5.20.12  Initial Contact and Research Actions Related to Abusive Tax Avoidance Transactions cases

Manual Transmittal

April 16, 2013

Purpose

(1) This transmits revised IRM 5.20.12, Abusive Tax Avoidance Transactions, Initial Contact and Research Actions related to Abusive Tax Avoidance Transactions cases.

Material Changes

(1) IRM 5.20.12.1(5) updated with correct link.

(2) IRM 5.20.12.5 updated with correct link.

(3) IRM 5.20.12.6(3) updated to include penalty reference number for frivolous tax penalties.

(4) IRM 5.20.12.7(3) updated to include procedures for requesting access to yK-1.

(5) IRM 5.20.12.8 updated to included information on CBRS.

(6) Existing material in IRM 5.20.12.8 on Electronic Research moved to IRM 5.20.12.10.

(7) IRM 5.20.12.9 has been updated to incorporate Interim Guidance Memorandum titled, Electronic Access to Suspicious Activity Reports for Title 26 Civil Tax Purposes by Revenue Officers, control number SBSE-05-0312-014, dated March 12, 2012.

(8) Existing material in IRM 5.20.12.9 on Foreign Bank and Financial Accounts moved to IRM 5.20.12.11.

(9) IRM 5.20.12.10 updated to include information on the Offshore Credit Card Project (OCCP) database. Updated links in this section.

(10) Removed notes in IRM 5.20.12.11(2) as the guidance is outdated.

(11) Editorial corrections made throughout IRM 5.20.12.

Effect on Other Documents

This material supersedes IRM 5.20.12, dated August 10, 2010. Incorporated Interim Guidance Memorandum titled, Electronic Access to Suspicious Activity Reports for Title 26 Civil Tax Purposes by Revenue Officers, control number SBSE-05-0312-014, dated March 12, 2012.

Audience

Distribution of this chapter is being made to all Collection employees including supervisory and management personnel in all Area offices. Additionally, distribution is being made to all Appeals offices, all Criminal Investigation offices, and all Counsel offices to enhance cooperation and coordination.

Effective Date

(04-16-2013)

Scott D. Reisher
Director, Collection Policy
Small Business/Self-Employed

5.20.12.1  (04-16-2013)
Overview

  1. Some Abusive Tax Avoidance Transactions (ATAT) encountered by revenue officers are designed to appear, and often are, quite complex and involve various transactions as well as numerous entities including trusts, partnerships, corporations, limited liability companies and offshore entities. These transactions and multiple or layered entities are often used by a taxpayer to make it difficult to track and follow title to assets or locate income sources.

  2. Research and investigation of ATAT cases does not entail techniques or tools unique to ATAT casework; however, some techniques are more commonly applied, such as use of the collection summons to follow income flow or to determine nominees, and nominee/alter ego/transferee relationships regarding title to assets.

  3. Potential fraud indicators may be present in ATAT cases. Contact your local Fraud Technical Advisor, when appropriate.

  4. Research to identify the nature of the promotion or transaction used by a taxpayer is important in developing an effective case strategy for resolution of ATAT cases.

  5. Research prior to contact is essential in ATAT cases. Guidance on conducting an initial analysis is located in IRM 5.1.30, Strategic Approach to Casework. Additional research may be necessary due to the complexity of an ATAT case. The focus of the investigation in an ATAT case is often to locate assets or create an accurate financial picture of a taxpayer that is participating in an abusive scheme. It is important to have a full understanding of the scheme and the transactions the taxpayer was involved with in order to maximize the effectiveness of any contacts.

  6. The Investigative Techniques home page located at the MySB/SE Collection website provides detailed insight into the nature and operational methods of various business types that may help to guide the revenue officer's research. The Investigative Techniques home page can be found by clicking on this link:http://mysbse.web.irs.gov/Collection/toolsprocesses/InvestTech/default.aspx.

