation. Penalties will reject if there is a 914 freeze on the promoter’s account. See IRM 4.32.2.8.2.2, Penalty Assessment – CI Parallel Investigation, for more information.

  2. An immediate penalty assessment should be considered when a promoter is planning to flee the United States, dissipate assets or property or place assets beyond the reach of the US Government. Examiners should consult with Area Counsel, the DOJ attorney, Collection and CI. See IRM 4.4.25, Quick Assessments, and IRM 3.17.244.2, Quick, Prompt, Jeopardy and Termination Master File Assessments, for additional information on prompt assessments.

  3. Refer to IRM 4.32.2.11.8, Penalty Case Processing Procedures, for more information on case closure procedures.

4.32.2.6.11  (09-23-2011)
Suspension of Penalty Assessment

  1. After the civil investigation is complete, including the litigation process, and if the penalty assessment is suspended at the request of CI, the investigation is updated to Status Code 16 and suspended in the group. The investigation should be completed to the point where penalties can be easily assessed once CI has completed its criminal investigation.

4.32.2.6.12  (06-08-2012)
Participant Lists

  1. Examiners assigned to promoter investigations should request a participant list from CI even when there has been a decision to proceed with only a criminal investigation. All participant lists should be forwarded to the designated headquarters AT SPA or OTSA as applicable for case-building of participant examinations. See IRM 4.32.2.13, Participant/Investor/Advisee Lists.

  2. If CI does not have a participant list readily available, examiners should prepare a list from available non-grand jury information such as search warrant documents or bank records. In grand jury investigations, the use of CI evidence must be approved to prevent unintentional release of grand jury information. See IRM 4.32.2.6.7, Information Sharing.

  3. CI may wish to review the participant list and exclude those participants who may be considered potential criminal subjects in their investigation.

4.32.2.6.13  (09-23-2011)
Coordinating Participant Examinations

  1. Examinations of participant returns should be initiated as soon as possible. CI should be kept apprised of all civil compliance actions with respect to participants.

  2. Special agents must be mindful of the civil statute of limitations and the potential loss of tax revenues to the government. Special agents should make every effort to provide the civil examiner with all information or potential sources of information to identify participants in a timely manner.

  3. CI may wish to postpone contact or examination of a limited number of participants who are being considered as potential criminal subjects as part of their investigation. CI should not prohibit civil compliance actions on participants just because the participant is a witness in the criminal case.

  4. Any tax theories or positions advanced in the participant examinations should be consistent. See IRM 4.32.2.6.5, Coordination of Tax Positions.

4.32.2.7  (09-23-2011)
Promoter Investigation Guidelines

  1. These guidelines provide basic steps for examiners to use. However, each promoter investigation is unique and varies in complexity. Examiners should use all available tools including internal and external sources to address specific investigations.

  2. The goals of an income tax examination and a promoter investigation are significantly different. The goal of an income tax examination is to determine the substantially correct income tax liability. The goal of a promoter investigation is to identify and quickly terminate the abusive promotion or activity and to address the tax implications to participants by:

    • Determining if a promoter has engaged in conduct that violates the applicable civil penalty statutes.

    • Determining if the promotion is reoccurring or likely to reoccur and if the promoter should be referred for an injunction.

    • Obtaining participant/investor/advisee lists.

    • Ensuring compliance with the requirements of IRC 6111 and IRC 6112.

4.32.2.7.1  (06-08-2012)
Pre-Contact Analysis

  1. Before meeting with promoters, examiners should discuss and plan the investigation with the assigned Area Counsel attorney. Although it is not required, Area Counsel should review Form 4564, Initial Document Request, so that it includes "summons ready" language.

  2. If a revenue officer is assigned to the investigation, the examiner should meet with the revenue officer. See IRM 4.32.3.4, Collection, for the procedures to have a revenue officer assigned to the investigation.

  3. If specialists are needed, examiners should request assistance as early in the investigation as possible. Requests are made using the Specialist Referral System (SRS).

  4. Information in the SB/SE LDC or OTSA referral package should be reviewed, verified, updated, and used as a basis for developing the investigation. The package may include leads that were not fully investigated by the SB/SE LDC or OTSA.

  5. Examiners should research IDRS, CBRS, the internet and other sources for current information on the promoter or promotion such as whether First Amendment issues may be present or possible leads regarding participants/investors/advisees, etc.

  6. If the investigation involves a paid return preparer, secure RPVUE for the most recent processing year and forward to the AT listkeeper.

  7. If the investigation is a parallel investigation, the examiner must initiate a six-way conference. See IRM 4.32.2.6.3, Six-Way Conference.

4.32.2.7.1.1  (06-08-2012)
SB/SE Pre-Contact Procedures

  1. SB/SE examiners are responsible for ensuring investigations are controlled on ERCS using the correct project code and ERCS tracking code (if applicable).

  2. A promoter investigation action plan is a tool that can be used by SB/SE examiners and group managers. It outlines the activities, actions and suggested time frames for SB/SE investigations. A sample action plan is available. See Exhibit 4.32.2-7, Sample Action Plan and is also available on MySB/SE, under "Promoter Investigations."

  3. SB/SE examiners may conclude during the pre-contact analysis that an investigation should be discontinued before contacting the promoter or that the investigation needs to be transferred to another compliance area. See IRM 4.32.2.8, Investigation Outcomes, for details on these actions.

