4.32.2  The Abusive Transactions (AT) Process (Cont. 2)

4.32.2.7 
Promoter Investigation Guidelines

4.32.2.7.5 
Summonses

4.32.2.7.5.1  (06-08-2012)
Summonses for Foreign Records

  1. Documents related to foreign accounts or entities can often be obtained by use of a summons. Summonses may be issued to persons or entities who have a presence in the United States (including United States possessions) and who have control over books and records located abroad. For countries with which the United States has treaties or tax information exchange agreements (TIEAs), examiners generally may request information that is either in the other country's possession or obtainable under the laws of the particular country. The treaty or TIEA does not obligate the foreign country to provide information that would disclose any trade or business secret. All requests for foreign information are made through the Deputy Commissioner (International) LB&I, (or his delegate) who is the U.S. Competent Authority for tax treaties and TIEAs. (See Delegation Order 4-12 (Rev. 3) for the current delegated offices within the Deputy Commissioner (International) (LB&I). Additionally, see Chief Counsel Directives Manual (CCDM) 34.6.3.6.6 for procedures in the handling and the enforcement of Tax Treaty and TIEA exchange of information requests received by the U.S. Competent Authority from the foreign country.)

    Note:

    Revisions of Delegation Order 4-12 (Rev. 3) are still in process.

  2. If the promoter is acting as agent for an entity or if there is a factual basis for concluding that the promoter controls or possesses foreign-based records (e.g., the promoter is the grantor of a foreign trust or is using a credit card issued by a foreign bank), a court can compel the promoter to produce the summoned books, papers, records, or other data. See United States v. Wheaton, 791 F. Supp. 103 (D. N.J. 1992 (the court applied the text articulated in United States v. Powell, 379 U.S. 48 (1964)). Other examples of "control" of records abroad include interlocking boards of directors, corporate officers holding positions with each corporation, or direct or indirect ownership.

  3. Any such proposed summons shall be submitted for pre-issuance review to the appropriate Area Counsel office. Area Counsel will then consult with Branches 6 and 7 of the Office of the Associate Chief Counsel (Procedure and Administration). The Office of Associate Chief Counsel (Procedure and Administration) will consult with the Office of Associate Chief Counsel (International), Branch 7, as necessary, particularly in situations where there is a likelihood that the foreign country where the records are located may attempt to "block" compliance or enforcement of the summons (see also, paragraph 6 below). In such cases, the DOJ may also be consulted.

  4. If the issuance of a summons for foreign information to a person or entity who has a presence in the United States and who has control over books and records located abroad is unsuccessful, only then may the Service consider if it is appropriate to obtain foreign information directly in the foreign country by utilizing treaties, conventions and agreements, including tax treaties and TIEAs.

  5. In situations where the United States has a tax treaty, TIEA or other bilateral or multilateral agreement for the exchange of information with the country where the information is located, the IRS will attempt to obtain the foreign information by utilizing such treaty, TIEA or agreement prior to issuance of a summons for the foreign information. See Chief Counsel Directives Manual (CCDM) 34.6.3.6.6Tax Treaty and TIEA Summons and Chief Counsel Directives Manual (CCDM) 34.6.3.6.7, Issuance of Summons for Books and Records Abroad.

  6. Requests for information to foreign governments under tax treaties and TIEAs must be made through the Office of the Deputy Commissioner (International) LB&I. The Deputy Commissioner (International) LB&I is the U.S. Competent Authority for treaties and TIEAs and only s/he or those with a delegated authority have the authority to exchange information with a foreign government. Any questions regarding the exchange of information process should be directed to the Manager of Exchange of Information Programs in that office, and any legal questions should be directed to Branch 7 of the Office of Associate Chief Counsel (International). The summoned party may allege that compliance with the summons will violate the law of the country where the books and records are located. In that case, the court will balance the competing interests of the two countries. Field counsel shall coordinate summons enforcement matters with Branch 6 or 7 of Procedure and Administration, and Procedure and Administration will coordinate with Branch 7 of the Office of Associate Chief Counsel (International) with regard to summons enforcement matters involving issues related to tax treaties and TIEAs. See Chief Counsel Directives Manual (CCDM) 35.4.5, Pre-Trial Activities - Evidence and Information from Abroad.

  7. Area Counsel should be consulted for assistance in preparing summonses to offshore entities. If a foreign trust chooses a foreign branch of a U.S. bank to be its trustee, a summons may be issued to the U.S. bank to produce its branch records. A proposed summons of this type will be subject to review by Area Counsel.

  8. A collective entity, such as a corporation or partnership, possesses no Fifth Amendment privilege; therefore, it cannot use that privilege as a defense against production of summoned books, papers, or other data. See IRM 25.5.5.4.1, Fifth Amendment Privilege Against Self Incrimination, IRM 25.5.5.4.1.1, Rights Concerning Partnership and Other Unincorporated Association Books and Records, and IRM 25.5.5.4.1.2, Rights Concerning Corporate Books and Records.

    1. This applies regardless of the corporation's size, and regardless of whether the summons is addressed to the corporation or to an individual in his representative capacity as a custodian of the collective entity's records. See Braswell v. United States, 487 US 99 (1988).

    2. An agent of a collective entity (including an offshore entity), such as the custodian of corporate records, may not resist a summons for such records on the ground that the act of production will incriminate him in violation of the Fifth Amendment privilege against self-incrimination. See Braswell, 487 U.S. at 117-18. Because the agent is acting as the collective entity's representative and not in his individual capacity, the act of production is deemed to be that of the entity, and the government may make no evidentiary use of the "individual act" of production against the individual. See Braswell, 487 U.S. at 118.

4.32.2.7.5.2  (06-08-2012)
Formal Document Requests

  1. A formal document request (FDR) is another method of gathering information from abroad. An FDR is any request issued during an investigation or examination and made after the normal request procedures have failed to produce the requested documents. IRC 982(c)(1). IRC 982, Admissibility of Documentation Maintained in Foreign Countries, provides consequences if a taxpayer fails to substantially comply with any FDR for documents.

