9.5.3  Criminal Investigation Strategies

9.5.3.1  (04-19-2006)
OVERVIEW

  1. Tax crimes are those which are in violation of the criminal statutes of Title 26, Title 18 and/or Title 31 of the Code of Federal Regulations as applicable to Title 26. Although violations of narcotics, money laundering or currency statutes usually have tax ramifications, those types of violations, will be discussed in separate sections.

  2. Criminal Investigation strategies consist of Compliance, Money Laundering, International and Terrorism. The Annual Business Plan (ABP) issued each fiscal year by the Chief, Criminal Investigation (CI), provides specific direction relative to the major strategies and operational priorities. The ABP also attempts to identify emerging areas of non-compliance, so that resources can be redirected, if required. Timely identification and intervention often prevents "emerging areas" from becoming more serious compliance problems. This section addresses the various programs and initiatives and selectively describes some of the fraud schemes routinely encountered.

  3. Also introduced in this section are the Money Laundering and Terrorism strategies.

  4. Criminal Investigation’s strategies are classified in terms of:

    1. priorities within the program areas

    2. initiatives in which CI participates

    3. schemes encountered in the program areas

    4. other situations to which the special agent should be sensitive when conducting an investigation

9.5.3.2  (02-09-2005)
Compliance Strategy

  1. Criminal Investigation’s Compliance strategy is comprised of the following programs:

    1. Legal Source Income

    2. Illegal Source Income

    3. Narcotics

9.5.3.2.1  (02-09-2005)
LEGAL SOURCE INCOME PROGRAM

  1. The prosecution of legal source income program investigations is essential to promoting voluntary compliance with the tax laws. Criminal Investigation's primary resource commitment is to develop and investigate legal source income investigations. Legal source income investigations involve legal industries and legal occupations, and more specifically, legally earned income. The primary motive or purpose of the illegal activity is the violation of tax statutes. Criminal Investigation is solely responsible for investigating these violations. The legal source income program includes those investigations that threaten the tax system, such as the Questionable Refund Program (QRP), unscrupulous return preparers (RPP) and frivolous filers/nonfilers investigations. Excise tax and employment tax investigations are also important components of the legal source income program. The legal source income program addresses tax investigations involving:

    1. legal occupations and industries

    2. Title 26 violations

    3. Title 18 United States Code (USC) §286, 18 USC §287, and 18 USC §371 (Klein conspiracy) violations

    4. CI is the sole investigating agency

  2. Within the legal source income program are the following initiatives, which are all part of the overall IRS Strategic and Program Plan or an ongoing commitment by the IRS:

    1. Income Tax — investigations relating to income from businesses, investments, or other legal activities and industries

    2. Employment Tax — investigations relating to unreported, underreported, unpaid, or underpaid employment tax obligations

    3. Excise Tax – investigations involving violations of the excise tax laws

    4. Abusive Tax Schemes – investigations involving abusive and/or fraudulent schemes to evade taxes which encompass violations of the Title 26 and related statutes where multiple flow-through entities are used as an integral part of the schemes. Such schemes are characterized by the use of trusts, Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards, and other similar instruments.

    5. Gaming — investigations relating to the income generated from the legal gaming industry

    6. Questionable Refunds (QRP) — investigations involving fraudulent tax refund schemes

    7. Unscrupulous Return Preparers (RPP) — investigations involving preparers of false and/or fraudulent tax returns

    8. Frivolous Filer/Non-filers — investigations involving the most egregious non-filers

  3. The CI Annual memorandum determines the investigatory emphasis on these priorities.

9.5.3.2.1.1  (02-09-2005)
Income Tax Investigations

  1. Legal source tax crimes encompass many types of investigations. The majority of these investigations involve individuals who earn income from legal industries. General tax fraud investigations are the main component of CI's effort to foster voluntary compliance. These investigations encompass the broadest base of taxpayers and involve individuals from all facets of our economy.

9.5.3.2.1.2  (02-09-2005)
Employment Taxes

  1. Employment tax investigations seek to identify those individuals who evade or fail to report and pay employment taxes.

9.5.3.2.1.2.1  (02-09-2005)
Employment Tax Schemes

  1. The emergence of employee leasing companies that fail to pay over taxes withheld from employees is an area of growing concern. Employee leasing is an industry where companies contract with a business to handle administrative duties, hire all the company's employees, and lease the employees back to the original company.

  2. Another concern in the employment tax area is businesses that "pyramid" employment taxes. This situation occurs when companies retain the taxes withheld from employees, then liquidate the company whenever they encounter any financial difficulties. Criminal Investigation is also actively pursuing bankruptcy investigations where companies are " pyramid" employment taxes and then file bankruptcy in an effort to evade the payment of these liabilities.

