4.32.2  The Abusive Transactions (AT) Process

Manual Transmittal

June 08, 2012

Note:All future releases of IRM 4.32.2 will be electronic only.

Purpose

(1) This transmits revised IRM 4.32.2, Abusive Transactions, The Abusive Transactions (AT) Process.

Material Changes

(1) This update primarily includes updates to Large Business and International (LB&I) titles, references, processes and procedures. Significant changes to this IRM are reflected in the table below:

Reference Description
IRM 4.32.2.2 Added paragraph (2), IRC definition of a tax shelter
IRM 4.32.2.2.1 Modified table
IRM 4.32.2.3.3 Corrected descriptions of LB&I programs
IRM 4.32.2.3.3.1 Expanded description of the role of Office of Tax Shelter Analysis (OTSA)
IRM 4.32.2.3.3.1.1 Expanded information regarding OTSA's role regarding disclosures of reportable transactions
IRM 4.32.2.3.3.1.2 Described process for evaluating taxpayer disclosures
IRM 4.32.2.3.3.5.1 Added information regarding LB&I process of evaluating promoter/material advisor activity
IRM 4.32.2.3.7 Added information regarding Joint International Tax Shelter Information Centre (JITSIC) membership and procedures
IRM 4.32.2.7.2.2 Clarified procedures for beginning LB&I Material Advisor Investigations
IRM 4.32.2.7.2.2.1 Clarified procedures regarding promoter's responses to audit letters
IRM 4.32.2.7.2.2.2 Added this section to provide instructions for issuance of IRC 6112 letter
IRM 4.32.2.7.2.2.3 Added this section to provide instructions for responses to IRC 6112 letters
IRM 4.32.2.7.2.2.4 Updated table describing types of reportable transactions
IRM 4.32.2.7.2.2.4.1 Updated citations and descriptions
IRM 4.32.2.7.5.1 Updated procedures regarding summons for foreign records
IRM 4.32.2.7.7.3 Added section regarding LB&I use of Appeals Fast Track procedures
IRM 4.32.2.8.3 Clarified LB&I discontinuation procedures
IRM 4.32.2.9 Clarified the purpose of injunctive actions
IRM 4.32.2.10.1 Updated citations regarding IRC 6111
IRM 4.32.2.10.2 Updated citations regarding IRC 6112
IRM 4.32.2.11.5.2 Expanded explanation of IRC 6707 penalties
IRM 4.32.2.14 Added section regarding partnership anti-abuse regulation
IRM Exhibit 4.32.2-1 Removed and renumbered remaining exhibits
IRM Exhibits 4.32.2-4 through IRM Exhibit 4.32.2-18 Added IRM Exhibits

Effect on Other Documents

IRM 4.32.2, dated 09-23-2011, is superseded.

Audience

This section provides guidance for Small Business/Self-Employed (SB/SE) Examination area office employees, Tax Exempt and Governmental Entities (TE/GE) employees, and Large Business and International (LB&I) examiners.

Effective Date

(06-08-2012)

Tamera L. Ripperda
Director, Abusive Transactions and Technical Issues SE:S:E:ATTI
Small Business/Self-Employed

4.32.2.1  (06-08-2012)
Overview of Abusive Transactions (AT) Program

  1. This IRM section provides guidance to compliance employees for referring potential Abusive Transactions (AT) promoter leads and outlines procedures for AT promoter investigations, participant examinations, and other AT matters. It addresses identification of promoter leads, the promoter investigation process, parallel investigation procedures, investigation outcomes, closing procedures, identification and case-building processes for participant cases, and other AT matters.

  2. The IRS is committed to pursuing investigations of AT promoters to stop the widespread use of abusive promotions that erode the voluntary tax compliance system and result in substantial tax revenue loss. These investigations are designated as priority work. The IRS combats AT promotions by:

    • Seeking timely civil injunctions.

    • Asserting civil penalties against promoters and return preparers.

    • Providing published guidance on various promotions.

    • Conducting participant examinations.

    • Criminally prosecuting promoters, preparers, or participants.

  3. This IRM section is a compilation of the IRS's AT policy encompassing operations of the Small Business/Self Employed Lead Development Center (SB/SE LDC), the Office of Tax Shelter Analysis (OTSA), and the Large Business and International (LB&I) Technical Tax Shelter Promoter Committee (TTSPC).

  4. The procedures are primarily for the use of examiners in Small Business and Self-Employed (SB/SE), LB&I, and Tax Exempt and Government Entities (TE/GE). These procedures may also be helpful to employees in Appeals, Criminal Investigation (CI), and the Office of Professional Responsibility (OPR).

  5. The term "promoter" as used throughout this IRM chapter unless specifically noted, includes promoters, material advisors as defined under IRC 6111, and tax return preparers.

  6. The term "participant" as used in this IRM chapter includes all persons who participated in a promotion, purchased a product or service from a promoter, had an interest in a promotion, or received any material aid, assistance, or advice with respect to the promotion. Participant includes investors and advisees.

4.32.2.2  (06-08-2012)
Abusive Transactions Defined

  1. Abusive transactions include the organization or sale of any plan or arrangement promoting false or fraudulent tax statements or gross valuation misstatements, aiding or assisting in the preparation or presentation of a return or other document to obtain tax benefits not allowed by law, and actions to impede the proper administration of the Internal Revenue Code (IRC). This general definition includes both tax shelters as defined in various sections of the IRC and other types of abusive tax promotions.

  2. IRC 6662(d)(2)(C) broadly defines a "tax shelter" as a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, if a significant purpose of such partnership, entity, or arrangement is the avoidance or evasion of federal income tax.

  3. AT promotions include, but are not limited to, programs that rely on:

    1. False statements about the allowance of tax benefits to participants that are contrary to clearly established law.

    2. Intentional manipulation or misapplication of IRC sections to improperly claim tax benefits.

    3. Sham arrangements having no economic significance or business purpose other than the avoidance or evasion of tax.

    4. Gross valuation misstatements that ascribe a value to an asset or service that is at least twice the correct value and result in a tax reduction.

    5. Noncompliance with disclosure requirements of IRC 6111, Disclosure of Reportable Transactions.

    6. Noncompliance by material advisors with the list maintenance requirements of IRC 6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees Etc.

    7. Attempts to impede the proper administration of tax laws.

    8. Gross overstatement of withholding or refundable credits to obtain false refunds.

  4. There are many tools available to the IRS to address the promotion of and the participation in an AT activity, including:

    1. Seek injunctive relief under IRC 7402, Jurisdiction of District Courts; IRC 7407, Action to Enjoin Tax Return Preparers; and/or IRC 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions.

    2. Assessment of civil penalties against promoters under 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;IRC 6694, Understatement of Taxpayer’s Liability by Tax Return Preparer; and/or IRC 6695, Other Assessable Penalties with Respect to the Preparation of Tax Returns for Other Persons.

    3. Criminal prosecution of individuals who organize; promote; sell; or assist in the organization, promotion, or sale of an AT activity; and, potentially, participants in the activity.

    4. Issuing notification letters to participants in AT promotions.

    5. Examinations of individuals involved in promotions (i.e., promoters, preparers, participants, etc.).

    6. Assessment of civil penalties against participants including IRC 6707A, Penalty for Failure to Include Reportable Transaction Information With Return, and IRC 6662A, Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions.

    7. Office of Professional Responsibility sanctions for those participants, promoters, or preparers who are practitioners defined in § 10.3 of Circular 230, Regulations Governing Practice Before the Internal Revenue Service, or otherwise subject to Circular 230.