  2. IRC 982(c)(1) provides a powerful incentive for a promoter to produce foreign-based documentation. Under specific conditions, see IRC 982(a), the appropriate court shall prohibit the introduction of any foreign-based documentation covered by the FDR in a civil proceeding in which the tax treatment of the examined item is an issue. IRC 982 does, however, provide a reasonable cause exception, IRC 982(b), and allows for a proceeding to quash, IRC 982(c)(2).

  3. Examiners should consult with managers and Area Counsel for the preparation of a FDR and consider issuing a summons concurrently with it. See IRM 4.61.2.1, Information Reporting and Record Keeping, and Chief Counsel Directives Manual (CCDM) 35.4.5.2.1, Formal Document Requests.

4.32.2.7.5.3  (06-08-2012)
Authorization Directives

  1. An authorization directive is a document, signed by a US person, that, without admitting the existence of documents, authorizes and directs a foreign specified person (bank, trustee, or other entity or individual) who has control over documents of the US person, to turn them over to the IRS. An authorization directive can only be used to obtain documents located outside the United States. The authorization directive says that to the extent the US person has foreign records under the specified person's control the foreign specified person is to release those records to the IRS. An authorization directive may be made voluntarily or compelled by court order in a summons enforcement proceeding (the request to sign the authorization directive is made by summons served on the US person). A summons issued under IRC 7602 may not be used to compel the taxpayer to execute a consent directive; however, the desired result may be achieved by summoning the taxpayer to produce the records. Even though the records are not in his possession, the taxpayer does have custody and control over them, and the taxpayer can be ordered to comply with the summons by either producing the books and records himself or by signing a consent directive authorizing the bank to produce the records on his behalf.

  2. The IRS may be able to compel a court order that compels a promoter to sign an authorization directive for releasing foreign bank or trustee records otherwise protected by bank secrecy laws. Consult Area Counsel for assistance with preparing this document.

  3. See Chief Counsel Directives Manual (CCDM) 34.6.3.7, Issuance of Summons for Books and Records Abroad, for guidance.

4.32.2.7.6  (06-08-2012)
Evidence

  1. One objective of the investigation is to develop evidence to support the government’s case. Evidence is generally defined as something that proves a fact and includes properly sworn testimony, documents, photographs, audiotapes and videotapes.

  2. Knowledge that a promoter’s activities are for tax evasion and avoidance purposes is an element of many promoter penalties. Examiners should develop and retain evidence of the promoter's claimed tax expertise.

  3. Generally, in a court of law, the contents of a document can be proven only by that document, rather than by summaries or testimony about the document. In addition, the original piece of evidence should be produced unless there is a satisfactory explanation why the original cannot be produced. A copy can be provided to the court if properly authenticated. Consequently, great care in handling or preserving information is necessary if it is to be used in court. See IRM 9.6.4.9, Admissibility of Evidence at Trial, for further information. Examiners should consult with Area Counsel if questions arise about handling or preserving potential evidence.

  4. All documents obtained during the investigation should be maintained in the condition in which they were received. For each document received the examiner should record on Form 9984, Examining Officer's Activity Record, or its equivalent, the date it was received, from whom it was received, and how it was received (mail, during interview, via fax, etc.).

  5. Do not make notations or other extraneous marks on any documents received. Examiners are seldom allowed to retain original documents obtained from the promoter, so it is very important to make copies. Mark the back of each copy with the statement "compared to original," then sign and date the document to authenticate it.

  6. If examiners are allowed to temporarily retain documents for additional examination and/or making copies they should provide a receipt to the promoter for the records. Form 2725-A, Document Receipt/History and Custody of Documents, is available for this purpose.

  7. See IRM 4.10.7.3, Evaluating Evidence, for additional information on evaluating evidence.

4.32.2.7.6.1  (06-08-2012)
Seals and Certifications

  1. IRS records (tax returns or other official documents) must be certified if they are to be used as evidence in court. See IRM 11.3.6, Seals and Certifications, for obtaining certified copies of official IRS records. When a record for which certification is requested is located in another office, it is generally preferable to transfer the certification request to the office that has the record, rather than to transfer the record to be certified elsewhere.

  2. Form 2866, Certificate of Official Record, is the cover sheet used for official certifications of documents or records. Attach copies of the certified documents or records to this form.

  3. Form 4340, Certificate of Assessments, Payments, Other Specified Matters, is attached to Form 2866 when certifying transcript information.

  4. Form 3050, Certificate of Lack of Record, can be used in lieu of Form 2866 when certifying a lack of records (for example, no record of a filed return).

4.32.2.7.7  (06-08-2012)
Closing Conferences

  1. Closing conferences are used to summarize the IRS’s understanding of the facts and evidence and ascertain any defense or rebuttal positions claimed by a promoter. No definitive statement should be made at the meeting regarding any final determination of the IRS. Instead, the examiner should discuss the possible outcomes.

  2. If an injunction referral is anticipated, a discussion of penalties is generally deferred until DOJ has had an opportunity to evaluate the injunction referral. If DOJ accepts the referral, examiners and Area Counsel should discuss the timing of assessment of any applicable penalties. In most instances, DOJ recommends suspending penalty assessments until a preliminary injunction is ordered by the court. In that case, a follow-up meeting with the promoter may be necessary in order to discuss penalty assessments.

  3. Generally, no extension of time shall be granted for the meeting, except in extenuating circumstances. Promoters are not entitled to any additional meetings with the IRS, although the IRS may at its discretion schedule additional meetings if productive to the investigation.

  4. If a promoter declines an offer to attend a meeting, fails to attend the meeting, or fails to provide the requested documents or information, the IRS shall proceed based on the available information.

  5. Although a closing conference is usually required in a promoter investigation, in SB/SE it may be waived with the concurrence of Area Counsel. If the promoter fails to cooperate during the investigation, the closing conference may not be warranted. LB&I requires closing conferences to be offered in all investigations.

  6. If there are indications of fraud, a closing conference would not normally be held. Examiners should consult the fraud technical advisor (FTA) and make a fraud referral when appropriate.

  7. If the Letter 3828, Opportunity to Present Position - Tax Shelter Promoter, was sent to the promoter, a closing conference is not required. However, if the promoter cooperated during the investigation, a closing conference is recommended.

  8. Examiners send Letter 3829, Closing Conference Letter for Tax Shelter Promoter Investigations, to the promoter to offer the closing conference. This letter should be modified to incorporate the specific IRC sections applicable to the investigation. Area Counsel must review all revisions to the letter. If possible, it is recommended that Area Counsel attend the closing conference.