4.32.2.7.1.2  (06-08-2012)
LB&I Pre-Contact Procedures

  1. LB&I Team Managers set up administrative controls, including input on ERCS.

  2. LB&I examiners should review the OTSA referral package which may include investor disclosure statements, OTSA database spreadsheets, attorney legal opinions, promotional materials, IDRS research, internet research, Q and A's of investors and any other material.

  3. For LB&I examiners, the investigation/audit plan for promoter penalty cases must be used by examiners involved in promoter investigations.

  4. LB&I Team Coordinators/Team Managers are responsible for completing the audit plan with estimated completion dates at each stage, including an estimated closing date (ECD). The status summary may be used for monitoring the progress of the investigation.

  5. LB&I Team Coordinators create activity records and logs to monitor progress for information document requests (IDRs), summonses, third party contacts, interviews, etc.

4.32.2.7.1.3  (06-08-2012)
The SB/SE LDC and OTSA

  1. The SB/SE LDC can assist SB/SE examiners with investigation development by obtaining promoter materials, conducting field surveys, and performing computer research. Generally, field surveys are limited to those investigations where the information is critical to developing the investigation. The SPA assigned to the promotion coordinates these survey requests.

  2. OTSA is available to assist LB&I examiners with investigation development by providing information from OTSA disclosure and registration databases and assisting in facilitating field surveys. Generally, field surveys are limited to investigations where the information is critical to developing the investigation. See IRM 4.32.2.3.3.1.1, Disclosures of Reportable Transactions.

4.32.2.7.1.4  (06-08-2012)
AT Senior Program Analysts (SPAs) and Technical Advisors (TAs)

  1. SPAs (SB/SE) or TAs (LB&I) responsible for specific promotions can provide additional information not in the SB/SE LDC or OTSA referral package, such as names of other IRS employees investigating the same promotion or similar promotions. SPAs or TAs can assist examiners with national coordination issues related to the promotion.

4.32.2.7.2  (09-23-2011)
Commencing the Investigation

  1. This section provides procedures for examiners to commence promoter investigations.

4.32.2.7.2.1  (09-23-2011)
Commencement of SB/SE Investigations

  1. Examiners schedule the initial appointment using Letter 1844, Initial Interview Letter, for investigations related to conduct potentially subject to penalties under IRC 6700, IRC 6701, IRC 6694, or IRC 6695. This initial appointment letter specifies the specific time and place of the initial interview.

  2. Examiners should schedule an initial appointment for 10 days from the date Letter 1844 is mailed to the promoter. The appointment should not be rescheduled to a later date unless there is a valid reason. Examiners should be alert for attempts by promoters to delay the investigation.

  3. In some investigations, it may be advisable to combine the opening and closing appointments into one meeting. This approach is generally used when an examiner has reason to believe the promoter will fail to cooperate or appear for the scheduled appointments. In these cases, the opening and closing appointments can occur in the same meeting by using Letter 3828, Opportunity to Present Position - Tax Shelter Promoter.

  4. A Notice 609, Privacy Act Notice, should be enclosed with the initial appointment letter.

  5. Form 4564, Information Document Request (IDR), must be sent with the initial appointment letter. The IDR must be specific and request relevant information related to the promotion.

  6. It is recommended that the IDR include "summons ready" language in the event the promoter fails to cooperate and an administrative summons is issued. Consult Area Counsel when preparing the IDR, particularly for complex transactions. Examiners should be prepared to serve the summons at the initial interview if they anticipate lack of cooperation by the promoter. See IRM 4.32.2.7.5, Summonses.

4.32.2.7.2.2  (06-08-2012)
Commencement of LB&I Material Advisor Investigations

  1. After the TTSPC approves the opening of a material advisor investigation under IRC 6707, the Team Manager/Team Coordinator issues the appropriate audit letter together with the standard IDR to the material advisor. The Team Manager/Team Coordinator should contact the LB&I:F Senior Program Specialist for the promoter program for the appropriate audit letter and IDR. The audit letter and IDR, issued by the Team Manager after Area Counsel review may be modified to fit the specifics of the investigation.

  2. Notice 609, Privacy Act Notice, must be included with the material advisor contact letter.

  3. The Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations, modified as appropriate, must also be included with the material advisor contact letter.

  4. Modifications may be made to the standard audit letter and IDR as needed, with the participation of Area Counsel.

  5. Central Audit File - All LB&I promoter investigation cases should have a "central audit file" that includes all documentation pertaining to the investigation including workpapers, analyses, correspondence, copies of summonses, taxpayer’s responses, etc. All examiners working on the investigation should have access to the central audit file. If the investigation is being worked by examiners in multiple locations and it is not feasible for all examiners to have access to the central audit file, then each examiner should be provided with a complete copy of all of the documents as the investigation progresses. The file should be arranged so that the information needed can be located easily. All examiners are required to have a complete activity record in the file. The central audit file must be separate and apart from the Counsel's file.

  6. LB&I examiners should send a copy of the potentially abusive transaction material obtained during the examination to OTSA. The identity of all material advisors who helped with the tax shelter promotion should also be sent to OTSA.