    8. Revocation of electronic filing privileges.

  5. Successful resolution of promoter investigations and participant examinations require the combined actions of Collection, Counsel, Criminal Investigation (CI), LB&I, SB/SE, TE/GE, W&I, and the Tax Division of the DOJ. See IRM 4.32.3, Coordination and Roles of Cross Functional Units, for additional information.

4.32.2.2.1  (06-08-2012)
Statutory History and Provisions

  1. The Tax Reform Act of 1976 (PL 94–455) added IRC 7407, Action to Enjoin Income Tax Return Preparers.

  2. Statutory tools provided in the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 (PL 97-248) used to address promotions include:

    • IRC 6700, Promoting Abusive Tax Shelters Etc.

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

    • IRC 7408, Action to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions.

  3. The Tax Reform Act of 1984 (PL 98-369), sections 141 and 142, added additional statutory provisions to the IRC imposing penalties for failure of an organizer or seller of an abusive tax shelter to register that tax shelter or to maintain the required list of investors. See IRC 6111, IRC 6112, IRC 6707, and IRC 6708.

  4. Abusive tax shelters that required registration by organizers and sellers in the 1980s and 1990s included 2:1 ratio tax shelters and confidential corporate tax shelters. See IRC 6111(c)(1) and (d) (as effective prior to October 23, 2004) for more information.

  5. The American Jobs Creation Act (AJCA) of 2004, sections 811 through 822 and 838, added additional statutory provisions to the Internal Revenue Code and amended some existing code sections as follows:

    Citation Description
    IRC 6111
    Disclosure of Reportable Transactions
    IRC 6112
    Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc.
    Amended IRC 6111 to require material advisors of reportable transactions to file informational returns identifying reportable transactions and the potential tax benefits expected to result from the transaction and such other information the Secretary may prescribe. IRC 6112 requires material advisors to maintain a client list of investors/advisees and to provide that list to the IRS upon request.
    IRC 6662A
    Imposition of Accuracy-Related Penalty on Understatements With Respect to Reportable Transactions
    Imposes a 20 percent penalty for understatements resulting from listed transactions and reportable transactions (other than listed transactions) if a significant purpose of the transaction is the avoidance or evasion of tax. The penalty increases to 30 percent for reportable transactions that are not adequately disclosed.
    IRC 6662(d)(1)(B)
    Imposition of Accuracy-Related Penalty on Underpayments - Substantial Understatement of Income Tax
    Revised to define substantial understatement of income tax for corporations other than an S corporation or a personal holding company as the lesser of 10 percent of the tax required to be shown on the return (or, if greater, $10,000) or $10 million.
    IRC 6700
    Promoting Abusive Tax Shelters, Etc.
    Amended to increase the penalty applicable to a person who knowingly makes, or causes another to make, a false or fraudulent tax benefit statement for any material matter pertaining to a tax shelter plan or arrangement to 50 percent of the gross income derived or to be derived from the abusive plan or arrangement.
    IRC 6707
    Failure to Furnish Information Regarding Reportable Transactions
    Amended to impose a penalty on material advisors for failing to timely file an information return or for filing false or incomplete information as required by IRC 6111 for reportable transactions. The penalty equals:
    1. For failures with respect to reportable transactions (other than listed transactions), $50,000; or

    2. For listed transactions, an amount equal to the greater of $200,000 or 50% (75% in the case of an intentional failure) of the gross income derived by such person with respect to aid, assistance, or advice which is provided with respect to the listed transaction before the date the return is filed under IRC 6111.

    IRC 6707A
    Penalty for Failure to Include Reportable Transaction Information With Return
    Imposes a penalty for failing to report certain transactions that have a potential for tax avoidance or evasion (reportable transactions as defined in IRC 6011 and the regulations thereunder) and transactions specifically identified as tax avoidance transactions (listed transactions) as required by Treas. Reg. 1.6011-4.
    IRC 6708
    Failure to Maintain Lists of Advisees With Respect to Reportable Transactions
    Amended to impose a daily penalty of $10,000 on material advisors of reportable transactions who fail to make a list of investors/advisees available as required by IRC 6112 within 20 business days from an IRS written request for the list.
    IRC 7408
    Action to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions
    Expanded to allow injunctions to be sought for actions subject to penalty under IRC 6707 or IRC 6708, or violating Treasury Department Circular 230, Regulations Governing Practice Before the Internal Revenue Service.
    IRC 6501(c)(10)
    Limitations on Assessments and Collection - Exceptions
    Amended to add an exception to the applicable statute of limitations for assessing underpayments of tax resulting from undisclosed listed transactions. The statute of a taxpayer who participated in a listed transaction remains open until the taxpayer or a material advisor discloses the taxpayer's participation in the transaction. After such disclosure occurs, the statute will remain open for 1 year from the date of that disclosure.
    IRC 163(m)
    Interest
    Revised to disallow any deduction for interest paid or accrued on any portion of an underpayment attributable to an undisclosed reportable transaction.
    IRC 7525(b)
    Confidentiality Privileges Relating to Taxpayer Communications – Section Not to Apply to Communications Regarding Tax Shelters
    Amended to extend the denial of privilege for written communications between a tax practitioner and a corporate client to include any individual engaged in a tax shelter activity.
    American Jobs Creation Act (AJCA) of 2004 section 821 Amended § 5321(a)(5) of Title 31, United States Code, to increase the penalty for failing to report interests in foreign financial accounts.
    AJCA of 2004 section 822 Amended § 330(b) of Title 31, United States Code, to authorize the Secretary to censure and fine an incompetent or disreputable tax advisor who practices before the Department of the Treasury.

4.32.2.3  (06-08-2012)
Lead Identification and Investigation Authorization

  1. This material provides guidance to all IRS employees for referring potential AT promoter leads and describes the process for authorizing promoter investigations.

  2. SB/SE investigations are authorized by the SB/SE LDC.

  3. LB&I investigations are authorized by the TTSPC.

4.32.2.3.1  (06-08-2012)
Identification of Promoter Leads

  1. All potential leads are sent to the SB/SE LDC or OTSA for development and evaluation. If sent to OTSA, OTSA will make a recommendation to the TTSPC.

  2. The following is a list of the types of promoter leads reviewed by SB/SE LDC and OTSA. The list is not all-inclusive.

    • Domestic abusive trust promotions

    • Offshore compliance promotions

    • Abusive business entity and deduction promotions

    • Refund and tax credit promotions

    • Anti-tax and constitutional arguments

    • Exempt organization promotions

    • Corporate tax shelter promotions

    • Arrangements designed to illegally reduce or eliminate employment taxes

    • Compliance issues relating to IRC 6111, Disclosure of Reportable Transactions

    • Compliance issues relating to IRC 6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees

    • Collection promotions

  3. No contact with a known or suspected promoter or third parties should be made prior to receiving authorization from the SB/SE LDC or LB&I TTSPC. Examiners may only conduct passive research on any lead. Examples of passive research are securing marketing or promotion materials from internal or public sources and researching IDRS to identify the suspected promoter’s taxpayer identification number (TIN). Any research should be included with the referral package.

  4. Active research of leads relating to a promoter is not conducted until appropriate approval is obtained from the SB/SE LDC or LB&I TTSPC. Active research includes:

    1. Forwarding promotional materials to Counsel for a formal opinion outside the scope of an ongoing income tax examination.

    2. Ordering the promoter's tax return.

    3. Initiating an income tax examination of the promoter.

    4. Making direct contact with the promoter or third parties.

    5. Ordering a return of a participant not currently under examination or directly related to a return currently under examination.