  9. Any proposed penalties must be approved in writing by the examiner's immediate supervisor before discussing with the promoter. See IRM 4.32.2.11.1, Approval of Penalties.

4.32.2.7.7.1  (06-08-2012)
LB&I Promoter Investigations

  1. A closing conference is generally scheduled after the examiner and Area Counsel determines that the evidence establishes that penalties should be asserted or that a suit to enjoin the promoter should be initiated. In making the decision, consider whether:

    1. All requested documents have been provided by the promoter.

    2. All documents received have been reviewed by the promoter team.

    3. All investor lists have been provided.

    4. Applicable penalties have been determined and computed.

  2. For LB&I examiners, Form 5701, Notice of Proposed Adjustment, should be prepared for the penalty asserted for each transaction. Any proposed penalties must be approved by the promoter team's DFO and subsequently the DFO, Financial Services, Manhattan, before discussing with the promoter. See IRM 4.32.2.11.1, Approval of Penalties.

  3. Promoters are given the opportunity to present facts or legal arguments as to why a penalty is not appropriate, including "reasonable cause" arguments. The promoter’s position should be obtained in writing, along with any informal protest that the promoter wishes to provide.

  4. For LB&I IRC 6707/IRC 6708 investigations, if the investigation is agreed, the promoter team prepares Form 906, Closing Agreement on Final Determination Covering Specific Matters. Area Counsel and the LB&I DFO with jurisdiction over the investigation and LB&I:F DFO, Manhattan, must be involved in the preparation of this agreement. The agreement finalizes the examination issues permanently. The agreement should also address future compliance of the promoter. The LB&I:F DFO, Manhattan must execute the agreement on behalf of the IRS.

  5. For potentially unagreed IRC 6707 and IRC 6708 investigations, examiners may consider the LB&I/Appeals Fast Track Settlement program (Fast Track) if it is applicable to the investigation and the promoter consents. The exam team must receive the approval of the LB&I:F DFO, Manhattan prior to participating in Fast Track. See IRM 4.32.2.7.7.3, LB&I Special Procedures - Use of Fast Track.

4.32.2.7.7.2  (06-08-2012)
LB&I Special Procedures

  1. Examiners and attorneys must agree on the appropriate action. Any disagreements must be referred to the respective managers for resolution.

  2. Examiners, with review by Area Counsel, prepare a recommendation memorandum to the examiner's DFO. The DFO's approval is mandatory for the assertion or non-assertion of promoter penalties. After the DFO's approval is obtained, the recommendation memorandum is sent to the LB&I Financial Services DFO, Manhattan, for final approval. The memorandum should include:

    • Case Summary and Facts (including the personal history, educational and professional background of the promoter and a discussion of the promotion(s)).

    • Findings (including spreadsheets supporting the penalty calculations, a discussion of the facts that support the promoter's violation of code provisions and prospects for future compliance, if asserting penalties).

    • Recommendations and conclusions (including the examiner's and Counsel's recommendations).

    • Position of the promoter.

    • Appendix of attached exhibits.

    • Other supplemental data.

    • Approval of the Team Manager, TM, and Industry Director Field Operations (DFO). Digital signatures may be used to document approvals.

  3. If case is agreed, copies of the Form 906 must be provided for the LB&I:F DFO Manhattan's signature.

4.32.2.7.7.3  (06-08-2012)
LB&I Special Procedures - Use of Fast Track

  1. The exam team may request the use of Fast Track for unagreed IRC 6707 and IRC 6708 examinations. The exam team prepares a memo recommending the resolution of the case using Fast Track and obtains signatures from the Team Manager, TM and Industry DFO. The memo shall include:

    1. A brief description of the shelter(s), a range of possible penalty resolutions, and support for each resolution position; and

    2. Recommendation to close the case unagreed if the Fast Track process is unsuccessful.

  2. The exam team will forward the signed memo and the following documents to the Promoter Program Senior Program Specialist who will submit the package to LB&I:F DFO Manhattan for review and approval:

    1. Form 5701

    2. Form 886-A

    3. Form 4665

    4. Promoter's position and exam team's response

    5. Spreadsheets supporting the penalty computations

  3. Concurrently with (2) above, the Promoter Program Manager will request Promoter Program Counsel to submit a concurrence memo in support of the exam team's recommendation to the LB&I:F DFO, Manhattan, via e-mail.

  4. The LB&I:F DFO, Manhattan will make the final determination of the recommendations of the exam team. After approval, the LB&I:F DFO, Manhattan will sign the memorandum and return the documents to the exam team.

  5. The LB&I:F DFO, Manhattan shall participate in the mediation or delegate authority to the LB&I:F Promoter Program Manager.

4.32.2.8  (06-08-2012)
Investigation Outcomes

  1. Preparer and promoter investigations can result in one or more of the following outcomes:

    • Injunction

    • Assessment of penalties

    • Discontinuation of the investigation

    • Criminal referral

    • Survey

4.32.2.8.1  (06-08-2012)
Injunctions

  1. During preparer and promoter investigations, examiners gather information to determine if injunctive relief is appropriate. An injunction is warranted if the preparer and/or promoter engages in conduct specified in IRC 7407(b) related to income tax return preparation and/or specified conduct under IRC 7408(c).

  2. The purpose of an injunction is to stop individuals from further engaging in certain conduct with respect to the preparation of returns or engaging in conduct related to tax shelters and reportable transactions and to prevent the recurrence of the conduct. There is no requirement that the conduct be ongoing but a court may be reluctant to grant the extraordinary remedy of an injunction unless the government can demonstrate that there is a likelihood of reoccurrence. Factors to consider in assessing the appropriateness of an injunction include:

    • Gravity of the harm to the government.

    • Extent of the promoter's participation.

    • Degree of knowledge.

    • Isolated or recurrent nature.

    • Promoter's recognition or non-recognition of culpability.

    • Likelihood that the preparer and/or promoter’s occupation would place him in a position where future violations could be anticipated.

  3. Injunction actions are separate and apart from any other civil or criminal actions (such as summons proceedings and criminal trials) brought by the government against promoters.