  3. Indications of employment tax fraud are typically discovered by the other operating divisions and then referred to CI. See IRM 25.1, Fraud.

9.5.3.2.1.2.2  (02-09-2005)
Employment Tax Investigations

  1. Title 26 USC §7512 and 26 USC §7215 are criminal provisions that may be useful in the employment tax area, especially in bankruptcy related tax crimes. See IRM 9.1.3, Criminal Statutory Provisions and Common Law.

  2. The penalty provided by 26 USC §7215 is not limited to the "willful" failure investigations, to which these other penalties are applicable. Title 26 USC §7215 (b) of the new code provides that the penalty provided by 26 USC §7215 (a), is not applicable in two types of situations:

    1. The penalty is not applicable if the person in question shows that there is reasonable doubt as to whether the law required the collection of the tax or that he/she was the one who was required by law to collect the tax. For example, in an investigation involving employment taxes, the target may show that there was reasonable doubt as to whether he/she was an employer or was simply engaged in a contract with an independent contractor. Another example where the penalty would not be applicable is when the individual in question can show that there is reasonable doubt as to who is the proper collection agent.

    2. The penalty in 26 USC §7215 (a) is not applicable when the target of the investigation can show that his/her failure to collect, deposit and/or keep the taxes in the separate account was due to circumstances beyond his/her control. For this purpose, however, a lack of funds immediately after the payment of wages (whether or not resulting from the payment of the wages) is not to be considered circumstances beyond the individual’s control. This can be illustrated by an employer subject to the requirement of 26 USC §7512, who has gross payroll requirements of $1,000, with respect to which he/she is required to withhold $100 of income taxes. If the employer had on hand only $900 and used this entire amount to pay his/her employees' salaries, withholding nothing, he/she would not be relieved of the penalty imposed by 26 USC §7215(a). A lack of funds occurring after the payment of wages (so long as it was not immediately after) would, however, qualify under this exception if it were due to circumstances beyond the person's control. Examples of such circumstances are theft, embezzlement, destruction of the business as the result of fire, flood, or other casualty, or the failure of a bank in which the person had deposited the funds prior to transferring them to the trust account for the government. However, lack of funds arising after payment of wages, resulting, for example, from the payment of creditors will not be considered circumstances beyond the person's control.

  3. An appropriate investigation will be made in each situation to determine whether the statutory exceptions set forth above are applicable, and the final report will set forth the results of such investigation.

9.5.3.2.1.2.3  (02-09-2005)
Balancing the Criminal and Civil Aspects of Employment Tax Investigations

  1. Once a criminal investigation is initiated, the other operating divisions will not contact the subject, his/her representative, or employees about the collection of the amounts due under the notice, or take any other action to enforce collection of those amounts, without the prior concurrence of the Special Agent in Charge (SAC). No part payment or installment agreement covering prior delinquencies will be entered into with the subject after the referral to CI. Voluntary payments by the subject after the referral will be reported to the SAC. This does not preclude issuance of collection first notices, acceptance of voluntary payments, or the filing of notices of lien, if required to adequately protect the government's interests.

  2. Enforced collection action may be taken on delinquencies for periods prior to the time the subject received the notice. In some instances, such action will include the filing of proof of claim in a pending insolvency proceeding because the subject's assets, or at least some portion thereof, will be under the jurisdiction of a court and will not be subject to levy. However, the SAC will be informed of any proposed enforcement action to ensure that it does not jeopardize a potential criminal investigation.

  3. The SAC may concur with the proposed enforced collection action relating to the amounts due under a referred notice, when it appears that such action will result in substantially full payment of the liability covered by such notice.

  4. Concurrence will not be given if the proposed action will result in only a small partial payment.

  5. The probable effect of a proposed action that will likely result in obtaining more than a small partial payment, but less than full payment of the liability, will be determined based on its likelihood of jeopardizing successful prosecution. Proposed enforced collection action involving participation in an insolvency proceeding will be considered to likely result in obtaining more than a small partial payment of the liability but less than full payment.

9.5.3.2.1.2.4  (02-09-2005)
Employment Tax Investigations

  1. Trust fund penalty investigations are referred directly to the US Attorney's Office (USAO) by the SAC. Criminal Tax (CT) Counsel should be consulted early in the investigation for advice on potential strengths and weaknesses.

  2. Concurrence of a proposed enforced collection action which is related to the liability due under the notice, will not be given by the SAC in those instances when the investigation was transmitted to the local USAO without the approval of said USAO.

  3. Concurrence requests may be oral or written from the other operating divisions in a proposed enforced collection action which relates to liabilities due under a referred notice. The SAC may also reply orally; however, his/her response should be confirmed in writing as soon as practicable.