    6. Performing IDRS research on participants.

  5. Promoter lead packages should contain sufficient background information that is readily available to make the referral useful. Examples of information that may be useful include:

    1. Marketing or promotional materials including legal opinions, secured during an examination or from third parties.

    2. Information regarding the promoter’s network, operations, or marketing strategy.

    3. A list of any known participants.

    4. Affidavits, interview notes, correspondence or statements from witnesses or participants.

    5. A brief overview of examination results (if applicable).

    6. An estimate of the scope and potential harm to the government.

    7. Copies of tax returns used in the promotion.

    8. Names, addresses, and employer identification numbers (EINs) for related and/or sub-promoters.

    9. Copies of any correspondence between related and/or sub-promoters.

    10. Years involved.

    11. Source(s) of information.

    12. Promoter /material advisor history, if known.

  6. Promoter lead packages are forwarded to the SB/SE LDC or OTSA as appropriate.

  7. For referral forms and additional information on the SB/SE LDC or OTSA referral process:

    • For SB/SE - See IRM 4.32.2.3.2, SB/SE Lead Development Center (SB/SE LDC).

    • For LB&I - See IRM 4.32.2.3.3.1, Role of OTSA.

4.32.2.3.1.1  (06-08-2012)
Time Charges for Promoter Referrals

  1. Time charged to SB/SE promoter investigations is non-case specific until the SB/SE LDC formally approves an investigation. Time spent by SB/SE examiners preparing referrals is charged as follows:

    Activity Code Activity
    593 Promoter activity under IRC 6700.
    594 Aiding and abetting promoter activity under IRC 6701.
  2. Once the SB/SE LDC authorizes an investigation, time is charged to the specific investigation.

  3. LB&I examiners and technical specialists must use Activity Code 529 for time spent developing information on lead referrals and for providing assistance to examiners in developing promoter leads before LB&I TTSPC approval. When a promoter investigation is approved, LB&I examiners use Activity Code 593.

4.32.2.3.2  (06-08-2012)
SB/SE Lead Development Center (SB/SE LDC)

  1. SB/SE Delegation Order 4.60, Functions Related to Potential Promoters/Tax Shelters Cases, delegates authority to approve and refer all SB/SE AT promoter investigations to the SB/SE LDC Program Manager, in consultation with the Director, Abusive Transactions and Technical Issues, Counsel, and CI.

  2. The SB/SE LDC was established to centralize receipt and development of SB/SE AT promoter leads, conduct research, build promoter cases, and authorize the initiation of promoter investigations in coordination with Counsel, CI, and other operating divisions.

  3. Leads are submitted to the SB/SE LDC using Form 14242, Reporting Abusive Tax Promotions and/or Promoters.

  4. The SB/SE LDC will acknowledge receipt of the lead and may contact the referring IRS employee for additional information.

  5. The SB/SE LDC conducts additional research and evaluates the investigation potential. Some factors they consider are:

    • Type of promotion.

    • Past activity of the promoter.

    • Ongoing activity or likelihood of reoccurrence.

    • Size of the promotion.

    • Tax impact of the promotion.

    • Possible tax law violations.

    • Favorable public impact or compliance impact.

    • Existing balance due liabilities including an open Collection assignment.

  6. If a promoter subject to Circular 230 violates any of its provisions (such as failure to file tax returns or a criminal conviction for financial crimes involving breach of trust), the SB/SE LDC will make a referral to the OPR. A copy of the referral is included in the investigation case file.

  7. Once an investigation is authorized, the administrative file is sent to the field. A copy of the authorization memo is sent via e-mail to Collection Policy. The file includes:

    1. An investigation authorization memorandum describing the promoter's background and history, the promotion, potential First Amendment concerns, summary of products or services sold, any criminal investigation information, the scope of the promotion, and recommendation for investigation.

    2. Any promotional or other materials provided by the referring examiner(s) or other lead source.

    3. Internal or public records research conducted by the SB/SE LDC.

  8. An investigation is not limited to the scheme identified in the referral. Approval of the investigation authorizes an examiner to review all potentially abusive promotional activities.

  9. Approval of a promoter investigation includes the investigation of any entity controlled by the promoter.

  10. Promoter investigations may be conducted simultaneously with examination of the promoter and related participants. While not required, it is sometimes preferable that one examiner conduct the promoter investigation and a different examiner conduct the income tax audit(s) of the promoter and/or participants. However, the examiners should coordinate and share relevant information.

4.32.2.3.2.1  (06-08-2012)
Primary/Secondary Promoters

  1. When a promotion involves multiple promoters, each person involved in the promotion is designated as either a "primary" or "secondary" promoter.

  2. The key person or principal organizing or arranging the AT promotion, if known, is designated as the primary promoter.

  3. If the Area where the primary promoter resides is not able to coordinate the investigation, the issue management team (IMT) selects the primary investigative office. If an IMT is not established, then an ATTI senior program analyst should be consulted.

4.32.2.3.3  (06-08-2012)
Office of Tax Shelter Analysis (OTSA), LB&I Tax Shelter Steering Committee and LB&I Technical Tax Shelter Promoter Committee (TTSPC)

  1. OTSA was created as part of the Pre-Filing and Technical Guidance (PFTG) function in LB&I (Announcement 2000-12, IRB 2000-12, 835, Disclosure Requirements for Corporate Tax Shelters). OTSA provides information and services to all IRS operating divisions and functions as well as other interested parties, including Treasury and Congress.

  2. The LB&I Tax Shelter Steering Committee provides leadership and executive oversight in implementing the tax shelter program.

  3. The LB&I TTSPC is a sub-committee of the LB&I Tax Shelter Steering Committee, and approves all LB&I tax shelter promoter and material advisor contacts and investigations. Examiners may NOT contact a promoter or material advisor with respect to a tax shelter or reportable transaction promotion unless approval is first obtained from the LB&I TTSPC.

4.32.2.3.3.1  (06-08-2012)
Role of OTSA

  1. OTSA serves the entire IRS as a centralized clearinghouse for all information related to abusive tax shelter activity and issues of significant compliance risk to tax administration that comes to the attention of the IRS from both internal and external sources. OTSA collects complete and accurate information, timely analyzes the information to identify trends and disseminates the results to those in the position to take the necessary action.

  2. OTSA is responsible for making recommendations to the LB&I TTSPC regarding tax shelter promoters/material advisors referrals and IRC 6112 letter requests from the technical specialists' review of Form 8918, Material Advisor Disclosure Statement.

  3. OTSA works with Counsel, headquarters, field personnel and others, including the operating divisions and CI to evaluate the tax treatment of new variations of tax-structured transactions. OTSA works indirectly with Treasury through Counsel.

  4. OTSA collects information from many sources to support and implement the IRS’s tax shelter compliance and behavior strategies, including, but not limited to:

    • Taxpayer and Material Advisor Disclosures of Reportable Transactions

    • Promoter/Material Advisor Investigations

    • Tax Shelter Hotline

    • LB&I Referrals

    • Emerging Issues

4.32.2.3.3.1.1  (06-08-2012)
Disclosures of Reportable Transactions

  1. OTSA is responsible for:

    1. Monitoring all reportable transactions disclosed by material advisors as required by IRC 6111, as amended by AJCA of 2004, and Treas. Reg. 301.6111-3.

    2. Monitoring all reportable transactions disclosed by taxpayers as required by Treas. Reg. 1.6011-4.

    3. Reviewing and analyzing reportable transactions to detect patterns as well as identifying new promoters and/or promotions.

    4. Maintaining a centralized and secure document repository of Form 8886, Reportable Transaction Disclosure Statement, and Form 8918, Material Advisor Disclosure Statement, and associated databases to be used for enterprise-wide issue collaboration, searching, and knowledge management.