  7. LB&I team managers are required to prepare and submit monthly progress reports on each promoter investigation to the Financial Services Senior Program Specialist for the promoter program. A copy of the monthly report format can be found in Exhibit 4.32.2-3, LB&I Monthly Progress Report. If anything significant happens between reporting dates (e.g., serving a summons, enforcement) contact the Financial Services Senior Program Specialist immediately.

  8. A promoter may not file a qualified amended return after the date any person is first contacted by the IRS concerning an examination of that person under IRC 6700 for an activity with respect to which the taxpayer claimed any tax benefit on the return directly or indirectly through the entity, plan, or arrangement. Treas. Reg. 1.6664-2(c).

4.32.2.7.2.2.1  (06-08-2012)
Responses to the Audit Letter

  1. If the promoter's response to the audit letter is adequate:

    1. Determine if additional staff or other resources are needed to assist in analyzing the documents. If needed, request help from the TM. If additional resources are not available in the territory, the TM should contact the Financial Services (FS) TM having responsibility for tax shelter promotions.

    2. Index and scan the documents submitted by the promoter;

    3. Prepare an investor list on the standard OTSA spreadsheet and forward it to the Senior OTSA Analyst for promotions, with a copy to the Financial Services Senior Program Specialist for tax shelters. OTSA forwards the investor information to the Tax Shelter Support Unit (TSSU) in Ogden. The TSSU enters the information in the OTSA database and generates referral letters to the field to open examinations.

    4. Determine the number of different promotions the taxpayer is involved in and make referrals for assistance from financial products specialists, TAs, international examiners, etc. as appropriate.

  2. If the promoter's response to the audit letter and IDR is insufficient, consider issuing a summons to compel production of the information. All summons must be approved by Area Counsel and enforced as necessary.

4.32.2.7.2.2.2  (06-08-2012)
Issuance of IRC 6112 Letter

  1. The IRC 6112 letter may only be issued if the Service has a reasonable basis for believing that the recipient is required to comply with IRC 6112. The Team Manager/Team Coordinator, together with Area Counsel, must evaluate whether such a letter is appropriate and when enough information exists to support the issuance of the IRC 6112 letter.

  2. The Team Manager/Team Coordinator issues an IRC 6112 letter by certified or registered mail or hand delivery. Letter 4378, Multiple Sec. 6112 Request, may be used to make requests under IRC 6112.

  3. Notice 609, Privacy Act Notice, must be included with the IRC 6112 letter.

  4. Modifications may be made to the standard IRC 6112 letter as needed, with participation of Area Counsel.

4.32.2.7.2.2.3  (06-08-2012)
Responses to IRC 6112 Letters

  1. The promoter's response to the IRC 6112 letter is due within 20 business days. IRC 6112 does not provide for extensions. If the investor/advisee list is not received or is received after the 20 day response period, the promoter or material advisor is subject to an IRC 6708 penalty unless the reasonable cause exception applies.

  2. If a promoter responds timely, examiners must copy any investor list obtained to the standard OTSA spreadsheet. It is important that the investor list information conform to the OTSA spreadsheet; otherwise it will impede the OTSA database process.

  3. If the examiner, together with Area Counsel, determines that the material advisor's timely response was complete, then the examiner should issue Letter 4376, Discontinuance Letter for Sec. 6112 Inquiry, after receiving approval from the LB&I:F DFO Manhattan.

  4. If a promoter does not respond to the IRC 6112 letter request or if the examiner, in consultation with Counsel considers the response incomplete, then the Team Manager/Team Coordinator should send the material advisor a letter stating that the material advisor's submission was not fully responsive and that an IRC 6708 investigation is being opened. The examiner should contact the LB&I:F Senior Program Specialist for the Promoter Program for the appropriate letter.

4.32.2.7.2.2.4  (06-08-2012)
Reportable Transactions

  1. A "reportable transaction" is defined in IRC 6707A(c)(1), and is a type of transaction that the Secretary determines has a potential for tax avoidance or evasion per regulations under IRC 6011. See Treas. Reg. 1.6011-4. Material advisors are required to disclose reportable transactions (including listed transactions) to the IRS on Form 8918, Material Advisor Disclosure Statement. See IRC 6111. Material advisors may be subject to penalties under IRC 6707 for failing to provide the required information. See Treas. Reg. 301.6111-3, Disclosure of Reportable Transactions.

  2. Reportable transactions include the following categories of transactions:

    Category Description
    Listed Transaction A transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a listed transaction. See Notice 2009-59, IRB 2009-31, 170, for a list of these transactions.
    Confidential Transaction A transaction offered to a taxpayer under conditions of confidentiality where the taxpayer's disclosure of the potential tax treatment and strategy is limited in any manner, and for which the material advisor is paid a minimum fee. The minimum fee equals:
    1. $250,000 if the taxpayer is a corporation (looking through partnerships and trusts), or

    2. $50,000 for all other taxpayers.