  4. An injunction should be pursued even if the preparer or promoter is criminally prosecuted and sentenced to incarceration, probation, etc. A criminal sentence is punishment for past criminal behavior while an injunction prohibits future behavior.

  5. See IRM 4.32.2.9, Injunctive Actions, for additional information on injunctions.

4.32.2.8.1.1  (06-08-2012)
Injunctions - Penalty Assessment

  1. If injunctive action is warranted, penalties generally are applicable. Examiners prepare penalty reports and close an investigation as described in IRM 4.32.2.11.8, Penalty Case Processing Procedures.

  2. The DOJ generally recommends penalties not be assessed until after the court has granted a preliminary injunction.

  3. In some instances, the timing of the penalty assessment may be done earlier or postponed (e.g., jeopardy assessments or parallel investigations). See IRM 4.32.2.6, Parallel Investigations, for additional information on coordinating a penalty assessment in parallel investigations.

4.32.2.8.1.2  (06-08-2012)
Injunctions - No Penalty Assessment

  1. In some limited instances, an examiner in consultation with the group manager and Counsel may determine that the assessment of penalties is not in the government's best interest.

  2. Collectibility is not a basis for non-assessment of penalties. Promoters frequently conceal assets and misrepresent their true financial status, making it difficult to immediately determine true collection potential. IRM 5.20.8.5, IRC 6700 and IRC 6701 Penalty Assessment, requires revenue officers to advise examiners that the penalty must be assessed regardless of collectibility.

  3. There may be rare situations when a penalty will not be asserted such as when the promoter is deceased or in the case of an entity, no longer in existence, and there are no assets in the promoter’s estate or there is no successor in interest. In these situations, Counsel should be consulted before determining that penalties should not be assessed.

  4. The group manager must approve all recommendations for non-assertion of penalties. In an LB&I examination, examiners should coordinate the preparation of the report with the LB&I:F Promoter Program Manager.

  5. Investigations with no penalty assessments are closed by the field compliance group using penalty processing procedures described in IRM 4.32.2.11.8, Penalty Case Processing Procedures.

4.32.2.8.2  (06-08-2012)
Penalty Assessment

  1. If a preparer or promoter engages in conduct or activity subject to penalties under IRC 6694, IRC 6695, IRC 6700, IRC 6701, IRC 6707, or IRC 6708, penalties will generally be assessed.

  2. Examiners may recommend asserting penalties regardless of whether injunctive relief is pursued by the government as long as the evidence demonstrates that the preparer and/or promoter engaged in conduct that violates specific penalty code sections.

  3. Prior to the AJCA, IRC 6707 and IRC 6708 allowed for a reasonable cause exception if the tax shelter organizer or any other person could establish that the failure to comply was due to reasonable cause. See Treas. Reg. 301.6707-1T and Treas. Reg. 301.6708-1T. After the AJCA, the reasonable cause exception only applies to IRC 6708. Persons subject to IRC 6707 are not entitled to reasonable cause consideration, but may request rescission of the IRC 6707 penalty under the procedures set forth in Rev. Proc. 2007-21.

  4. IRC 6751 requires written managerial approval for the assessment of most penalties, including IRC 6700, IRC 6701, IRC 6707, and IRC 6708 by the immediate supervisor of the individual making the determination to assess the penalty or such higher level official as the Secretary may designate. See IRM 4.32.2.11.1, Approval of Penalties, and IRM 20.1.1.2.3, Managerial Approval for Penalty Assessments.

  5. Coordinate with the Area ATAT Collection Coordinator based on the location of the preparer/promoter whenever the collectibility of a potential penalty is a concern. For a list of ATAT Collection Coordinators, see the collection contact located on MySB/SE.

4.32.2.8.2.1  (06-08-2012)
Penalty Assessment - No Injunction

  1. If an examiner, in consultation with the group manager and Area Counsel, does not pursue injunctive relief, penalties may still be assessed.

  2. Injunctive action generally will not be sought if there is insufficient evidence to demonstrate that the specified conduct is likely to reoccur. Lack of current or ongoing activity alone should not be the basis for failing to seek an injunction. See IRM 4.32.2.8.1, Injunctions, for a discussion of factors to consider in determining the potential for future recurrence of the conduct.

  3. DOJ may decline to pursue injunctive action against a promoter or the court may deny the government’s motion for injunctive relief if there is insufficient evidence to demonstrate a reasonable likelihood of reoccurrence. In such cases, penalties may still be applicable provided there is evidence to show that the promoter engaged in conduct in violation of one or more of the penalty statutes.

  4. Examiners must use sound judgment when pursuing only penalties. Preparers and promoters may provide self-serving testimony maintaining that they have voluntarily ceased the conduct when, in fact, they continue to advocate abusive schemes, abusive tax shelters, or reportable transactions. Many promoters modify existing promotions to avoid detection by the IRS or become engaged in a new but equally abusive promotion.

  5. Examiners prepare penalty reports and close the investigation as described in IRM 4.32.2.11.8, Penalty Case Processing Procedures.

4.32.2.8.2.2  (06-08-2012)
Penalty Assessment – CI Parallel Investigation

  1. In parallel investigations, CI may request suspending penalty assessments until the conclusion of the criminal investigation. See IRM 4.32.2.6, Parallel Investigations, for additional information on coordination of penalty assessments in parallel investigations.

4.32.2.8.3  (06-08-2012)
Discontinuations

  1. A discontinuation of an investigation may occur before or after promoter contact.

  2. SB/SE examiners should consult with their group manager, assigned Area Counsel, AT or IMT SPA and the SB/SE LDC prior to discontinuing an investigation.

  3. LB&I examiners must contact assigned counsel, the LB&I DFO with jurisdiction over the promoter investigation and LB&I Financial Services, DFO, Manhattan prior to discontinuing an investigation. If the promoter has been contacted, examiner must issue a withdrawal letter when closing the investigation. LB&I examiners do not issue the withdrawal letter until approved by the DFO, Financial Services, Manhattan.

  4. Circumstances that may warrant a discontinuation of an investigation include:

    1. The individual or entity identified as the AT promoter is in fact not involved in the activity.

    2. The activity has been proven not to be abusive in nature, and accordingly, would not be subject to penalty under one of the applicable penalty statutes.