    5. Assigning unique material advisor reportable transaction numbers to each reportable transaction disclosed by a material advisor on Form 8918.

    6. Identification of potential IRC 6707A penalty cases for non-compliance with disclosure laws and dissemination to appropriate business operating divisions (BODs) for examination.

4.32.2.3.3.1.2  (06-08-2012)
Taxpayer Disclosures

  1. OTSA receives and evaluates all Form 8886, Reportable Transaction Disclosure Statements, (disclosures), which are submitted by taxpayers who have participated in a reportable transaction(s) as defined in Treas. Reg. 1.6011-4. A taxpayer may have multiple disclosures in its tax return and may disclose the same transaction with different taxable year returns if they participated in the transaction in multiple years. However, only those disclosures that are included in the tax return for the first time are to be submitted to OTSA. The OTSA submitted disclosure by the taxpayer has to be an exact copy of the disclosure included in their tax return and is to be sent to the Office of Tax Shelter Analysis (OTSA) at the following address:

    Internal Revenue Service
    OTSA
    1973 North Rulon White Blvd. Mail Stop 4915
    Ogden, UT 84404

  2. Forms 8886 received by OTSA during a calendar year are processed and evaluated as follows:

    • OTSA processing is conducted on a batch basis. That is, received disclosures are accumulated during each calendar year until there is a sufficient number of disclosures to warrant committing processing resources.

    • Once processing resources have been committed, OTSA analysts review the disclosures and sort or assign them to various predetermined categories. During this initial sorting phase, care is taken to ensure that all submitted supporting documents continue to be associated with the disclosure.

    • During the initial sorting process, each disclosure is reviewed by an analyst for completeness. Any potentially incomplete disclosure is identified.

    • Once the initial sorting has been completed, all disclosures and supporting documents are scanned and saved in a secure repository. In addition, the data from certain fields on the disclosure is transcribed into a database by OTSA clerical staff.

    • At this point, OTSA has a scanned image of each disclosure and a database of information about each disclosure that can be used for further review activities.

    • The OTSA analyst reviews each disclosure in each of the initial sorted categories and assigns each disclosure with a specific OTSA shelter type identification (ID) number and enters this number into the OTSA database. In addition, the OTSA analyst will determine which disclosures require further action or review. For those disclosures identified for further review or action, certain additional information is ascertained and entered into the OTSA database. At this point, OTSA has identified those disclosures having further interest to OTSA which includes potentially incomplete disclosures. For the rest of the disclosures, the OTSA processing and evaluation activities have been completed.

    • For those disclosures having further interest, additional data is secured such as the exam status and exam group code (EGC) of the associated taxpayers. This additional data is then saved to the OTSA database.

  3. Disclosures having further interest are re-sorted by BOD and disseminated as follows:

    • SB/SE, W&I and TE/GE BOD: The OTSA database and disclosures are made available to the SB/SE Abusive Transaction Support Unit (ATSU) or the TE/GE contact for further review and to make exam determination. OTSA's processing and evaluation activities are complete with respect to these disclosures.

    • LB&I BOD: Disclosures for which the related taxpayer has an open examination in the field: the OTSA analyst sends the Team Manager an e-mail with copy of the disclosure, requesting review of the transaction. If OTSA has identified the disclosure as potentially incomplete, the e-mail will also request consideration of potential penalty under IRC 6707A because the disclosure received was incomplete.

    • For LB&I BOD: Disclosures which are listed transactions and the related taxpayer is not currently under examination: OTSA analyst sends the disclosure to the appropriate workload identification team for possible assignment to an exam team for review of the transaction. If OTSA has identified the disclosure as potentially incomplete, the assigned examination team will be asked to consider a potential penalty under IRC 6707A because the received disclosure was incomplete.

    • LB&I BOD: Disclosures that are non-listed transactions with no open exam: The OTSA analyst will send the disclosures to the appropriate workload identification team for possible assignment to an exam team. If OTSA has identified the disclosure as potentially incomplete, the assigned examination team should consider a potential penalty under IRC 6707A.

    • Processing of disclosures is complete.

  4. Under the IRC 6011 regulations, disclosure of a reportable transaction (on Form 8886, Reportable Transaction Disclosure Statement), is not always made at the same time a tax return is filed.

    • If a transaction is reportable at the time the taxpayer files a return reflecting participation (as described in Treas. Reg. 1.6011-4) in that transaction, the taxpayer is required to attach a Form 8886 with its filed tax return for each reportable transaction for every year of participation. A taxpayer may report multiple reportable transactions on one form if they are the same or substantially similar. In addition, a copy of the Form 8886 is to be sent to OTSA at the time a Form 8886 is first filed by the taxpayer pertaining to a particular reportable transaction. Failure to comply with these requirements could result in penalties.

    • If a transaction is not listed at the time that the taxpayer files its return reflecting participation in the transaction, Treas. Reg. 1.6011-4(e)(2)(i) requires taxpayers to file a disclosure with OTSA within 90 calendar days of the date that a transaction is listed or identified as a transaction of interest (TOI) by the Service, if the period for assessing tax on the previously filed return remains open and the taxpayer reported tax benefits from the transaction on the previously filed return.

  5. When placing a tax return under examination that has a Form 8886 attached, LB&I examiners must contact OTSA under the following conditions to verify if a Form 8886 was properly and timely filed:

    • The attached Form 8886 has a check in the "Initial year filer" box on line C

    • The attached Form 8886 has a check in the "Listed" box on line 2a

    • The attached Form 8886 identifies a year that is potentially open on line 1b.

    All other examiners, please refer to IRM 4.32.4.3.2.1, Opening an IRC 6707A Penalty Examination, for further guidance

  6. Contacting OTSA is not mandatory if the examiner has previously verified that OTSA has received a copy of the attached Form 8886.

    • To contact OTSA, examiners are to send an e-mail requesting Form 8886 verification (including only the taxpayer's name and taxpayer identification number). In order to determine the proper e-mail address, the examiner should go to the OTSA website.

    • OTSA will respond back to the examiner by e-mail and identify all Forms 8886 that are on file with OTSA.

  7. For a job aid to assist examiners in determining whether a Form 8886 is required, timely, and complete. see Exhibit 4.32.2-4, Audit Tools. This form is also available on MySB/SE at Audit Tool worksheet.

4.32.2.3.3.1.3  (06-08-2012)
Material Advisor/Promoter Investigations

  1. OTSA serves as a centralized collection point for all leads involving abusive technical tax shelters and reportable transactions. OTSA is responsible for the evaluation of leads, completion of referral packages, and submissions to the LB&I TTSPC for consideration of a LB&I promoter investigation. For additional information, see IRM 20.1.6.13.1, LB&I, SB/SE and TE/GE Functional Guidelines.

  2. Advisee/investor lists are secured through material advisor investigations under the authority of IRC 6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc.

  3. These lists secured by LB&I examiners are routed to OTSA in Ogden for input into a database and case building. After input, OTSA forwards the investor or advisee names to the appropriate operating division for examination consideration.

4.32.2.3.3.1.4  (06-08-2012)
Tax Shelter Hotline

  1. OTSA receives information on potentially improper tax shelter activity from both internal and external sources.

  2. OTSA is responsible for the evaluation of these leads.

  3. The IRS Internet website contains contact information for the hotline as follows:

    Type of Contact Contact Information
    Mailing address: Internal Revenue Service
    Office of Tax Shelter Analysis
    LB&I:PFTG:OTSA M/S 4916
    1973 North Rulon White Blvd.
    Ogden, UT. 84404–5402
    Telephone Number: 866-775-7474
    (toll free)
    Fax Number: 801-620-5122
    (not toll free)
    E-Mail Address: irs.tax.shelter.hotline@irs.gov

4.32.2.3.3.1.5  (06-08-2012)
Emerging Issues

  1. OTSA evaluates information on new and emerging transactions which may have potential for strategic importance to the IRS and facilitates various compliance actions such as issuing notices, alerts, pronouncements, or seeking to designate the issue as a listed transaction or a transaction of interest.