    The agreement or understanding limiting such disclosure can be express or implied.
    Transaction With Contractual Protection The taxpayer or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences are not sustained, or fees are contingent on the taxpayer's realization of tax benefits.
    Loss Transactions Any transaction resulting in the taxpayer claiming a loss under IRC 165, Losses, of at least the following amounts:
    1. For C corporations and partnerships that only have C corporations as partners - a $10 million loss in a single tax year or a $20 million loss in any combination of taxable years.
    2. For individuals and trusts - a $2 million loss in a single tax year or a $4 million loss in any combination of taxable years; or a $50,000 loss in a taxable year if the loss arises with respect to an IRC 988 transaction.
    3. For all other taxpayers, a $2 million loss in a single tax year or a $4 million loss in any combination of taxable years.
    Transactions of Interest (TOI) A transaction that is the same or substantially similar to one of the types of transaction that the IRS has identified by notice, regulation or other form of published guidance as a transaction of interest. See Notice 2009-55, IRB 2009-31, 170 for a list of TOIs.
    Transactions With a Significant Book-Tax Difference For a transaction, any items of income, gain, expense, or loss for tax purposes which differ by more than $10 million on a gross basis from the amount used for book purposes. This provision only applies to taxpayers that are reporting companies under the Securities Exchange Act of 1934 and related business entities, or to business entities that have $250 million or more in gross assets for book purposes. For taxpayers that would have to make disclosures on or after January 6, 2006, these taxpayers are not required to file a disclosure statement. See Notice 2006-6, IRB 2006-51 1, "Notification of Removal of the Transaction With a Significant Book-Tax Difference Category of Reportable Transaction Under Treas. Reg. 1.6011-4."
    Transactions With a Brief Asset Holding Period Any transaction resulting in the taxpayer claiming a tax credit (including a foreign tax credit) exceeding $250,000 if the underlying asset giving rise to the credit is held by the taxpayer for 45 days or less. This transaction category was removed in the Final IRC 6011 Regulations issued August 3, 2007.

  3. For returns and statements due after October 22, 2004, and which were not filed before that date, any taxpayer who participates in a reportable transaction and fails to disclose information on Form 8886, as required, is subject to an IRC 6707A penalty.

  4. Specific exceptions to the requirement to report loss transactions are described in Rev. Proc. 2004-66, 2004-50 IRB 966. Generally, the exceptions include losses from the sale or exchange of assets with a qualifying basis, losses under IRC 165(c)(3), involuntary conversions, certain mark-to-market losses, losses determined by reference to cash payments, and various other losses as described in Rev. Proc. 2004-66, Section 4.03.

  5. Specific exceptions to the requirement to report transactions with contractual protection are found in Rev. Proc. 2007-20, 2007-7 IRB 517. These exceptions apply to certain contractual protection arrangements for which the fee is related to certain credits. See Rev. Proc. 2007-20, Section 4.02.

  6. In general, any taxpayer, including an individual, trust, estate, partnership, S-corporation, or other corporation, that participates in a reportable transaction and is required to file a federal income tax return or information return, must file a Form 8886.

  7. Regulations requiring disclosures of reportable transactions by participants in those transactions are found under IRC 6011 at Treas. Reg. 1.6011-4.

4.32.2.7.2.2.4.1  (06-08-2012)
Listed Transactions

  1. The IRS has alerted taxpayers to transactions that it has determined are tax avoidance transactions and identified these transactions as "listed transactions."

  2. Listed transactions are defined as transactions that are the same as, or substantially similar to, one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction. Refer to Treas. Reg. 1.6011-4(b)(2) and IRC 6707A(c)(2), as added by the AJCA of 2004.

  3. In Notice 2009-59, IRB 2009-31, 170, Listed Transactions, and subsequent notices the IRS provides a list of certain transactions it has determined to be tax avoidance transactions and classified those transactions as listed transactions. Contact OTSA for a complete summary of all listed transactions.

  4. Organizers, sellers, and material advisors involved with listed transactions must maintain and furnish certain investor/advisee information under Treas. Reg. 301.6112-1, Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc., for interests sold in these shelters after February 28, 2000.

  5. After the AJCA amended IRC 6111 effective for transactions with respect to which material aid, assistance, or advice is given with respect to a transaction after October 22, 2004, material advisors must disclose listed transactions by filing a Form 8918.

  6. Taxpayers must disclose their participation in listed transactions per Treas. Reg. 1.6011-4, Requirement of Statement Disclosing Participation in Certain Transactions By Taxpayers.

  7. When a listed transaction is identified during an examination, the issue is raised and developed. Examiners should contact the SPA orTA , identified coordinator or IMT handling the issue. Examiners should provide the name of the taxpayer, taxable period(s) involved, type of listed transaction, and the name of the promoter, if known. LB&I examiners should include the names of the team manager and team coordinator and their telephone numbers. SB/SE examiners should include the name of their group manager (GM) and their telephone numbers. The initial contact may be via e-mail (utilizing secure messaging), fax or telephone.

  8. As a transaction is listed, the SPA or TA, with the assistance of the Field Counsel attorney assigned to the issue, prepares a paper describing the facts of the issue, questions raised and the best way to address the issue to ensure full development and consistency among taxpayers. Training, reference and resource materials are also provided. The SPA or TA, with the assistance of the Field Counsel attorney assigned to the issue, develops and proposes a coordinated issue paper (CIP) or similar document, as appropriate.

  9. Examiners should consult with the SPA or TA and Area Counsel on the development of the issue. Examiners must secure the concurrence of the SPA or TA if their examination deviates from any mandated specific examination techniques proposed for issue development or their proposal for adjustment deviates from any stated legal positions. Examiners must also consult with, and secure the concurrence of, the SPA and Area Counsel before proposing any resolution other than full concession of the issue by the taxpayer. No proposals can be made without the concurrence of the Executive Issue Owner. See IRM 4.32.1.4.1, Membership in the Issue Management Team, for more information on Executive Issue Owners.