5.20.12.2  (04-16-2013)
Initial Contact

  1. The initial contact time frames outlined in IRM 5.1.10.3.1, Initial Contact Time Frames, apply to all Field Collection cases, including ATAT cases. However, the use of an appointment letter to initiate contact is common in ATAT work due to the complexity and other factors found more often in ATAT inventories. Issuing an appointment letter requesting the taxpayer provide the needed information may provide for a more effective initial contact and allow the revenue officer to determine the level of cooperation to expect from the taxpayer.

    Note:

    If a contact letter is used to initiate contact, a field call to observe assets and the lifestyle of the taxpayer is recommended.

  2. In situations where the revenue officer determines the use of an appointment letter is the appropriate method for initiating contact with the taxpayer, the revenue officer will document the case history outlining the circumstances for the determination.

  3. When an appointment letter is used, the revenue officer will include Form 9297, Summary of Taxpayer Contact, listing the information and documents the taxpayer should bring to the scheduled appointment so that a complete financial statement can be secured. Revenue officers should refrain from summons action until after it is determined that the taxpayer will not voluntarily provide the information being sought.

    Note:

    In ATAT cases, the use of an appointment letter, along with the case history documenting why that approach is being used, within the time frames outlined in IRM 5.1.10.3.1, Initial Contact Time Frames, will meet the requirement for timely contact.

  4. Prior to making contact, the revenue officer will need to identify the proper person to contact. Because ATAT cases often include multiple entities and whipsaw assessments, care must be given to properly identify the contact person for each entity. Each whipsaw entity should be treated as an individual entity unless the key taxpayer (usually the IMF taxpayer) has now reported all income on their tax return.

  5. When the entity is a trust, the initial contact letter can be used to also request a copy of Form 56, Notice Concerning Fiduciary Relationship. This information is necessary to determine who has the authority to act for the trust.

5.20.12.3  (04-16-2013)
TXMODA Research

  1. Integrated Data Retrieval System (IDRS) research using command code TXMOD with definer A can provide valuable information regarding ATAT cases in areas such as Whipsaw Assessments, Examination Project Codes and Frivolous filer Indicators, in addition to specific account transactions and control bases.

5.20.12.4  (04-16-2013)
Use of TC 971 AC 266 and TC 971 AC 267 on Unagreed Whipsaw Assessments

  1. An abusive trust situation occurs when a taxpayer has attempted to reduce or eliminate the tax liability through the use of one or more layers of trust entities. When the subjects of the examination refuse to cooperate and the Service is unable to accurately determine the correct and agreed tax owed by each entity, the Service will issue whipsaw notices of deficiency (for example, one to the individual, one to the business trust, and one to the family trust), taxing the same income for each entity.

  2. When the abusive trust case has defaulted after issuance of the whipsaw statutory notice of deficiency due to no agreement received or petition sent to the court, a whipsaw assessment will be made. This means that the tax may be assessed multiple times; for example, assessment is made against the individual and each separate trust entity, but the liability will only be collected once. See IRM 5.20.6, Whipsaw Assessments , for additional information.

  3. Since the tax is only collected once in whipsaw assessment situations, each entity must be cross-referenced. The use of TC 971 AC 266/267 provides for identification and linking of the key and related cases. In most instances, the individual Form 1040 taxpayer will be identified as the key case. The key case will have a separate TC 971 AC 266 on each module that references each related entity involved in the whipsaw assessment. Each related case will have a TC 971 AC 267 to cross-reference the key case. TXMODA research for TC 971 AC 266/267 will identify cross references related to whipsaw assessments. Payments are not systemically cross-referenced and should be monitored to prevent over-collection of the liability.

5.20.12.5  (04-16-2013)
Project Codes

  1. When Transaction Code 424 (Examination Request Indicator) is present on TXMODA, research of the Exam project code will provide information regarding the nature of the abusive tax avoidance transaction identified by Examination. The project code can be located on TXMODA as the four digit numerical code following the literal SPCL-PROJ>. Once the project code has been identified, research can be done using the list available on the Abusive Transactions and Technical Issues website at http://mysbse.web.irs.gov/AboutSBSE/Exam/at/ExamAids/default.aspx.