  2. OTSA is responsible for coordinating and assisting in the identification of potentially abusive transactions.

  3. Information on making a referral of a potentially abusive transaction can be found on the OTSA website under the "Emerging Issues" program.

  4. See IRM 4.51.2.3, LMSB Emerging Issues.

    Note:

    The title of the IRM section reads LMSB, even though the operating division is now LB&I.

4.32.2.3.3.1.6  (06-08-2012)
Communications and Guidance

  1. OTSA facilitates technical guidance communication to LB&I examiners on tax shelter issues.

4.32.2.3.3.2  (06-08-2012)
LB&I Tax Shelter Steering Committee

  1. The LB&I Tax Shelter Steering Committee makes key decisions in implementing LB&I’s strategic initiative pertaining to abusive tax shelters. Some areas of focus include:

    • Oversight of the LB&I TTSPC, which approves LB&I tax shelter promoter/material advisor investigations.

    • Coordinating and developing consistent approaches addressing abusive tax shelters in LB&I.

    • Sharing information with other operating divisions.

    • Formulating strategies to deal with abusive tax shelter promotions and investors including allocation of resources to these activities in LB&I.

    • Supporting coordination of legislation and published guidance.

    • Establishing studies and task teams.

4.32.2.3.3.3  (06-08-2012)
LB&I Technical Tax Shelter Promoter Committee (TTSPC)

  1. The LB&I TTSPC is a sub-committee of the LB&I Tax Shelter Steering Committee. Its purpose is to ensure consistency and uniformity in selecting promoter/material advisors for investigation within LB&I. OTSA submits referrals to the LB&I TTSPC for investigation consideration and for their consideration of IRC 6112 letter requests from the technical specialists.

  2. The LB&I TTSPC has sole authority to approve LB&I tax shelter promoter/material advisor investigations. No contact may be made with a promoter/material advisor by an LB&I examiner unless approved by the LB&I TTSPC.

  3. The LB&I TTSPC comprises the following:

    • Industry Director, Financial Services (Chairperson).

    • Industry Director, Field Operations, Financial Services (designated by the Industry Director).

    • LB&I Area Counsel, Financial Services.

    • LB&I Special Counsel, designated by LB&I Division Counsel.

    • Senior Manager, OTSA.

  4. Representatives from other operating divisions and OPR may be invited to participate in LB&I TTSPC discussions.

4.32.2.3.3.4  (06-08-2012)
Referrals to the LB&I TTSPC

  1. OTSA analyzes information received on promoters/material advisors to make an initial determination as to whether a formal investigation is warranted.

  2. OTSA coordinates with other operating divisions to determine if the promoter is already under investigation. In determining if a promoter should be recommended for investigation, OTSA considers many factors such as:

    • Past activity of the promoters or material advisors

    • Type of shelter

    • Number of taxpayers

    • Size of the promotion

    • Scope (years involved)

    • Gross income derived from the promotion

    • Amount of tax benefits claimed

    • National impact

    • Specific issues

  3. If OTSA determines a formal investigation is warranted, the information is presented to the LB&I TTSPC.

  4. OTSA receives requests from technical specialists for issuance of an IRC 6112 letter subsequent to their review of Form 8918. OTSA coordinates with the other operating divisions to determine if there is a conflict with OTSA sending the IRC 6112 letter. If it is determined a letter should be issued, the letter request is referred to the TTSPC for their approval prior to sending the IRC 6112 letter.

  5. Contact the OTSA senior program analyst for tax shelter promotions/material advisor disclosures for questions regarding referrals to the LB&I TTSPC. All referrals to the LB&I TTSPC must be made through OTSA.

4.32.2.3.3.5  (09-23-2011)
Criteria for Authorization

  1. This section provides guidance on the type of information considered by the LB&I TTSPC in determining whether to approve an investigation. The type of information includes:

    • Entities

    • Law firms

    • Individuals

4.32.2.3.3.5.1  (06-08-2012)
Entities

  1. The following types of information are considered by the LB&I TTSPC in reaching a determination regarding promoter/material advisor activity. This list is not exclusive:

    • Returns filed by material advisors regarding any reportable transaction under IRC 6111 (post-AJCA of 2004).

    • Registration of, or failure to, register a tax shelter under IRC 6111 (pre -AJCA of 2004) with respect to interests sold in such shelters before October 23, 2004.

    • Disclosure statements filed by investors/advisees under IRC 6011.

    • Evidence obtained from investor/advisee income tax examinations or other promoter investigations, including interview statements, indicating that the entity was promoting tax shelters/reportable transactions and/or providing any material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount as defined in Treas. Reg. 301.6011-3(b)(3). For additional information and definition of terms, see Treas. Reg. 301.6111-3, Disclosure of Reportable Transactions.

    • Information received from the IRS Tax Shelter Hotline.

    • Written promotional materials or prospectuses discussing the tax benefits of a transaction.

    • Confidentiality or nondisclosure agreements between investors and promoters/material advisors.

    • Evidence that a known promoter/material advisor created a new entity to facilitate a tax shelter/reportable transaction promotion.

    • Evidence of fees received for a tax shelter promotion/material aid, assistance or advice.

    • News articles or evidence of seminars, conferences, etc.

    • Internet research.

    • IDRS or other internal research.

4.32.2.3.3.5.2  (06-08-2012)
Law Firms

  1. When considering whether a law firm is the promoter or material advisor of a tax shelter, items listed in IRM 4.32.2.3.3.5.1 (1) above should be considered.

  2. In addition to the items in IRM 4.32.2.3.3.5.1 (1), evidence which may tend to show a law firm was "selling a product" and not providing independent legal advice may include, but is not limited to:

    • Copies of written opinions discussing the tax implications of participating in a particular transaction, including evidence of multiple "cookie cutter" legal opinions.

    • Copies of fee schedules, particularly those including fees tied to the amount of tax savings derived by investors.

    • Evidence showing that the clients and the law firm are not geographically close.

    • Information showing that the opinion/legal advice was part of a prepackaged tax shelter product or service.

    • Written opinions/legal advice that fail to discuss applicable law.

4.32.2.3.3.5.3  (06-08-2012)
Individuals

  1. The LB&I TTSPC must approve IRC 6111 and IRC 6112 investigations of individuals. Whether an individual is a material advisor depends on the specific facts and circumstances of each promoter investigation. Examiners should carefully review the facts to determine if an individual is a material advisor.

  2. IRC 6111 and IRC 6112 were amended by the AJCA of 2004 and the corresponding regulations have been modified several times. It is imperative that examiners carefully consider which rules apply to their investigation and they should contact Area Counsel for guidance.

  3. There are two compelling situations where individuals have been referred to the LB&I TTSPC and approved for investigation:

    • Where evidence shows that the individual promoted/provided material advice in their individual capacity.

    • Where evidence tends to show that the promoter entity was a shell with the intent to avoid or evade the provisions of IRC 6111, IRC 6112, IRC 6707, or IRC 6708.

  4. Appropriate referrals of individuals with other persuasive facts are encouraged. All the factors listed under IRM 4.32.2.3.3.5.1, Entities, are also considered in determining whether an individual should be subject to a promoter/material advisor investigation.

4.32.2.3.3.6  (06-08-2012)
LB&I TTSPC Procedures

  1. After reviewing the information provided by OTSA, the LB&I TTSPC may:

    1. Approve the lead for investigation.

    2. Reject the lead.

    3. Send the lead back to OTSA for further development.

    4. Refer the lead to the LB&I Tax Shelter Steering Committee for guidance if the LB&I TTSPC cannot agree on a course of action.

  2. All decisions by the LB&I TTSPC are documented in the TTSPC minutes and formalized on a Promoter Investigation Approval/Disapproval form.

  3. Approval of a promoter/material advisor investigation encompasses all promotions/reportable transactions conducted/advised by that promoter/material advisor.

  4. Promoter/material advisor investigations may be conducted simultaneously with an income tax examination of the promoter/material advisor and/or investor(s).

  5. Approved promoter/material advisor investigation cases are forwarded to the Executive Issue Owner for assignment. See IRM 4.32.1.4.1, Membership in the Issue Management Team, for more information on Executive Issue Owners.

4.32.2.3.4  (09-23-2011)
Tax Exempt and Government Entities (TE/GE) Referrals

  1. If a TE/GE examiner identifies a potential AT or emerging issue involving a TE/GE entity during the course of an examination, the examiner should contact the appropriate function through the links on TE/GE Emerging Issues intranet page.

  2. If the applicable Committee determines a referral warrants further development, the information is forwarded to the SB/SE LDC or OTSA for consideration and authorization.

4.32.2.3.5  (06-08-2012)
Coordination With Criminal Investigation (CI)

  1. The SB/SE LDC and OTSA submit deconfliction memoranda to the CI Lead Development Center (CI LDC) advising of their intent to authorize a civil promoter investigation (SB/SE) or present a referral to the TTSPC (LB&I).

  2. CI queries their database, Criminal Investigation Management Information System (CIMIS), to identify any ongoing CI investigations of the promoter or associates.

  3. Based on the query the investigation falls into one of three categories:

    • No CI Activity

    • CI Activity - No Conflict

    • CI Activity - Conflict

  4. If CI notifies the LDC or OTSA that there is CI activity, the civil investigation is authorized and sent to the local SB/SE or LB&I field compliance group whether there is conflict or not. The examiner is directed to hold a six-way conference with CI before starting any investigative activity (see IRM 4.32.2.6.3, Six-Way Conference).

4.32.2.3.5.1  (06-08-2012)
No CI Activity

  1. If the CIMIS database search fails to disclose any open investigation of the primary subject or any related party, CI will advise the SB/SE LDC or OTSA to proceed with the authorization.

  2. If CI decides to conduct a criminal investigation after the civil promoter investigation has been authorized, CI is responsible for initiating a six-way conference. See IRM 4.32.2.6.3, Six-Way Conference.

  3. The progress of the civil investigation should not be postponed or delayed pending CI’s assessment of the criminal potential.

  4. The decision to stop an authorized civil investigation rests with the SB/SE or LB&I field compliance managers. If agreement is not reached between SB/SE or LB&I and CI, the issue will be elevated. See IRM 4.32.2.6.3.3.3, Resolving Conflicts.

4.32.2.3.5.2  (06-08-2012)
Open CI Investigation

  1. If there is an ongoing criminal investigation, the CI LDC issues a memorandum to the local CI special agent in charge (SAC) requesting a determination as to whether there would be a conflict between the proposed civil action and the criminal investigation. The determination should be made within 10 days of receipt of the CI LDC memorandum.

4.32.2.3.5.2.1  (06-08-2012)
No Conflict With Parallel Investigation

  1. A no conflict determination means concurrent civil and criminal promoter investigations (referred to as a parallel investigation) may be pursued. See IRM 4.32.2.6, Parallel Investigations.

  2. A six-way conference is required before initiating the investigation. See IRM 4.32.2.6.3, Six-Way Conference.

4.32.2.3.5.2.2  (06-08-2012)
Conflict With Parallel Investigation

  1. Conflict means a civil investigation would greatly harm an ongoing criminal investigation. The mere existence of a criminal investigation, including a grand jury investigation, does not present a conflict and should NOT automatically delay or forestall a civil investigation.

  2. If CI believes a conflict exists that warrants a halt to a civil investigation, this must be discussed during the six-way Conference. See IRM 4.32.2.6.3, Six-Way Conference.

4.32.2.3.6  (06-08-2012)
SB/SE Coordination With Return Preparer Program (RPP)

  1. The SB/SE LDC also evaluates return preparer leads for investigation. These cases generally fall into one of two categories:

    • Return preparers authorized for civil investigation.

    • Return preparers who have been the subject of a preparer project and who have not corrected their misconduct.

  2. Return preparers can engage in conduct in violation of IRC 6700, IRC 6701, IRC 6694, and IRC 6695, so coordination between the return preparer program coordinators (RPC) and the SB/SE LDC is important.

  3. Before the RPC submits a program action case (PAC) request (see IRM 20.1.6.5, Program Action Cases Overview), the RPC contacts the SB/SE LDC to determine if a promoter investigation has been considered. See IRM 20.1.6, Preparer/Promoter/Material Advisor Penalties, for more information on PACs. The following actions may be taken:

    Category Action
    Investigation authorized or pending authorization RPC will not request PAC
    Investigation not authorized-return preparer not engaged in promotional conduct RPC may initiate a PAC request
    Investigation not authorized-return preparer engaged in promotional conduct SB/SE LDC will assess lead on expedited basis. If authorized RPC will not proceed with PAC.
  4. If a PAC is approved, the RPC monitors the examinations of the preparer's clients and the assessments of preparer penalties. Depending on the outcome of the PAC or other information regarding the preparer’s activities, the RPC may resubmit a new referral to the SB/SE LDC for consideration of an investigation.

  5. See IRM 20.1.6, Preparer/Promoter/Material Advisor Penalties, for more information on the RPP program.

4.32.2.3.7  (06-08-2012)
Joint International Tax Shelter Information Centre (JITSIC)

  1. In 2004, the IRS and the national taxing agencies of the United Kingdom, Canada and Australia created the Joint International Tax Shelter Information Centre (JITSIC) to identify, develop and share information and expertise about abusive transactions, particularly those that cross borders. In 2007, the Japanese National Tax Agency joined JITSIC as a member. In 2010, the tax agencies of the Republic of Korea and the People’s Republic of China joined JITSIC as members and France joined in 2011. A tax agency may send a representative to JITSIC as an observer. An observer country participates as a full member, but does not participate in the governance of JITSIC. Participation in JITSIC enables each country to better target compliance and enforcement efforts to combat abusive transactions. Since its creation, JITSIC has evolved to address issues beyond abusive transactions. This IRM will address only JITSIC's role with abusive transactions.

  2. The JITSIC role in addressing abusive transactions is to:

    1. Provide support to the parties through the identification and understanding of abusive transactions and those who promote them.

    2. Share expertise, best practices and experience in tax administration to combat abusive transactions.

    3. Exchange information on abusive transactions, in general, and on specific promotions, their promoters, and investors consistent with the provisions of bilateral tax conventions.

    4. Enable the parties to better address abusive transactions promoted by firms and individuals who operate without regard to national borders.

  3. The objectives of JITSIC are to deter promotion of, and investment in, abusive transactions. Through information exchange and knowledge sharing, the parties:

    • Increase public awareness of the potential civil and criminal risks of promoting and investing in abusive transactions.

    • Share best practices among the parties' tax administrations for identifying and addressing abusive transactions.

    • Enhance each party's compliance and enforcement efforts through coordinated and "real time" exchanges of tax information consistent with the provisions of bilateral tax conventions.

    • Develop new internet search and other techniques for early identification of promoters and investors involved in abusive transactions.

    • Identify emerging trends and patterns to anticipate new abusive transactions.

    • Improve parties' knowledge of techniques used to promote abusive tax avoidance transactions cross-border.

  4. JITSIC representatives have been designated Competent Authorities for purposes of their JITSIC work and have the authority to exchange information per bilateral tax treaties and disclosure rules.

  5. JITSIC has offices in Washington, D.C., and London, England. Representatives from the member and observer countries work together to supplement the ongoing work of member tax administrations. They identify abusive transactions, arrangements and schemes and enhance activities against cross-border transactions involving compliance risk.

  6. Examiners that identify cross-border abusive transactions that involve a JITSIC member and/or an observer country should make referrals directly to JITSIC following instructions on the JITSIC website or through the SB/SE LDC. Examiners may consult with the appropriate technical specialist or field specialist as needed for a list of the current observer countries and to determine if an identified issue is potentially abusive. All referrals to JITSIC should be clearly referenced with "JITSIC Referral" .

  7. Referrals outside the IRS can be made to JITSIC through OTSA.

    Internal Revenue Service
    Office of Tax Shelter Analysis
    1973 North Rulon White Blvd.
    LB&I:PFTG:OTSA;M/S 4916
    Ogden, Utah 84404-5402

  8. Examiners should refer to their respective operating division's Guidance Memorandum for individuals to contact for further guidance.

4.32.2.4  (06-08-2012)
Frivolous Return Program (FRP)

  1. This section describes the coordination of the campus FRP with AT investigations. A complete description of the FRP is contained in IRM 4.10.12, Frivolous Return Program.

  2. The FRP identifies individuals or promoters preparing or promoting frivolous returns, claims or documents and educates them on their tax responsibilities. Campus examination is responsible for detecting, controlling, processing and examining frivolous activities.

  3. The FRP takes a proactive approach to frivolous non-compliance by providing outreach education through stakeholders on pertinent program data such as geographic trends of frivolous filings and common frivolous arguments.

  4. All frivolous documents received in the campuses are processed at the Ogden Compliance Services Campus.

  5. Campus examination conducts orientations to campus functions involved in processing or examining returns or correspondence to emphasize recognition of frivolous documents and provide appropriate referral instructions.

  6. The program participates in coordinating new systemic identification of frivolous filings wherever possible and makes referrals to affected stakeholders such as OPR, CI, SB/SE LDC, OTSA and Communications and Government Liaison.

4.32.2.4.1  (09-23-2011)
Frivolous Tax Submission Penalties

  1. IRC 6702(a), Civil Penalty for Frivolous Tax Returns, imposes a $5,000 penalty on any taxpayer filing a document purporting to be a return which:

    1. Does not contain sufficient information to determine the substantial correctness of the self-assessment, or contains information on its face which indicates the self-assessment is substantially incorrect, and

    2. Is due to a position that the Secretary has identified as frivolous, or reflects a desire to delay or impede the administration of federal income tax laws.

  2. IRC 6702(b), Civil Penalty for Specified Frivolous Submissions, imposes a $5,000 penalty on any person who submits a specified frivolous submission. The term "specified frivolous submission" means a specified submission if any portion of such submission:

    1. Is based on a position which the Secretary has identified as frivolous, or

    2. Reflects a desire to delay or impede the administration of federal tax laws.

  3. The term "specified submission" means:

    • A request for hearing upon filing of notice of lien (IRC 6320).

    • A request for hearing before levy (IRC 6330).

    • An application relating to agreements for payment of tax liability in installments (IRC 6159).

    • An application relating to compromises (IRC 7122).

    • An application relating to taxpayer assistance orders (IRC 7811).

  4. The Secretary maintains a list of identified frivolous positions and updates it as necessary.

  5. Under IRC 6702(b)(3), if a taxpayer withdraws the frivolous submission within 30 days of notification by the IRS, the penalty will not apply. The amount of the penalty can be reduced if in the opinion of the Secretary it would promote compliance with and aid administration of federal tax laws (IRC 6702(d)).

  6. This penalty can be imposed in addition to other applicable penalties (IRC 6702(e)).

4.32.2.4.2  (06-08-2012)
Detecting Frivolous Submissions

  1. Identification of frivolous submissions can be made during original return processing, amended return or claim processing, examinations, collection activities, and other contacts with a taxpayer or the taxpayer's representative. These filings are frequently identified in Customer Account Services (CAS) and compliance in the campuses, field offices, and other IRS offices.

  2. Frivolous submissions not related to an open examination or collection case should be routed to the Ogden Compliance Campus Frivolous Return Program. See IRM 4.10.12.1.3.4, Transshipping Frivolous Filings to FRP.

  3. If there is an open examination or collection case, frivolous submissions should be copied and forwarded to the campus FRP.

  4. The Ogden Compliance Campus Frivolous Return Program mailing address is:

    Internal Revenue Service
    1973 N. Rulon White Blvd., M/S 4450
    Ogden, UT 84404

4.32.2.4.3  (09-23-2011)
Responses to Frivolous Submissions

  1. Employees are responsible for replying to frivolous submissions associated with an open case using Letter 3175, Response to Frivolous Documents/Returns Received from Taxpayers.

  2. If the document submitted is a frivolous return or amended return, employees must contact the FRP. The FRP will send Letter 3176, Response to Frivolous Documents/Returns Received from Taxpayers, to the taxpayer and impose the frivolous submissions penalty, as appropriate.

  3. Any reply associated with an open case is documented in the case file and on IDRS via Command Code ACTON.

  4. If the document contains valid requests (e.g., FOIA, transcripts, or taxpayer advocate issues), the request is forwarded to the appropriate function.

4.32.2.4.4  (09-23-2011)
New Frivolous Positions

  1. A Servicewide Electronic Research Program (SERP) alert can be prepared to notify the campuses and field compliance of new frivolous positions. See IRM 1.11.8, Internal Management Documents System - Servicewide Electronic Research Program (SERP).

  2. The government’s position with respect to new frivolous positions should be coordinated with the FRP Senior Technical Coordinator, Campus Reporting Compliance (CRC) Exam Policy FRP Analyst and Counsel.

4.32.2.4.5  (09-23-2011)
FRP Master Database

  1. The FRP master database is used to track and monitor frivolous submissions. The database includes current inventory and historical data on accounts not in compliance (return filing or payment of tax) for two consecutive years. It provides a means to identify new AT promotions to make referrals for injunctive actions, civil and criminal investigations, and follow-up monitoring on violations of existing court orders on promoters.

  2. FRP provides reports to SB/SE Communications and Liaison and other affected parties on:

    • Emerging promotions.

    • Promoters involved in AT promotions.

    • Trends in geographic locations of frivolous submissions or specific business affiliations.

    • The need for outreach education on specific promotions.

    • Any data pertinent to the overall compliance objectives of the IRS.

  3. FRP reports are also used to provide data to examiners conducting related promoter investigations. Examiners should submit requests for FRP database information to the Ogden FRP Senior Technical Advisor.

4.32.2.4.6  (09-23-2011)
Campus Promoter Investigations

  1. The FRP screens each frivolous submission to determine if it is related to a promotion, specific promoter or return preparer. If four or more related frivolous submissions are identified, a referral is made to the SB/SE LDC for consideration of a promoter investigation.