  10. Penalties under IRC 6662, Accuracy-Related Penalty, and IRC 6662A, Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions, must be considered for all listed transactions. Due to the definition of "reportable transaction understatement," the IRC 6662A penalty, unlike the IRC 6662 penalty, may apply even if there is no underpayment of tax on the taxpayer’s return. Furthermore, if the taxpayer did not disclose their participation in the transaction as required by Treas. Reg. 1.6011-4, penalties under IRC 6707A should be considered.

4.32.2.7.2.3  (09-23-2011)
Responses to Promoter Frivolous Challenges

  1. Examiners should anticipate arguments and questions from the promoter defending the arrangement and questioning the right of the IRS to examine the books and records.

  2. Examiners also should familiarize themselves with The Truth about Frivolous Tax Arguments and the various toolkits located on the IRS internet website at www.irs.gov/.

4.32.2.7.2.4  (06-08-2012)
Powers of Attorney

  1. Promoters may have an attorney, certified public accountant (CPA), enrolled agent, or other authorized person represent them during the investigation. If so, a Form 2848, Power of Attorney and Declaration of Representative, should be secured. The form should indicate the type of tax to be "Civil Penalties" as the type of tax. The tax form number should be marked as "Not Applicable (N/A)." The year(s) or period(s) block should be completed showing the current year and any prior year in which the promotion was ongoing.

  2. Refer to IRM 21.3.7, Processing Third Party Authorizations onto the Centralized Authorization File (CAF), for additional information regarding powers of attorney including whether the form is complete.

    Note:

    Married filing joint taxpayers - A separate Form 2848 should be secured for each spouse.

4.32.2.7.2.5  (06-08-2012)
Claims of Identity Theft

  1. If a promoter or participant claims to be a victim of identity theft, the following documents must be provided to establish the claim. These documents have been established as service-wide standards to reduce taxpayer burden. See IRM 21.9.2, Accounts Management Identify Theft, and IRM 10.5.3Identity Protection Program, for additional information.

    • Authentication of Identity – A copy of a valid United State federal or state government issued form of identification (e.g., driver’s license, state identification card, social security card, passport, etc.).

    • Evidence of identity theft – A copy of a police report or a completed Form 14039, Identity Theft Affidavit.

4.32.2.7.3  (06-08-2012)
Promoter Interviews

  1. The primary goals of the initial interview are to:

    1. Conduct a detailed interview with the promoter.

    2. Secure promotional materials.

    3. Secure a complete participant, investor, or advisee list.

  2. Examiners should prepare a list of interview questions with guidance from Area Counsel before the interview. Interview questions should cover the following topics:

    • Personal history.

    • Business and professional history.

    • Structure of the organization and role of various parties within the organization.

    • Size of the promotion.

    • Description of tax attributes of the promotion.

    • Sub-promoters, co-promoters, or other related parties.

  3. Every effort should be made to secure as much information as possible at the initial interview as the promoter may cease to cooperate at any point during the investigation.

  4. Examiners should consider preparing a summons in advance of the interview to serve on the promoter in the event the promoter fails to comply with the IDR.

  5. Examiners also should provide Pub 1, Your Rights as a Taxpayer, or a Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations, at the initial interview. Pub 1 or Letter 3164-P (DO) may also be sent with the initial appointment letter.

  6. It is recommended that interviews be conducted in the presence of at least one IRS witness.

  7. If possible, the assigned Area Counsel attorney should attend the interview.

  8. In parallel investigations, promoters will not be interviewed without coordination with CI and consultation with Area Counsel. See IRM 4.32.2.6.6, Interviews, for procedures regarding special agents attending interviews. See IRM 4.32.2.6, Parallel Investigations.

  9. It is recommended that interviews be held in government facilities. Group managers may agree to alternative arrangements to facilitate interviews provided the safety of the examiner is not compromised.

  10. For LB&I, court reporters are required for all formal interviews. Examiners should make arrangements for purchase of the interview transcript. Examiners should contact a LB&I Financial Services Senior Program Specialist for assistance.

  11. For some sample promoter interview questions, see Exhibit 4.32.2-8, Sample Interview Questions for Promoters/Preparers. This document is also available on MySB/SE, Promoter Investigations.

  12. See IRM 4.10.3.2, Interviews: Authority and Purpose, for the authority for and purpose of conducting interviews.

  13. See IRM 4.10.3.2.7, Interview Techniques, for additional general interviewing techniques.

4.32.2.7.3.1  (09-23-2011)
Recording Interviews

  1. IRC 7521, Procedures Involving Taxpayer Interviews, allows audio recordings of in-person taxpayer interviews by either the taxpayer or the IRS if the party desiring to record provides advance notice. See IRM 4.10.3.2.6, Requests to Tape Record Interviews. Advance notice of at least 10 calendar days is required if either the IRS or the taxpayer intends to make an audio recording under the provision in IRM 4.10.3.2.3, Preparation and Planning for Interviewing.

  2. If the promoter audio records the interview or uses a court reporter, the examiner must record the meeting.

  3. Promoters may fail to provide the IRS with advance notice of their intention to record a meeting. Since time is of the essence in these investigations and recordings of interviews can play a pivotal role in the investigation, examiners should be prepared to audio record all interviews.

  4. Cameras, cell phones with cameras, and videotaping are never allowed. See IRM 25.5.5.4.4, Right to Make an Audio Recording of the Proceeding, for additional information.

  5. Examiners should consider audio recording all interviews with promoters and participants to document the meetings. See IRM 4.16.1.3.2.2, Electronic or Verbatim Recording of Interviews, and IRM 4.10.3.2.6, Requests to Tape Record Interviews, and IRM 4.71.1.13, Verbatim Recordings.

  6. If the IRS is not recording the interview, examiners should ask whether the promoter or participant is recording the interview, and document the question and the response in the interview notes. Many states have wiretap laws prohibiting the secret recording of conversations without a court order. If the meeting/interview was illegally recorded, the promoter’s denial could be used in later legal proceedings.

  7. Promoters may use a court reporter in their own interview if the court reporter is licensed by the state to record official court proceedings and will make a copy of the transcript available to the IRS.

  8. See IRM 25.5.5.4.4, Right to Make an Audio Recording of the Proceeding, and IRM Exhibit 4.10.3-1, Pattern Letter P2156: Recording Interviews.

4.32.2.7.3.2  (06-08-2012)
Third-Party Contacts

  1. IRC 7602(c) requires the IRS to provide notice to the promoter before contacting third parties. Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations, is used to provide this statutory notification for promoter investigations.

  2. IRC 7602(c)(3)(C) provides for an exception to the third-party notification requirement with respect to any pending criminal investigation. Accordingly, in parallel investigations where CI has requested “no-contact,” the third-party notification letter (Letter 3164-P (DO)) is not required.

  3. Examiners should attempt to obtain the information in writing from the promoter before contacting any third parties. However, third-party contacts will be required in most promoter investigations to obtain or verify information provided by the promoter.

  4. Tax return information may be disclosed to a third party to the extent necessary for the third party to answer questions. Sufficient information should be included in the file to document the necessity for IRC 6103(k)(6) disclosure purposes. Further information on disclosures to third parties may be found in IRM 11.3.21.3, Requirements of Investigative Disclosure, and in IRC 6103(k)(6).

  5. Form 12175, Third Party Contact Report Form, should be forwarded to the Area Third Party Contact Coordinator for each third party contact. Use IMF MFT 55 or BMF MFT 13, as appropriate, and the tax period on ERCS for the penalty case when completing Part 10 of Form 12175.

  6. Promoter's requests for third party contact lists must be forwarded to the Area Third Party Contact Coordinator. Before forwarding any such request, the employee receiving the request must secure the promoter’s current mailing address.

  7. Taxpayers and their counsel have no legal right to be present for IRS interviews of any third party witness. However, if the interview is with a former employee of a corporation who exercised managerial responsibility, contact Area Counsel to determine what questions can be asked of the former employee without taxpayer’s counsel present. See also IRM 25.5.5.5.5, Excluding a Taxpayer or a Taxpayer's Representative From the Interview of a Summoned Third Party, and IRM 25.5.5.5.7, Third-Party Witness’s Choice of Representative, for additional information.

  8. See IRM 4.10.1.6.12, Third Party Contacts - Background, for more information.

4.32.2.7.3.3  (06-08-2012)
Sub-promoters/Co-Promoters Contacts

  1. Sub-promoters/co-promoters are involved in promoting the same transaction as the promoter. They may also be organizers, managers or sellers of this transaction. They generally receive fees for their role in the transaction.

  2. A promotion may involve several sub-promoters/co-promoters, such as an accounting firm, financial services/investment boutique firm, investment banker, or law firm. Generally, the entity that gives an opinion on the transaction being promoted is a law firm.

  3. Some abusive tax promotions are multi-level marketing promotions. Individuals in multi-level marketing promotions pay fees or commissions to whoever recruited them into the promotion, and receive fees or commissions from whomever they recruit into the promotion. Examiners must be alert to the possibility that sub-promoters and co-promoters could have other sub-promoters and co-promoters working under them.

  4. Sub-promoters/co-promoters may be subject to penalties under IRC 6700, IRC 6701, IRC 6707, or IRC 6708.

  5. Examiners should contact the SB/SE LDC or LB&I Financial Services Senior Program Specialist to obtain information on related or affiliated promoters. The sub-promoter or co-promoter may have previously, or may be currently, the subject of an investigation. If so, contact should be made with the examiner who conducted or is currently conducting that investigation.

  6. In LB&I, if the co-promoter is not under investigation, contact OTSA to find out if any disclosure statements pertaining to the co-promoter have been filed.

  7. If the sub-promoter’s or co-promoter’s activities warrant investigation or should be included with the key promoter investigation, the sub-promoter or co-promoter should be referred to SB/SE LDC or OTSA. See IRM 4.32.2.3, Lead Identification and Investigation Authorization. Investigation of a sub-promoter or co-promoter requires SB/SE LDC or LB&I TTSPC approval.

  8. In parallel investigation cases, sub-promoters and co-promoters should not be contacted without coordination with CI. See IRM 4.32.2.6, Parallel Investigations.

  9. Contacts with sub-promoters and co-promoters are considered third-party contacts subject to the notice and record-keeping requirements of IRC 7602(c). See also IRM 4.11.57, Third Party Contacts, for additional information

  10. Examiners should consider recording all interviews with sub-promoters and co-promoters. See IRM 4.32.2.7.3.1, Recording Interviews.

  11. Interviews with sub-promoters and co-promoters should follow the guidelines contained in IRM 4.32.2.7.3, Promoter Interviews, except that third-party interviews are not covered by IRC 7521 and the taxpayer has no legal right to be present for IRS interviews of any third-party witness. See IRM 25.5.5.5.7, Third Party Witness’s Choice of Representative, for additional information.

  12. For some sample sub-promoter and co-promoter interview questions, see Exhibit 4.32.2-9, Sample Interview Questions for Sub-Promoters and/or Co-Promoters. This document is also available on MySB/SE, Promoter Investigations.

4.32.2.7.3.4  (09-23-2011)
Promoter or Related Promoter Income Tax Examinations

  1. Income tax returns should be reviewed for potential tax issues; however, an examination is not mandatory.

  2. If an examination is warranted, it should be done concurrently with the promoter investigation. It is generally advisable to have one examiner conduct the promoter income tax examination and another examiner conduct the promoter investigation, although there is no prohibition against one examiner doing both.

  3. Promoters often utilize their own promotion, and in the absence of known participants, the promoter's income tax examination could reveal the underlying operation of the promotion.

  4. The additional time and resources necessary to complete the examination must be balanced against the need to shut down the promotion as quickly as possible.

  5. Examiners should ensure the promoter has made all required disclosures with their individual return. See IRC 6011 and Treas. Reg. 1.6011-4. If there is noncompliance, appropriate penalties are assessed.

4.32.2.7.3.5  (06-08-2012)
Participant Contacts

  1. Identification and contacts with participants is a critical component in the development of a promoter investigation. Participants can be a good source of information on the promoter and the promotion, providing insight on operations of the promotion, principals or entities involved and the flow of the money through the promotion. Participant information can be helpful in determining the tax harm of the promotion.

  2. In parallel investigation cases, participants are not contacted without coordination with CI. See IRM 4.32.2.6.6, Interviews.

  3. The number of participant contacts and the selection of specific participants for interview are determined on a case-by-case basis.

  4. Examiners should consider securing an affidavit from the participant. See IRM 4.32.2.7.4, Affidavits and Oral Testimony.

  5. Examiners should consider recording interviews with participants. See IRM 4.32.2.7.3.1, Recording Interviews.

  6. For some sample participant interview questions, see, Exhibit 4.32.2-10, Sample Interview Questions for Participants. This document is also available on MySB/SE, Promoter Investigations.

  7. Examiners should consider reviewing participants' compliance history and current collection status. If there is a need for a revenue officer to assist refer to IRM 4.32.3, Coordination and Roles of Cross Functional Units, for current procedures.

4.32.2.7.3.6  (06-08-2012)
Participant Tax Examinations

  1. Participant examinations are frequently conducted simultaneously with a promoter investigation, but these examinations are not always mandatory. Examiners should also proceed with third-party contacts or other sources of information and not delay or suspend the investigation pending the outcome of any participant exams. The AT program makes participant exam decisions on a case-by-case basis.

  2. Examiners should secure any available information about prior examinations of participants to use as evidence for the promoter investigation. Contact an AT SPA for assistance.

  3. Examiners should consider reviewing participants' compliance history and current collection status. If there is a need for a revenue officer to assist, refer to IRM 4.32.3, Coordination and Roles of Cross Functional Units, for current procedures.

  4. In parallel investigations, participant income tax examinations are not initiated without coordinating with CI. See IRM 4.32.2.6.3, Six-Way Conference, and IRM 4.32.2.6, Parallel Investigations.

  5. In SB/SE, if participant examinations are necessary to develop a promoter investigation, the Area PSP office can build a maximum of 20 examination files. This number can be adjusted, if necessary, by agreement between the AT listkeeper, the case building team and the Area PSP Coordinator. Case building cannot be conducted at the group level.

  6. Participants who fail to disclose information required under IRC 6011 regarding a reportable transaction on a return or statement due after October 22, 2004, may be subject to IRC 6707A penalties.

  7. Examiners are required to consider the application of IRC 6662A penalties and other relevant penalties as part of the package audit requirements.

  8. The AJCA of 2004 amended the IRC 7525(b) exception to confidentiality privileges relating to taxpayer communications. This privilege does not apply to any written communication which is in connection with the promotion of the direct or indirect participation of the person in any tax shelter, as defined in IRC 6662(d)(2)(C)(ii).

  9. Examiners should be aware that the participants' returns most likely have statute of limitation (SOL) periods different from that of the promoter's return. This may be because the due dates of the promoter's information return and participants' returns differ. Additionally, the AJCA of 2004 made exceptions to the ordinary SOL periods in IRC 6501(c), Limitations on Assessment and Collection, if the taxpayer fails to include on any return or statement for any taxable year any information regarding a listed transaction. AIMS Alpha Code "WW" is used to identify this exception to the normal statute of limitations. See IRC 6501(c)(10) and Rev. Proc. 2005-26 for further guidance.