  4. Reporting procedures will be followed for "Discontinued Investigations" returned to the Collection function (See IRM 9.5.14, Investigation Closing Procedures).

  5. Information concerning payments made by a subject after the criminal investigation was referred to the attorney for the government, or for any enforced collection action related to prior delinquencies, will be transmitted to the attorney for the government.

  6. Trust fund penalty investigations will be processed in accordance with established procedures. The SAC will notify the other operating divisions promptly of the disposition of the criminal aspects of an investigation (See IRM 9.5.14, Investigation Closing Procedures). The SAC may furnish suggestions to the other operating divisions for future collection action in:

    1. any referral which was declined by CI

    2. an investigation in which CI declined prosecution but where the taxpayer's actions might result in more favorable circumstances for a prosecution recommendation at a later date

9.5.3.2.1.3  (02-09-2005)
Excise Tax

  1. An excise tax is a duty levied upon the manufacture or sale of goods and services, upon certain occupations, and upon certain activities of non-profit organizations. While income taxes are based on net income or net profits and are graduated, excise taxes are not. Excise taxes can be based upon any of the following factors:

    1. selling price of merchandise or facilities

    2. services sold or used

    3. number of units manufactured, etc.

    4. weight

    5. volume of units sold

    6. nature of occupation

  2. Civil excise tax investigations cannot be appealed to the US Tax Court. All appeals by excise tax litigants must be made to either the US Court of Claims or to the US District Court, and then only upon prepayment of the taxes.

  3. Certain excise tax returns are required to be filed on either a fiscal-year or calendar-year basis. In general, excise tax returns are filed on a calendar quarter-year basis.

  4. The excise tax categories of most frequent interest to CI include:

    1. Manufacturers’ excise taxes: automotive and related items (gasoline, gasohol sales, gasoline sales used for gasohol, and tires); coal from underground mines and from surface mines; recreational equipment such as firearms (pistols, revolvers, other firearms, shells and cartridges); and sporting goods (fishing equipment, hunting, and related equipment)

    2. Occupational taxes: wagering; brewers; retail liquor dealers; retail dealers in beer; wholesale liquor dealers; wholesale dealers in beer; and other limited retail dealers

    3. Facilities and services: communications (local and toll telephone service and teletypewriter service) and transportation (transportation of persons by air, inland waterway users) fuel and transportation of property

    4. Heavy trucks and trailers retailers taxes: truck parts and accessory installations; truck chassis or body; truck trailer or semi-trailer chassis or body

    5. Miscellaneous excise taxes: seabed mining; environmental taxes; highway motor vehicle use tax; foreign insurance policies; wagering taxes; liquor taxes; and tobacco taxes

  5. Information concerning the investigation of these types of excise taxes can be found in IRM 9.5.11, Other Specialized Investigations.

    Note:

    The preceding excise taxes on alcohol, tobacco, and firearms are not under the jurisdiction of CI. Those items are taxed under Subtitle E of Title 26. Responsibility for the enforcement of excise taxes on alcohol, tobacco, machine guns and certain other firearms is vested exclusively with the Department of Justice (DOJ), Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).

9.5.3.2.1.3.1  (02-09-2005)
Fuel Excise Tax

  1. Since the mid-1980s, organized criminal elements have devised elaborate schemes to steal Federal and state motor fuel excise tax revenue. The impact of these evasion schemes went far beyond the substantial revenue loss. These criminal enterprises adversely affected the fuel industry, as well as, eroding the market share of legitimate dealers and forcing some out of business. Since 1991, CI has made a concerted effort to disrupt those organized criminal elements responsible for perpetrating motor fuel evasion schemes across the country. These enforcement efforts provided the impetus for the enactment of important legislative changes to reduce evasion, and materially contributed to dramatic and sustained increases in Federal and state motor fuel tax revenue.

9.5.3.2.1.3.2  (02-09-2005)
Wagering Excise Tax

  1. A wagering excise tax is imposed on wagers and is a percentage of the wager. The tax is assessed on the individual who accepts wagers. A special wagering tax also exists and is a flat fee to be paid by each person who is engaged in receiving wagers or employed by such person. Wagering tax investigations are often joint efforts with other agencies. These joint investigations would then become part of the illegal source income program area. For additional information concerning CI’s involvement in the enforcement of the wagering taxes see IRM 9.5.11, Other Specialized Investigations.

  2. There are special disclosure restrictions regarding wagering investigations (See IRM 9.3.1, Disclosure).

9.5.3.2.1.4  (02-09-2005)
Abusive Tax Schemes

  1. