4.90.15  FSLG Fraud Procedures

Manual Transmittal

June 03, 2013

Note:FSLG began development a new fraud program to address the unique circumstances of fraud development in the governmental sector, an area that has not been specifically addressed in IRS prior to the formation of FSLG. We contacted the SB/SE owner of IRM 25.1. the Fraud Handbook, about material in 25.1.9, Tax Exempt and Government Entities, about moving material related to FSLG out of that section into a new IRM, 4.90.15, to address, in an expanded form, these unique issues and procedures involved in the government sector. SB/SE consented and cooperated in this decision and agreed to this change. Both IRMs will refer to the other in new and future editions.

Purpose

(1) This transmits a Table of Contents and text for new IRM Part 4, Examining Process, Chapter 90, Federal State and Local Governments, Section 15, FSLG Fraud Procedures.

Material Changes

(1) This is a new IRM. It includes material previously contained in IRM 25.1.9.7, and additional material addressing the unique issues faced by FSLG.

Effect on Other Documents

Material related to fraud for FSLG has been relocated from IRM 25.1.9.7, which addresses fraud topics for TE/GE. The new section provides more specific guidance to FSLG Specialists on procedures related to the unique issues of governmental entities. The creation of a separate FSLG fraud IRM was done in consultation with the office of SB/SE BSA/Fraud

Audience

This section contains procedures and guidance for all FSLG employees

Effective Date

(06-03-2013)

Paul Marmolejo
Director, Federal, State and Local Government

4.90.15.1  (06-03-2013)
Overview

  1. This section provides detailed information on the fraud process and procedures that FSLG Specialists (Specialists) should follow when developing fraud referrals on government entities and/or Fraud Development Leads (FDLs) on related parties such as employees, officers, appointed/elected officials and vendors. For general information regarding fraud, refer to IRM 25.1, Fraud Handbook.

  2. As employees, we all play a key role in the identification and development of fraud and we must view our responsibility from a global perspective to ensure indicators of fraud are developed when necessary. While the fraudulent activity may not be perpetrated by a government entity or reflected on its filed returns, it is critical that we remain alert to potentially fraudulent transactions and activities affecting returns outside our tax jurisdiction so that fraud may be developed and pursued as necessary. Failure to do so will limit the organization’s effectiveness in carrying out its part in our global compliance mission.

  3. FSLG Specialists must be aware of the indicators of potential fraudulent activities of parties associated with the government entity (i.e., employees, vendors, etc.) when conducting examinations. Specialists must discuss these indicators with their group manager. Failure to consider and refer potential issues such as embezzlement schemes may result in unreported income that is never taxed. For a list of indicators, see IRM 25.1.2.3.

  4. Forms listed within IRM 4.90.15 may be submitted electronically with digital signatures.

4.90.15.2  (06-03-2013)
Identification and Development of Fraud

  1. The identification and development of fraud at the government entity or related party level begins with planning the examination and continues throughout the examination. During an examination, there are three basic areas Specialists should focus on to detect fraud: pre-audit techniques, the initial interview and the evaluation of internal controls.

  2. Pre-audit techniques, including internet research, should be conducted in every examination. This will help Specialists to identify and request the necessary information in the initial Information Document Request, and to develop thorough initial interview questions to probe any inconsistencies noted during the pre-audit research. There are many external and internal databases, such as Google, Yahoo, and IDRS, that the Specialist may use as well.

  3. Specialists should tailor the initial interview to the particular taxpayer and inquire about the nature of large, unusual, or questionable payments or obligations, noted in the books and records. During the initial interview ask questions that provide the taxpayer the opportunity to inform Specialists about fraud they previously discovered in their entity or to alert Specialists to relationships, or situations where the misappropriation of public funds may have occurred.

  4. Specialists should also conduct a thorough evaluation of internal controls to identify weaknesses where funds may be misappropriated. Pursuant to IRM 4.90.8, the evaluation of internal controls is mandatory in each examination and should be part of the decision making process when selecting the scope and appropriate audit techniques. Additionally, comments on the effectiveness of internal controls must be made in the work papers.

4.90.15.3  (06-03-2013)
Fraud Process for a Government Entity and/or Related Party

  1. When indicators of fraud are discovered during the examination of a government entity and/or a related party, the Specialist will initiate a discussion with the group manager and the group’s FSLG Fraud Subject Matter Expert (SME). If the group manager and SME concur, the Specialist and/or SME will contact the FSLG Fraud Coordinator (FC) to discuss the indicators of fraud. For a list of indicators of fraud, see IRM 25.1.2.3.

  2. The FC serves as the main contact person for the Specialists concerning fraud related issues. If necessary, the TE/GE Fraud Specialist (FS) may be contacted. The FS serves as a resource and will provide additional guidance to enhance further development to assess the potential of whether fraudulent transactions exist. For a list of TEGE Fraud Coordinators and TEGE Fraud Specialist, link to Tax Exempt/Government Entities

  3. If the Specialist, group manager, SME and FC agree that indicators of fraud are present, the SME will contact a Fraud Technical Advisor (FTA) in their area to discuss the documented fact scenario of the case. The FTA serves as a resource person and will provide additional guidance to enhance further development to assess the potential of whether fraudulent transactions exist within a government entity or a related party.

  4. If there is agreement that the potential for fraud exists in a government entity and/or a related party, the SME or FC will arrange a five-way conference, if necessary, with the Specialist, the group manager, SME, FC and the local FTA.

  5. Specialists and/or SME will conduct the necessary internal research (i.e. IDRS, CBRS, etc.) when questions arise regarding related taxpayer transactions with the government entity (i.e. determining if the related party filed returns or if they have reported income and/or deductions correctly on their returns). Research may also be necessary to support the indicators of fraud on a government entity and/or related party. Research requests should be routed to the SME or FC.

4.90.15.4  (06-03-2013)
Procedures on Fraud Development Leads (FDLs) of a Related Party during an Examination of a Government Entity

  1. If the FTA agrees that indicators of fraud exist on a related party, the Specialist will generate an FDL. The FDL consists of Form 5666, TEGE Referral Information Report, and any information and/or documentation (i.e. IDRS research, CBRS, cancelled checks, invoices, etc.) on the related party in question discovered during the examination of the government entity. The Specialist will prepare the Form 5666 and attachments.

  2. The SME and the FC may assist the Specialist with the preparation of the FDL.

  3. The SME will submit the FDL to the FC.

  4. The FC will forward the FDL to the appropriate Planning and Special Programs (PSP) and provide a courtesy copy to the appropriate FTA Group Manager.

  5. If it is agreed by the FC and FSLG Group Manager that it would be beneficial to have another business unit examiner assigned to work with the Specialist on the open examination of the government entity, the Specialist will prepare Form 6229, Collateral Examination. The other business unit will obtain the information needed for the development of their business unit fraud case in conjunction with the government entity. The Form 6229 will be given to the accepting business unit and a copy will be forwarded to the FC.

4.90.15.5  (06-03-2013)
Fraud Procedures on a Government Entity

  1. If the FTA agrees that indicators of fraud exist on a government entity, the Specialist will prepare Form 11661, Fraud Development Recommendation – Examination, for fraud development consideration. The FC and FTA may assist the Specialist in preparing the Form 11661. See IRM 25.1.2.2(2).

  2. After review and approval by the group manager of Form 11661, the Specialist will forward the Form 11661 to the FTA and a copy to the FC. Upon FTA acceptance, a copy of the Form 11661 will be provided to the FC. See IRM 25.1.2.2(3).

  3. If the FTA recommends fraud development, the FTA will complete Section 7a of Form 11661 and return the form to the Specialist and a copy to the FC. The Specialist will perform the necessary steps to update the case controls to Status Code 17 on RCCMS/AIMS. See IRM 25.1.2.2(5).

  4. The Specialist and the FTA will prepare a plan of action to develop and document fraud. The Specialist will then proceed with the plan until affirmative acts of fraud are established or a determination is made that the potential for fraud no longer exists. See IRM 25.1.2.2(4). The plan must:

    1. Outline the steps required to establish affirmative acts (proof) of fraud.

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

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

    4. Specify any direct assistance by the FTA.

    The role of the FTA can be advisory or consultative in nature.

  5. There must be a follow up plan within 60 days of the initial Plan of Action and within 60 days of all subsequent action plans. The follow up plans may be documented in a memorandum, on Form 11660, Fraud Development Checksheet, or other document intended for this purpose.

    Note:

    Under no circumstance should the Specialist, SME or group manager contact Criminal Investigation (CI) at this stage.

  6. A case will remain in fraud development Status Code 17 as long as there is active FTA involvement in an ongoing audit, or until the FTA recommends one of the following actions (see IRM 25.1.2.2(7)):

    1. return the case on AIMS to Status Code 12, when it is determined that the potential for fraud no longer exists, as evidenced by the reasons and decisions documented on Form 11661;

    2. a referral to CI for criminal investigation; or (c)

    3. assertion of the civil fraud penalty under IRC section 6663 and/or the fraudulent failure to file penalty under IRC section 6651(f) on Form 11661.

  7. Specialist must request copies of the original tax returns. See IRM 25.1.2.2(5).

  8. If it determined that the potential for fraud no longer exists, the Specialist will contact the FC and the FTA and provide the reason(s) and the recommendation to return the case to AIMS Status Code 12. The FTA will document and forward the Form 11661 to the Specialist, with a copy to the FC. See IRM 25.1.2.2(6).

4.90.15.6  (06-03-2013)
Criminal Fraud

  1. When the Specialist establishes that an affirmative act(s) (firm indicators) of fraud exist, the Specialist should suspend the examination, including all contact with the taxpayer and/or representative and discuss the audit results with the group manager, FC and the FTA. See IRM 25.1.1.3(1) and (2), Indicators of Fraud vs. Affirmative Acts of Fraud.

  2. If the FTA agrees that the case meets criminal criteria, the Specialist will prepare Form 2797, Referral Report of Potential Criminal Fraud Cases, and forward the form, via Microsoft Outlook/Secured Messaging (electronically) for approval (clearance). The FTA and the FC are available to assist with the preparation of Form 2797, if needed. See IRM 25.1.3.2.

  3. The Specialist must suspend the examination, including all contact with the taxpayer and/or representative. See IRM 25.1.3.2(1).

  4. The completed Form 2797 will be routed through the FSLG group manager, the FTA, and the FTA manager for review and concurrence. Upon approval, the FTA group manager will forward the Form 2797 to the appropriate CI field office for consideration.

    Note:

    The Specialist will send a copy of Form 2797 to the FC when the form is sent to the group manager for review.

  5. See IRM 25.1.3.3, Referral Evaluation, through 25.1.3.5, Declined Criminal Referrals, for a description of the CI evaluation process. The Specialist will electronically forward a copy of the accepted or declined referral the FC.

  6. If CI declines the referral, the civil fraud penalty and/or fraudulent failure to file penalty should be considered. See IRM 4.90.15.7.

  7. If the criminal referral is declined for criminal investigation or if the criminal investigation is subsequently discontinued and the FTA and the Specialist determine that fraud (civil and criminal) no longer exists, the Specialist will resubmit Form 11661 to the FTA for recommendation to return the case on AIMS to Status Code 12.

  8. If the referral is accepted by CI, the Specialist will update the case on AIMS to Status Code 18 (Accepted by CI) and electronically forward a copy of the Form 2797 to the FC.

4.90.15.7  (06-03-2013)
Civil Fraud

  1. When affirmative acts of fraud have been established and it is determined that criminal criteria (criteria used to accept a case for criminal investigation) are not met, or the criminal proceeding has been completed; the FTA may recommend assertion of the civil fraud penalty (filed return) IRC §6663 and/or assertion of the fraudulent failure to file (FFTF) penalty (delinquent return) IRC §6651(f) via Form 11661.

  2. If the civil fraud penalty is recommended by the FTA, the FTA will send the completed Form 11661 to the Specialist, his/her group manager, and send a copy to the FC. The Specialist will complete the development and write up the penalty. The FC and/or the FTA will assist with the write up of the penalty, if the need arises. The case will stay in Status Code 17 during this process.

4.90.15.8  (06-03-2013)
Reporting Fraud without Established Examination

  1. If a Specialist is contacted by an individual or given information asserting allegations of potential wrong doing by a non-government entity or individual, the Specialist will encourage the individual to provide a written statement, offer to take down the information and complete Form 5666, TEGE Referral Information Report, with the information, and forward to the Referral Coordinator in CPM; or refer the individual to IRS.gov and conduct a search on Whistleblower. See IRM 25.2, Information and Whistleblower Award.

  2. If the information is related to a government entity, record the information, complete Form 5666 and send to the Referral Coordinator in CPM. In the above situations, do not ask probing questions, make third-party contacts or request any documentation which may be construed as an examination.

4.90.15.9  (06-03-2013)
Fraud Database

  1. A fraud database will be maintained by CPM to track fraud referrals. It is critical that copies of all Forms 5666, 6229, 11661 and 2797 prepared for FSLG cases and related cases be forwarded to the FC.


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