  2. The SB/SE LDC evaluates and authorizes civil investigations of AT promotions.

  3. The SB/SE LDC determines whether an authorized investigation will be conducted by the FRP or by an SB/SE Area.

  4. If assigned to an SB/SE Area, the examiner should contact the FRP for assistance and to obtain pertinent data related to the promotion.

4.32.2.4.6.1  (09-23-2011)
FRP Preparer Projects

  1. If the SB/SE LDC does not authorize a civil investigation of a referred return preparer, the FRP will consider initiating a preparer project under IRC 6694 or IRC 6695. This process is described in the Frivolous Return and Non-filer Programs Overview section of IRM 4.10.12.9.5, Approved Cases for Preparer Penalty Assessment Only.

  2. All preparer penalty cases prepared by FRP are coordinated with Area Counsel. Depending on the facts, the case may result in a referral for civil injunction, penalty assessment, or no action.

4.32.2.5  (06-08-2012)
Case Control/Case Assignment Procedures

  1. All promoter investigation cases (except for TE/GE investigations) must be input on the Examination Return Control System (ERCS) Promoter investigations are not controlled on AIMS. TE/GE will be publishing IRM 4.70.3, TE/GE Promoter Investigations, for TE/GE case control procedures. In the meantime, refer to the TE/GE intranet webpage for instructions. Also see the ERCS Handbook for further instructions.

  2. Investigation cases are input on ERCS through the "Control Penalty Investigation" screen option as indicated in the following chart:

    Code Section ERCS MFT Code Time Charge Activity Code
    IRC 6700 P6 593
    IRC 6701 P7 594
    IRC 6707 P0 549
    IRC 6708 P8 595

4.32.2.5.1  (06-08-2012)
SB/SE Case Assignment Procedures

  1. SB/SE Area Planning and Special Programs (PSPs) establish SB/SE promoter investigations on ERCS as penalty investigations, with a project code and tracking code if applicable. A tracking code is generally assigned after a participant list is forwarded to the listkeeper for case building. See IRM 4.32.2.5.5, SB/SE Tracking Codes.

  2. For SB/SE, only the promoter's most current fully completed tax year is established on ERCS.

  3. SB/SE examiners upon assignment of the investigation should verify that the investigation was established on ERCS by PSP.

4.32.2.5.2  (06-08-2012)
LB&I Case Assignment Procedures

  1. The Executive Issue Owner forwards the OTSA referral package to the Team Manager for field assignment. See IRM 4.32.1.4.1, Membership in the Issue Management Team, for a description of the roles of these members.

  2. Team Managers set up the administrative ERCS record for the promoter investigation. The tax period used is the year the investigation was approved by the LB&I TTSPC. See IRM 4.32.2.5, Case Control/Case Assignment Procedures, for further information on setting up the investigation case on ERCS.

4.32.2.5.3  (06-08-2012)
Invalid or Unidentified Promoter TINs

  1. If a valid TIN was not identified for the promoter, the PSP ATTI Coordinator assigns a temporary TIN.

  2. When the promoter's correct TIN is identified or a permanent TIN is secured, the ERCS record is updated with the correct information. See IRM 4.32.2.5.3.2 (4).

4.32.2.5.3.1  (06-08-2012)
SB/SE PSP ATTI Coordinator Responsibilities

  1. PSP ATTI Coordinators are responsible for obtaining temporary TINs for promoter investigation cases without valid TINs before sending the investigation to a field group.

  2. Command Code AMTIN7 is used to assign a new temporary number. See IRM Exhibit 2.8.8-3, Command Code AMTIN7, for the input display for Command Code AMTIN7.

  3. If an income tax examination is to be conducted as well as the promoter investigation:

    1. Establish a Non-Master File (NMF) record on AIMS using Form 5354, Examination Request Non-Master File. See IRM 4.4.9.4.2, AIMS Control When TP Does Not Have a TIN, for additional information.

    2. Use Command Code AMNON to establish the dummy number on AIMS. See IRM Exhibit 2.8.8-1, Command Code AMNON, for the input display for Command Code AMNON.

4.32.2.5.3.2  (06-08-2012)
Examiner Responsibilities

  1. Examiners will attempt to identify a promoter's valid TIN during their investigation.

  2. If a promoter does not have a valid TIN, examiners will request the promoter to acquire a TIN as follows:

    For a Social Security Number (SSN):

    TIN Type TIN Source Form
    Social Security Number (SSN) Social Security Administration (http://www.socialsecurity.gov) Form SS-5, Application for a Social Security Number
    Individual Taxpayer Identification Number (ITIN) See IRM 3.21.263.4.4, How to Obtain Application and Where to File Form W-7, Application for IRS Individual Taxpayer Identification Number
    Employer Identification Number (EIN) Internal Revenue Service (www.irs.gov) Form SS-4, Application for Employer Identification Number

  3. If a promoter does not have a valid TIN and refuses to obtain one, examiners should contact the PSP ATTI Coordinator to secure a valid TIN from the campus.

  4. Once a valid TIN has been determined or obtained, the promoter examiner should update ERCS from the temporary TIN with the valid TIN. Use the Correct or Display option from the ERCS Main Menu and select "Change a Non-Master File Return to a MasterFile Return."

  5. If a promoter is not located, the promoter investigation is closed as discontinued before contact. See IRM 4.32.2.11.8, Penalty Case Processing Procedures, for investigation case closing procedures. For LB&I promoter investigations, the LB&I:F DFO Manhattan's approval must be obtained before discontinuing a promoter investigation.

  6. If an income tax examination is conducted on the promoter and a valid TIN has been determined or obtained, both ERCS and AIMS must be updated as follows:

    1. ERCS is updated as described in paragraph (4) above.

    2. The Non-Master File return is deleted from ERCS and replaced with the MasterFile return by completing a Form 5345-B, Examination Request Non-ERCS Users. This is done at the group level if the user has Command Code AMSOC permissions. Two command codes are generated to update AIMS: a MasterFile requisition (AM424) and a Non-Master File deletion (AMSOC).

    3. If a substitute for return (SFR) is required, wait until a valid TIN is received before sending the SFR for processing. When the return is converted on ERCS and if an SFR is to be generated at the same time, input Push Code 036. If an SFR is not to be generated at the same time as the AIMS opening, update the push code on ERCS to 036 when the SFR is to be generated.

4.32.2.5.3.3  (09-23-2011)
SB/SE LDC Responsibilities

  1. The SB/SE LDC updates the database with the temporary/valid TIN as applicable.

  2. If a valid TIN is received, the LDC should be notified so that the Investigation Authorization memorandum and LDC database can be updated with the correct TIN.

4.32.2.5.4  (06-08-2012)
Transferring Promoter Investigations

  1. There may be instances where the promoter investigation is transferred from one compliance area to another. For example:

    • The promoter has relocated or the promotional activity is concentrated in another compliance area. It may be more efficient to transfer the investigation to the other area office.

    • The receiving area office may be unable to conduct a civil promoter investigation due to staffing limitations or other considerations.

    • The promoter is related to another investigation and it would be more efficient to have one area or examiner work all the related investigations.

4.32.2.5.4.1  (06-08-2012)
Field Compliance Responsibilities

  1. Examiners prepare Form 4665, Report Transmittal, explaining the reasons for the transfer. A copy of the Form 4665 should be sent to the SB/SE LDC by secure e-mail at the *LDC mail box or faxed to 949-389-5083.

  2. Update the promoter investigation on ERCS to Status Code 41 using Disposal Code 30.

  3. Send the administrative investigation case file to the SB/SE Area PSP ATTI Coordinator or LB&I PSP using Form 3210, Document Transmittal.

  4. Transfers of LB&I promoter investigations must be coordinated through the LB&I Promoter Penalty Program Manager.


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