  5. Discontinuing a civil investigation is not a “no change” closure and does not preclude the investigation from being reopened if more information becomes available at a later date, if the statute of limitations permits. The reopening of a civil investigation is not subject to the reopening requirements of an income tax examination.

  6. See IRM 4.32.2.11.8, Penalty Case Processing Procedures, for investigation discontinuation processing procedures.

4.32.2.8.4  (06-08-2012)
Criminal Referral

  1. The SB/SE LDC or LB&I OTSA coordinates all civil promoter investigation cases with CI prior to approval of the investigation. See IRM 4.32.2.3.5, Coordination with Criminal Investigation (CI).

  2. Examiners should be alert to indicators of fraud throughout their investigation. A fraud technical advisor (FTA) should be contacted if the investigation reveals indicators of fraud. See IRM 25.1.2, Recognizing and Developing Fraud, for more information on fraud development.

4.32.2.8.5  (06-08-2012)
Survey

  1. For SB/SE, the decision to survey a promoter investigation should be discussed with Area Counsel and an LDC SPA. The group manager must approve the reason for the survey. LB&I promoter examinations may not be surveyed.

  2. No survey is allowed if there has been any contact with the promoter or more than 10 hours were charged to the case.

4.32.2.9  (06-08-2012)
Injunctive Actions

  1. The primary goal of a civil promoter investigation is to obtain information on whether the promoter complied with its obligations under the code, to obtain information on the promoter's participants and to quickly terminate an abusive promotion or activity. Seeking injunctive relief under IRC 7402, IRC 7407, or IRC 7408 can accomplish these goals.

  2. Examiners gather information during the investigation to determine if the promoter engaged in conduct or activities subject to one or more penalties under IRC 6700, IRC 6701, IRC 6707, or IRC 6708 and whether the activity is ongoing or likely to reoccur, thereby causing irreparable tax harm to the government.

  3. The IRS should consider injunction actions in investigations where the promotion is ongoing or is likely to recur and there is irreparable tax harm to the government, even when a criminal investigation has begun. For coordination between civil and criminal cases, see IRM 4.32.2.6, Parallel Investigations.

  4. Failure to make a referral as early as possible may result in continued harm to the government from the promotion. An injunction referral should be made to DOJ once:

    • Evidence has been developed to prove the promoter's engaging in activities subject to penalties or violation of Circular 230 provisions,

    • Evidence of irreparable harm from current and potential or future activities, i.e., involvement with another scheme or promotion, and

    • Evidence that the promoter's conduct is substantially interfering with the proper administration and enforcement of the Internal Revenue laws.

  5. In some instances, such as when the evidence demonstrates that the activity has ceased and is not likely to reoccur, the examiner in consultation with the group manager and Area Counsel may opt to pursue only penalties. However, penalties alone sometimes do not deter future promotions. Injunction referrals including referrals to obtain consent injunctions should always be considered. See IRM 4.32.2.9.4, Consent Injunctions.

4.32.2.9.1  (06-08-2012)
Examiner Injunction Referrals

  1. Examiner Injunction Referrals (EIR) are prepared using a specific format. The referral should include detailed information about the promoter and any related promoters, the mechanics of the promotion, and the basis for an injunction recommendation.

  2. The EIR is organized into the five sections:

    1. Investigation summary

    2. Facts and findings

    3. Exhibits

    4. Investigative agent data

    5. Witness list

  3. If several individuals or entities were investigated, the EIR should discuss the involvement of each person or entity. See IRM 4.32.2.9.2, Related Promoters.

  4. An example of an Examiner Injunction Referral (EIR) is available on MySB/SE, Promoter Investigations.

4.32.2.9.1.1  (06-08-2012)
Investigation Summary

  1. The investigation summary briefly describes the examiner’s findings and recommendations. The information may be presented in narrative or outline format and is generally limited to 1 or 2 pages.

  2. The investigation summary must include:

    1. Name and address of person(s) or entities under investigation.

    2. Basis for the injunction (e.g., false or fraudulent statements, gross valuation misstatement, aiding or abetting the understatement of tax liability, abusive return preparation or a combination of the above).

    3. Years involved.

    4. Recommendations.

4.32.2.9.1.2  (06-08-2012)
Facts and Findings

  1. The facts and findings section is a comprehensive discussion of the promotion or scheme and the evidence obtained in the investigation.

  2. The following information is included in this section:

    1. Personal background of the promoter(s)

    2. Business background

    3. Criminal Investigation (CI) involvement

    4. Mechanics of the promotion

    5. Applicable penalties, i.e., IRC 6700, IRC 6701, IRC 6707, IRC 6708, IRC 6694, or IRC 6695 violations

    6. Conduct violating Circular 230

    7. Penalty calculations (or estimation of penalties)

    8. The code sections under which the injunction action should be commenced, i.e., IRC 7402, IRC 7407, or IRC 7408

    9. Venue

    10. Pre-filing notification

    11. Closing conference

    12. Recommendations

4.32.2.9.1.3  (06-08-2012)
Examiner Injunction Referral Exhibits

  1. Exhibits are used to support material facts included in the referral and should be referenced in the narrative section of the referral.

  2. While not mandated, using a numbering system such as Bates stamping is an efficient way to organize and refer to specific documents and pages in lengthy documents. Evidence is frequently organized by:

    • Witness

    • Type of information

    • Specific items or documents

    • Page number of documents

  3. It is very important throughout the investigation to document the source of the evidence identifying when, how, and from whom it was received. See IRM 4.32.2.7.6, Evidence.

  4. If the amount of information is voluminous, examiners should consider including only the most significant items as exhibits and prepare a summary of other evidence available for inspection. Examiners should also consider scanning the information and placing it on a compact disc (CD) or digital video disc (DVD).

4.32.2.9.1.3.1  (06-08-2012)
Tax Harm

  1. Documentation of potential or future tax harm to the government is a critical component of any injunction action. Examiners should include a preliminary computation of tax harm in the EIR.

  2. The computation can be an estimate and does not require completion of participant audits.

  3. If participant examinations have been, or are being, conducted, an exhibit identifying the participants, the examination status, and the proposed or estimated tax deficiency should be included in the EIR. This exhibit should be prepared early in the investigative process and updated as new information is secured or as requested by DOJ during the litigation process.