5.20.12.6  (04-16-2013)
Frivolous Filer Indicators

  1. The Frivolous Return Program (FRP), located at the Ogden Campus, or a Service employee such as a revenue agent or revenue officer may have identified frivolous filings by a taxpayer during original return processing, amended return or claim processing, examinations, or contact with a taxpayer or their representative. In response to frivolous filing, Letter 3175 or Letter 3176, Response to Frivolous Documents/Returns Received from Taxpayers, may have been issued by the Service.

  2. When Letter 3175 or Letter 3176 is issued, documentation of issuance of the letter is input to IDRS via command code ACTON. Upon input to IDRS, record of the letter can be found in the TXMODA History section through an entry reflecting that the letter was issued and the date of issuance.

  3. A frivolous tax penalty is typically reflected as a TC 240 with penalty reference number 666 on TXMODA.

  4. See IRM 5.20.10, Frivolous Tax Submissions Subject to a § 6702 Penalty, for guidelines for the appropriate processing of frivolous returns and other specified submissions.

5.20.12.7  (04-16-2013)
yK-1 Research

  1. yK-1 is an interactive software tool and database developed and maintained by Headquarters Research. yK-1 uses K-1 data from corporations, flow-through returns, Form 851, Schedule K-1, and high income individual returns to visually depict relationships and income/loss flow between payers and payees. yK-1 draws graphs of nodes and links to help visualize complex corporate and flow-through structures.

  2. Visualization presented by yK-1 provides a graphic representation of the taxpayer and their investment relationship to other entities. It is not limited to direct investments and can display multiple levels of investment tiering. Where K-1 data is present, yK-1 research may provide a number of benefits on ATAT cases because it does the following:

    1. Expands knowledge of related entities, including shareholders and partners of entities which may not initially be apparent from other collection activity or research.

    2. Provides an analysis of relationships which may be useful in planning the scope of the taxpayer's cross compliance.

    3. Provides useful information in conducting a risk analysis, identifying significant returns of interest and helping to bypass tiers that are not of interest.

    4. Provides "footprints" which may indicate shelter activity.

    5. For promoter investigations, yK-1 may identify unknown investors and help in organizing data from other sources.

  3. Revenue officers can request access to yK-1 by submitting an electronic Form 5081 . There are two steps to becoming a user; securing a database account and downloading and installing the program files. More information on how to gain access and to use yK-1 can be found on the yK-1 Link Analysis Tool website at http://k1.soi.irs.gov.

    Note:

    yK-1 Disclosure: The output from the yK-1 Link Analysis Tool (electronic or hardcopy) contains tax return information of multiple taxpayers. Pursuant to IRC 6103, 7213, 7213A, and 7431 this information cannot be disclosed to the taxpayer or his representative.

5.20.12.8  (04-16-2013)
Currency and Banking Retrieval System (CBRS)

  1. The Currency and Banking Retrieval System (CBRS) is a system of databases operated and maintained by the Detroit Computing Center Information Technology personnel. It includes information from returns required under 26 USC, such as Form(s) 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, and Currency Transaction Reports (CTR) required under 31 USC 53.

  2. WebCBRS information is useful in identifying cash activity that may not be accurately reported on the income tax return or disclosed on financial statements. WebCBRS information is a "window" on the underground economy, with invaluable information not obtainable elsewhere. Revenue officers can refer to the WebCBRS User’s Guide for guidance in interpreting WebCBRS extracts. See IRM 4.26.4, Currency and Banking Retrieval System.

  3. Access to WebCBRS begins with an Online 5081. Once a password is obtained, a tutorial for using CBRS can be found on the CBRS website. The link to WebCBRS is https://cbrs.web.irs.gov/cbrsnet/ .

5.20.12.9  (04-16-2013)
Suspicious Activity Reports (SAR)

  1. Suspicious Activity Reports (SARs) are reports made by a financial institution to the Financial Crimes Enforcement Network (FinCEN) regarding suspicious or potentially suspicious activity. SARs include detailed information about transactions that are or appear to be suspicious which is stored on WebCBRS.