4.32.2.7.3.6.1  (06-08-2012)
Participant Job Aid

  1. The examiner working the promoter investigation will prepare a participant job aid or "white paper" for use by other examiners working the related participant cases. The job aid is forwarded to the listkeeper along with the participant list for case building

  2. Information provided in the participant job aid includes:

    • Identifying information on the promoter, including project and tracking codes.

    • Key tax issues and a description of the scheme.

    • Tax law analysis.

    • Suggested audit techniques.

    • Contact information on the promoter examiner and SPA.

    • Information from the participant audit files to be provided to the promoter examiner.

    Optional information that can be helpful includes suggested interview questions and a penalty application addendum.

  3. The participant job aid is intended to provide a brief overview of the promotion and the relevant tax issues, and to facilitate coordination between examiners. Normally, 4 or 5 pages is sufficient. In some instances, a separate issue paper may be prepared by the SPA to address technical or complex issues.

4.32.2.7.4  (06-08-2012)
Affidavits and Oral Testimony

  1. Affidavits can be used to document oral statements of the promoter or any other person interviewed during the promoter investigation. Form 2311, Affidavit, and Form 2311-B, Affidavit Continuation Sheet, can be used to document the interview.

  2. Affidavits are used:

    • When other documentary evidence is not available to support the statements of a person.

    • To record the testimony of a person.

    • To discourage a person from later changing his testimony.

    • In certain circumstances as evidence if the person cannot be located for future proceedings.

    • To accurately record and document a person’s statements.

  3. Examiners can administer an oath or affirmation to the person being interviewed. The authority for administering oaths is IRC 7602, Examination of Books and Witnesses, and IRC 7622, Authority to Administer Oaths and Certify, and authority 14 of Delegation Order 25-1 (IRM 1.2.52.2), Summonses, Oaths, Certifications, and Related Functions. Contact Area Counsel prior to administering any oath or affirmation.

  4. See IRM 20.1.6.20, Affidavits Overview, for information to be included in affidavits related to preparer penalty cases.

  5. There is no set form for an affidavit as long as all of the required information is present. There are four basic types of affidavits:

    • Narrative Affidavit – A verbatim written record of the person’s statements or testimony.

    • Summary Affidavit – A summary of the person’s statements or testimony.

    • Question and Answer Affidavit – A written record containing the exact question asked, and either the verbatim answer or a summary of the answer given by the witness.

    • Attested Interview Report – A summary of the interview that is not signed by the person but is signed under oath by the examiner and all other IRS employees attending the interview.

  6. Except for an attested interview, the person giving the affidavit should sign and date the document. If the affidavit is more than one page, the person should initial and date each page. Any typographical errors or other changes to the person’s statement must be initialed and dated by the person. If more than one person is interviewed, prepare a separate affidavit for each person.

  7. If a person refuses to sign the affidavit, but states that it is true and correct, the following statement should be added to the bottom of each page of the document:

    "This statement was read by [insert name] on [date], who stated it was true and correct but refused to sign it."

4.32.2.7.5  (06-08-2012)
Summonses

  1. A summons can be used to require a witness to appear on a given date to give testimony, or to produce existing books, papers and records, or other data. A summons cannot require the preparation or creation of documents (including tax returns) that do not already exist. If a privilege defense is raised to the production of summoned documents, it is a best practice to describe the elements of the privilege log requested from the witness in the instructions to the summons. See IRM 25.5.5.4.3, Privileged Communication and Summons.

  2. For summonses related to promoter investigations the following language must be included in the summons: "In the matter of liability of [promoter or preparer's name] under 26 USC Secs. 6694, 6695, 6700, 6701, 6707 and 6708 [use all sections that may be applicable]."

  3. The periods on the summons form should say "From January 1, [year] through date of compliance with this summons" . The year to be inserted would be the earliest year that the promoter is suspected of having engaged in the abusive transaction.

  4. The Area Counsel attorney assigned to the promoter investigation should review all summonses before they are issued to make sure they are legally enforceable. For LB&I investigations, LB&I Area Counsel forwards the summons to DOJ for approval after Counsel review through procedures prescribed by LB&I Division Counsel and the CCDM. Area Counsel can conduct interviews pursuant to a summons. Summonses are of particular concern in cases where First Amendment concerns are present. Such summonses must be narrowly tailored to avoid infringing on First Amendment rights.

  5. In parallel investigations, examiners must coordinate all summonses with CI before issuance. Examiners should be aware that IRC 7602(d) limits the authority of the IRS to issue or enforce summonses when there is a "Justice Department referral" in effect. See IRM 4.32.2.6.9, Administrative Summons. For advice on the meaning of that restriction, examiners should contact Area Counsel.

  6. Examiners should continue to develop the promoter investigation during the summons enforcement process and attempt to secure the information from another source.

  7. Additional requirements for LB&I examiners:

    1. A summons log must be kept. A sample copy of the summons log is in IRM Exhibit 4.32.2-2, Sample Summons Log.

    2. Each listed transaction should be shown on a separate summons. All other transactions should be combined on one additional summons.

    3. Team Managers should sign the summons. It is left to the discretion of the TM whether or not to inform the promoter of the pending summons. If a summons is a third party summons, notice must be given under IRC 7609(a).

  8. See IRM 25.5, Summons, for additional information on summonses and IRM 1.2.52.2, Delegation Order 25-1, Summonses, Oaths, Certifications, and Related Functions.


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