  4. If a tracking code has been assigned to the investigation, examiners should contact an AT SPA or TA to obtain a list of participant examinations.

4.32.2.9.1.4  (06-08-2012)
Investigating Agent Data

  1. The investigating agent data list contains the contact information of all IRS personnel who were involved with the investigation, including the examiner(s), their respective manager(s), any specialists, Counsel attorney and the Counsel attorney's supervisor.

  2. In parallel investigations, the contact information should also include the name(s) and contact information of the special agent, the supervisory special agent, Criminal Tax (CT) Area Counsel and the Assistant US Attorney (AUSA), if one is involved.

4.32.2.9.1.5  (09-23-2011)
Witnesses

  1. Witnesses are a critical component of a successful injunction. An alphabetical list of potential witnesses, their contact information and a description of the nature of their testimony should be included in the injunction report.

4.32.2.9.2  (06-08-2012)
Related Promoters

  1. It is a best practice to consolidate related promoters in one referral to the extent possible. DOJ may elect to:

    • File one injunction suit against all parties.

    • File separate suits against specific individuals or entities.

    • Decline to file a suit against some or all of the related individuals or entities.

    • Request that IRS refer additional parties to be included in the injunction suit.

  2. The decision to consolidate related promoters in one referral is based on many factors, including when cases are identified or investigated, the related promoter’s involvement in the activity, and the strength of the evidence.

  3. The necessity and appropriateness of any further investigative actions on the related promoter should be discussed with the group manager and the AT or IMT SPA. For LB&I investigations, the LB&I:F, Promoter Program Manager should be consulted. The decision may be made to assert penalties based on the best available information, discontinue the investigation or proceed with the investigation, depending on the facts and circumstances of the case.

4.32.2.9.3  (06-08-2012)
Counsel Injunction Suit Letter

  1. After receipt of the EIR, Area Counsel will prepare an injunction suit letter authorizing DOJ to file an injunction suit on behalf of the IRS or to secure a consent injunction.

  2. Area Counsel shall consult the CCDM on coordination requirements.

  3. All injunction packages are sent to DOJ Tax Division, Civil Trial Division, Central Region regardless of the location of the promoter

  4. Copies of the referral are sent by Area Counsel to:

    • SB/SE Division Counsel assigned to AT schemes.

    • LB&I Division Counsel for the Promoter Program.

    • Counsel for the related Issue Management Team, if any.

    • SB/SE Lead Development Center (LDC).

    • LB&I Office of Tax Shelter Analysis (OTSA).

  5. Injunction referrals must be handled on an expedited basis. These cases are classified as standard referrals.

4.32.2.9.3.1  (06-08-2012)
Pre-Referral Consultation

  1. Examiners should work closely with Area Counsel throughout the investigative process. In some investigations, it may be beneficial to engage DOJ early in the investigation. Area Counsel can prepare a consultation injunction referral memorandum for this purpose. The memorandum should describe the factual background of the case and the reasons(s) for seeking the consultation.

4.32.2.9.3.2  (06-08-2012)
Summons Enforcement Related to Injunctions

  1. Examiners should report to Area Counsel any refusal by the promoter or other summoned party to comply with a summons following the procedures outlined in IRM 25.5.10, Enforcement of Summons.

  2. All recommendations for enforcement of IRS summonses issued in connection with promoter investigations are sent to DOJ Tax Division, Civil Trial Section, Central Region.

4.32.2.9.4  (06-08-2012)
Consent Injunctions

  1. The IRS will consider offers by promoters to enter into consent injunction agreements whereby the promoter agrees to a voluntary permanent injunction.

  2. An injunction referral must be made to DOJ to initiate the consent injunction process. Examiners should work with Area Counsel on preparing an expedited referral to DOJ.

  3. A Form 906, Closing Agreement on Final Determination Covering Specific Matters, or any other agreement cannot be used as a substitute for a consent injunction.

  4. If a consent injunction offer is made by the promoter prior to an injunction referral to DOJ, the information requested in all IDRs (see IRM 4.32.2.7, Promoter Investigation Guidelines) should still be obtained in the event the promoter does not execute the consent injunction.

  5. If DOJ enters into negotiations for a consent injunction subsequent to a referral, Area Counsel will participate in all negotiations.

4.32.2.9.5  (06-08-2012)
First Amendment Considerations

  1. Promoters may claim that the First Amendment to the US Constitution (freedom of speech) prevents the government from obtaining injunctions against them.

  2. Federal courts can enjoin promoters without violating their First Amendment free speech rights if it is commercial speech, aids or abets a crime, or incites imminent lawlessness.

  3. The determination of what is deemed to be protected speech is a complex area of law. Examiners should seek assistance from Area Counsel on how best to address the promoter’s First Amendment assertions.

  4. The EIR and the corresponding Area Counsel injunction suit letter to DOJ should clearly explain the reasons why the First Amendment does not protect the promoter’s activities.

  5. For additional information on First Amendment issues, see the LDC intranet webpage on MySB/SE, First Amendment Guidance, under "News Flashes."

4.32.2.9.6  (06-08-2012)
Post Injunction Referral Activities

  1. The injunction referral to DOJ does not conclude the involvement of the examiner in the investigation. Examiners and Area Counsel will assist DOJ attorneys throughout the litigation process.

  2. Litigation support may include:

    • Securing certified copies of participant returns.

    • Interviewing new or potential witnesses.

    • Computing or refining computations of estimated tax loss.

    • Gathering evidence of ongoing promoter activity.

    • Testifying in court proceedings.

  3. Examiners will execute a sworn declaration prepared with the assistance of the DOJ attorney. The declaration is filed with the initial complaint filed by DOJ.

  4. Examiners should contact Area Counsel or an AT SPA for assistance with requests from DOJ that will require extensive research or the gathering of substantial documents. (e.g., certified copies of large numbers of participant returns).

4.32.2.9.6.1  (06-08-2012)
Litigation Holds

  1. When litigation is initiated or is reasonably anticipated, a “litigation hold” on relevant or potentially relevant documents and electronically stored information (ESI) must be established and the steps taken in this regard must be fully documented.

  2. The Service’s obligation under a litigation hold is to search, identify, preserve, and isolate ESI related to specific, predictable and identifiable litigation. This obligation supersedes all records management policies that would otherwise result in the alteration or destruction of ESI.