  2. Access to Bank Secrecy Act (BSA) information through WebCBRS for tax purposes is governed by the Memorandum of Understanding (MOU) between the Financial Crimes Enforcement Network (FinCEN) and IRS dated September 24, 2010.

  3. Although SAR information can now be used for civil tax purposes, no SAR information, including the existence of a SAR, can be disclosed in the course of any compliance activity to the filer of the SAR, the subject of the SAR, or to any party outside the IRS without prior consultation with the SAR Coordinator and, as necessary, with the BSA FinCEN Liaison. Within IRS, SAR information can only be shared on a strict need to know basis.

  4. SAR information is subject to UNAX guidelines and inquiries must only be made in connection with specific and assigned tax administration matters.

  5. Revenue officers are authorized access to SAR information in connection with active and assigned cases.

    • ATAT and GS 13 field collection revenue officers are authorized online access to SARs through WebCBRS.

    • Revenue officers, not authorized online access to SARs, can request a search for SARs through their Area SAR Gatekeeper. The link to the Area SAR Gatekeepers can be found on the Suspicious Activity Reports webpage at http://mysbse.web.irs.gov/Collection/toolsprocesses/sar/default.aspx

  6. Getting online access to SARs:

    1. Prior to being authorized access to electronic SAR documents, revenue officers and their managers must complete required security briefings. Revenue officers must complete the following briefing on Enterprise Learning Management System (ELMS) before submitting an online 5081 request.
      - ELMS 41166, Safeguarding Online Access and Using SAR Information.
      Group managers must complete this same briefing (ELMS 41166) as well as
      - ELMS 41167, Manager Online SAR Audit Trail Reviews.

    2. Once the revenue officer and group manager have completed the briefings, the revenue officer will prepare an online 5081 request. How the revenue officer does this will depend on whether the revenue officer already has access to CBRS.
      - If the revenue officer already has an active CBRS account, the revenue officer will request a modification of their existing CBRS account. The revenue officer will do this by accessing their current CBRS application and clicking the "modify" button.
      - If the revenue officer does not have an active CBRS account, the revenue officer will prepare an online 5081 request using the application titled: SBSE Collection Restricted Access- Gatekeeper Access (WebCBRS).
      - In either circumstance, the following statement is included in the Special Instruction box: "Modify CBRS User Profile For full SAR Access - SBSE ATAT or Grade 13 Revenue Officer authorized online access. Requestor profile to include access to All SAR Documents. Required briefing(s) have been completed."

  7. SARs and SAR information must be treated with the same security as information received from a confidential informant. The following procedures must be followed to protect SARs and SAR information:

    1. Attach Form TDF 15-05.11, Sensitive But Unclassified (SBU) cover sheet to the outside of any case file containing a SAR or SAR information. This cover sheet clearly identifies documents that must always be under the personal observation of an authorized IRS employee or maintained in a locked container.

    2. Keep all SARs and SAR information inside a sealed confidential envelope labeled "SAR Information" . This includes both SARs filed on the case subject and SARs filed by the case subject.

    3. No specific reference to "SAR" or "Suspicious Activity " should ever be made in the case history. The compliance employee can refer to the SAR only as a "confidential informant" as the information source in work papers or in the case file history, and note that the information is located in the confidential envelope.

    4. If work papers or the case file history reference the SAR or information derived from a SAR, the work papers and case file history must be maintained in the confidential envelope.

    5. Upon advice of Counsel and the Disclosure Office, compliance employees must respond to public inquiries on how information contained in a SAR became known by replying:

      I cannot disclose that information. The authority to withhold that information is contained in Internal Revenue Code section 6103(e) (7).

    6. When SAR information is no longer needed or when closing the case, the revenue officer should destroy any SAR documents, work papers, or any documentation referencing the SAR or SAR information.

  8. Managers of employees with electronic access to SARs must conduct online reviews of SAR audit trails for his employees’ logons, logoffs, and SAR records access no less than annually and for a period of no less than 30 days of SAR access within the past year. See IRM 1.4.50.11.6, Suspicious Activity Report (SAR) Monitoring, for additional information.