  3. Area Counsel will contact the appropriate Service personnel that may possess potentially relevant ESI when a litigation hold is warranted and provide additional instructions at that time.

  4. In 2006, the Federal Rules of Civil Procedure were amended to establish procedures applicable explicitly to ESI and provide a framework for dealing with the legal and ethical obligations to preserve evidence. ESI includes, but is not limited to:

    • All e-mails and attachments.

    • Word processing, spreadsheets, graphics presentation documents, images, and text files.

    • Any other information stored on hard drives or removable media, meta-data, databases, instant messages, transaction logs, audio and video files, voice mail, web pages, computer logs, text messages, and backup and archived material.

  5. The timing of the initial litigation hold will depend on whether the Service is a plaintiff or a defendant in a particular matter. When the Service is a plaintiff, the litigation hold should be implemented no later than when Area Counsel authorizes the filing of a suit by the DOJ. When the Service is a defendant, Area Counsel must begin implementing the litigation hold procedures upon receipt of a filed complaint.

  6. Failure to preserve documents and ESI can result in unfavorable discovery orders, sanctions against the government, disadvantage to the government’s position in litigation or exclusion of evidence in favor of the government’s position. It can also result in monetary or contempt sanctions directly against individuals who failed to take appropriate steps to locate and segregate information subject to a litigation hold.

4.32.2.10  (06-08-2012)
Disclosure of Reportable Transactions Provisions

  1. This section provides an overview of IRC 6111 and IRC 6112.

4.32.2.10.1  (06-08-2012)
IRC 6111 - Overview

  1. Any person who is a material advisor for a reportable transaction as defined under Treas. Reg. 1.6011-4(b) must disclose the reportable transaction in the manner prescribed by the Secretary. Failure to timely disclose or submitting false or incomplete disclosure statements are subject to penalties under IRC 6707. Material advisors must use Form 8918, Material Advisor Disclosure Statement, (or successor form) and the form must be completed in the manner provided for in the regulations and the instructions to the form.

  2. IRC 6111(b)(1) (as amended by the AJCA) defines a material advisor as any person who provides any material aid, assistance, or advice relating to organizing, managing, promoting, selling, implementing, insuring or carrying out any reportable transaction, and who directly or indirectly derives gross income for the advice or assistance in excess of the threshold amount. See IRC 6111(b)(1)(B), for threshold amounts. The threshold amounts are:

    1. For reportable transactions other than list transactions, $250,000 if all participants in the shelter are corporations (looking through any partnerships or trusts) or $50,000 for all other taxpayers;

    2. For listed transactions, these thresholds are reduced to $25,000 and $10,000, respectively.

  3. See Treas. Reg. 301.6111-3(d) and (e) for the form and content of material advisor disclosure statement and time for providing disclosure.

4.32.2.10.2  (06-08-2012)
IRC 6112 - Overview

  1. Each material advisor (as defined in IRC 6111, as amended by the AJCA) of a reportable transaction is required to maintain a list identifying each person for whom the advisor acted as a material advisor with respect to that transaction. Lists are retained for seven years following the earlier of the date the material advisor last made a tax statement relating to the transaction or the date the transaction was last entered into, if known. See Treas. Reg. 301.6112-1(d) for rules regarding entries that have been dissolved or liquidated prior to the expiration of the seven year period.

  2. Material advisors must furnish this list when requested in writing by the IRS. The revised penalty under IRC 6708 (as amended by the AJCA) applies to requests made after October 22, 2004, for such lists. A material advisor who fails to make the list available within 20 business days of the request is subject to penalties under IRC 6708, as amended.

4.32.2.11  (06-08-2012)
Promoter Penalties

  1. This section focuses on promoter penalties and the corresponding post-assessment rights relative to the following penalties:

    • IRC 6700, Promoting Abusive Tax Shelters, Etc.

    • IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability.

    • IRC 6707, Failure to Furnish Information Regarding Reportable Transactions.

    • IRC 6708, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions.

  2. Additional guidance on promoter penalties can be found in:

    • IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties.

    • IRM 20.1.6.13, Penalty for Promoting Abusive Tax Shelters - IRC 6700.

    • IRM 20.1.6.14, Penalties for Aiding and Abetting - IRC 6701.

    • IRM 20.1.6.16, Failure to Furnish Information Regarding Reportable Transactions - IRC 6707.

    • IRM 20.1.6.18, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions - IRC 6708.

4.32.2.11.1  (06-08-2012)
Approval of Penalties

  1. IRC 6751 requires written managerial approval for the assessment of most penalties, including those under IRC 6700, IRC 6701, IRC 6707 and IRC 6708, by the immediate supervisor of the examiner making the determination to assess the penalty or such higher level official as the Secretary may designate. Documentation of the supervisor's approval must be included in writing in the file.

  2. Managerial approval should only be granted after the examiner has fully developed the facts, completed the workpapers, and clearly established a basis for penalizing the promoter or material advisor.

  3. In SB/SE investigations, the penalty case should be reviewed by Area Counsel prior to closing for assessment. Area Counsel does not, however, need to approve the penalty assessment.

  4. In LB&I, after Area Counsel reviews the investigation case, it is forwarded to the following officials for their review and approval:

    1. Territory Manager

    2. Director, Field Operations (DFO)

    3. Director, Field Operations, Financial Services, Manhattan (LB&I:F:DFO:M)

  5. See IRM 20.1.1.2.3, Managerial Approval for Penalty Assessments, for additional information.

4.32.2.11.2  (09-23-2011)
Collection Statute of Limitations

  1. The 10-year collection statute of limitations begins on the date the penalty is assessed.

4.32.2.11.3  (06-08-2012)
IRC 6700 - Promoting Abusive Tax Shelters

  1. IRC 6700, Promoting Abusive Tax Shelters, Etc., permits assertion of penalties against any person who:

    • Organizes or assists in the organization of a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, or

    • Participates (directly or indirectly) in the sale or any interest in an entity or plan or arrangement and

    • Makes or furnishes or causes another person to make or furnish a false or fraudulent statement about any material matter or a gross valuation overstatement.

  2. Penalties can usually be assessed after a preliminary injunction is obtained if there is not an on-going parallel investigation. See IRM 4.32.2.8.2.2, Penalty Assessment - CI Parallel Investigation.

  3. Penalties under IRC 6700 are assessed and collected in the same manner as taxes. See IRC 6671, Rules for Application of Assessable Penalties.

  4. It is not necessary to have a return filed in order to assess IRC 6700 penalties. The activity is the "sale or organization" of a plan or arrangement. Examiners need not prove the promoter's clients actually used the promotion, only that if the participant had utilized the promotion, there would have been tax harm to the government. The statute requires potential, not actual, tax harm to the government.

  5. An IRC 6700 penalty can be imposed in addition to any other penalty, except it cannot be assessed on the same document on which an IRC 6701 penalty is applied.

  6. See IRM 20.1.6.13, Penalty for Promoting Abusive Tax Shelters- IRC 6700, for more information.

4.32.2.11.3.1  (06-08-2012)
Assessment Statute of Limitations

  1. There is no assessment statute of limitations for IRC 6700. An IRC 6700 penalty can be assessed at any time for each specific act of organizing and/or selling interests in a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement.

4.32.2.11.3.2  (06-08-2012)
Computation of IRC 6700 Penalties

  1. For activities occurring after October 22, 2004, involving material false or fraudulent tax statements, the IRC 6700 penalty is equal to 50 percent of the gross income derived (or to be derived) by the promoter from the following activities:

    1. Organizing or assisting in the organization of a partnership or other entity, any investment plan or arrangement or any other plan or arrangement.

    2. Participating (directly or indirectly) in the sale of an interest in any entity, plan or arrangement in a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement.

  2. For all activities that involve gross valuation overstatements as defined in IRC 6700(b)(1), the penalty is $1,000, or if the person establishes that it is lesser, 100 percent of the gross income derived (or to be derived) by such person for each activity.

  3. When the penalty is based upon gross income from an activity (i.e., statement described in IRC 6700(a)(2)), examiners must compute the gross income based on the best available information. For example, a promoter’s scheme used limited liability companies (LLCs) and trusts to divert income. The examiner can prove the promoter created 40 LLCs, 25 of which were used by known participants in the scheme. The examiner also can prove 4 of the 25 participants paid $1,000 to the promoter. Gross income to be derived from the scheme was $40,000 (40 LLCs X $1,000 minimum per package), so the penalty is $20,000 (50% of the gross income).

4.32.2.11.4  (06-08-2012)
IRC 6701 - Penalties for Aiding and Abetting Understatement of Tax Liability

  1. IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability, permits assertion of penalties against persons who help others understate their tax liabilities. A person who aids, assists in, procures, or advises others regarding the preparation or presentation of any portion of a return, affidavit, claim or other document who knows (or has reason to believe) that the document will be used in connection with any material matter arising under the IRC, and who knows will result in an understatement of another person's tax liability, may be liable for penalties under IRC 6701.

  2. If an injunction was pursued, penalties can be assessed after a preliminary injunction is obtained, except in the case where there is an on-going parallel investigation. Coordination with DOJ is recommended prior to assessment. See IRM 4.32.2.8.2.2, Penalty Assessment - CI Parallel Investigation.

  3. Penalties under IRC 6701 are assessed and collected in the same manner as taxes. See IRC 6671, Rules for Application of Assessable Penalties.

  4. IRC 6701 penalties generally can be imposed in addition to any other penalty. The penalty cannot be assessed on the same document for which a penalty under either IRC 6700 or subsections (a) or (b) of IRC 6694 is applied.

  5. See IRM 20.1.6.14, Penalties for Aiding and Abetting - IRC 6701, for more information.

4.32.2.11.4.1  (09-23-2011)
Assessment Statute of Limitations

  1. There is no assessment statute of limitations for IRC 6701. The penalties can be assessed at any time.

4.32.2.11.4.2  (06-08-2012)
Computation of IRC 6701 Penalties

  1. IRC 6701 imposes a penalty in the amount of:

    1. General - $1,000 with respect to each document.

    2. Corporations - $10,000 for each document if the return, affidavit, claim, or other document relates to the tax liability of a corporation; S-corporations are not subject to this higher penalty amount.

  2. IRC 6701 penalties cannot be asserted or assessed if a penalty under IRC 6700 or IRC 6694(a) or IRC 6694(b) is asserted for the same document.

4.32.2.11.5  (06-08-2012)
IRC 6707 - Failure to Furnish Information Regarding Reportable Transactions

  1. For material advisors required to disclose reportable transactions under IRC 6111 (as amended by AJCA) for material aid, assistance or advice given after October 22, 2004:

    1. IRC 6707, Failure to Furnish Information Regarding Reportable Transactions, as amended by the AJCA, permits the assertion of penalties against any person who fails to file an information return with respect to a reportable transaction timely, or files a false or incomplete return, as required by IRC 6111(a). IRC 6707, as amended by the AJCA, is effective for returns the due date for which is after October 22, 2004.

  2. For tax shelter registrations due before October 23, 2004:

    1. Pre-AJCA IRC 6707, Failure to Furnish Information Regarding Tax Shelters, permits the assertion of penalties against any person who failed to register a tax shelter timely, or filed a false or incomplete registration, as required by pre-AJCA IRC 6111(a).

  3. IRC 6707 penalties can be applied in addition to any other penalty allowed by law.

  4. See IRM 20.1.6.16, Failure to Furnish Information Regarding Reporting Transactions - IRC 6707, for more information on IRC 6707 penalties.

4.32.2.11.5.1  (06-08-2012)
Assessment Statute of Limitations

  1. For material advisors required to disclose reportable transactions for advice given after October 22, 2004 (post-AJCA of 2004), IRC 6707 penalties for failing to file an information return timely or for filing false or incomplete information on a return required by IRC 6111(a) must be assessed within three years of the filing of return or the return with the false or incomplete information.

  2. For tax shelters required to be registered before October 23, 2004 (pre-AJCA of 2004):

    1. For organizers, IRC 6707(a)(1) penalties for failing to register a tax shelter or for filing a false or incomplete registration are not subject to an assessment statute of limitation.

    2. For participants, IRC 6707(b)(2) penalties for failing to include a tax shelter registration number on a return must be assessed within three years of filing the return with the missing identification number.


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