  9. For more guidance including instructions for requesting SAR research through the Area SAR Gatekeeper refer to the Collection SAR webpage on MySBSE at: http://mysbse.web.irs.gov/Collection/toolsprocesses/sar/default.aspx.

5.20.12.10  (04-16-2013)
Electronic Research

  1. Electronic research can lead to useful information on ATAT cases. The SB/SE Collection ATAT and IRS Abusive Transactions and Technical Issues websites contain a number of resources for conducting electronic research.

  2. Information on specific promotions and transactions encountered in ATAT cases can be found on the Issues and Procedures website at http://mysbse.web.irs.gov/exam/tip/default.aspx.

  3. The Offshore Credit Card Project (OCCP) database is a web based application that contains financial information on taxpayers that have accounts offshore. It includes data from John Doe summonses issued to offshore credit card companies, third party processor and merchant accounts. Information has also been received from Exchange of Information and through other government agencies such as the Security Exchange Commission. The database is maintained by LB&I Offshore Compliance Initiatives (OCI) group and is a potential source for financial information. Revenue officers can request

    • Access to the OCI Application through the online 5081 process. The application is titled, ASTARS - OCI Users (ASTARS). The link to the OCCP database is http://vci.enterprise.irs.gov/OCI_PROD/.

    • OCI research by sending an email to "*SBSE Area # OCI Research" with the search criteria, e.g. Names, Addresses, Account Numbers, Telephone Numbers, email addresses, and bank information, such as a bank name, or its country.

  4. The International Collection website contains contact names and useful information on international issues and can be found by clicking on this link: http://mysbse.web.irs.gov/Collection/international/default.aspx.

  5. The Investigative Techniques home page located at the MySB/SE Collection website contains links to internet resources and other valuable information. The Investigative Techniques home page can be found by clicking on this link:http://mysbse.web.irs.gov/Collection/toolsprocesses/InvestTech/default.aspx.

  6. Additional information and links can be accessed through the Collection E-Business Corner website by clicking on this link: http://mysbse.web.irs.gov/Collection/toolsprocesses/EBusiness/default.aspx.

5.20.12.11  (04-16-2013)
Foreign Bank and Financial Accounts

  1. Foreign banking information can be valuable in working ATAT cases and can be utilized as a source to trace a taxpayer's assets and income. One resource available to obtain foreign financial information is the Treasury Department's Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1. FBAR reports are filed at the Enterprise Computing Center in Detroit and are entered in the Currency and Banking Retrieval System (CBRS).

  2. FBAR reports must be filed by any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. Failure to file FBAR reports when required to do so may result in civil and criminal penalties.

    United States persons include a U.S. citizen or resident, a domestic partnership, a domestic corporation, and a domestic estate or trust.
    A "financial account" includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. The term "financial account" generally also encompasses accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund. An example of such a commingled fund account would be a mutual fund account.

  3. Information required on FBAR reports includes:

    • Number of accounts.

    • Type of accounts.

    • Names of financial institutions.

    • Last name or organization name of account holder(s).

    • Taxpayer Identification Number.

  4. FBAR information may be valuable in working ATAT cases and may be secured through research of IDRS command code IRPTR, and CBRS research. IRPTR research will indicate whether a taxpayer has filed an FBAR report. Once FBAR activity has been noted through command code IRPTR, a revenue officer can request CBRS research to obtain transcript data from FBAR filings.

  5. FBAR filings can provide indicators of offshore activity by a taxpayer. Foreign banking information can be utilized to "follow the money" to trace a taxpayer's assets and income. FBAR information can also be used to determine if a taxpayer has been forthcoming with financial information.

    Note:

    Administrative collection action cannot be taken against funds held offshore unless the funds are on deposit in countries with which the U.S. has a collection tax treaty, funds are on deposit in an offshore account of a U.S. bank, or the funds are on deposit with an offshore financial institution that has a branch in the U.S. or a U.S. territory. See IRM 5.11.1.3.4 , Property Outside the United States, for additional information.


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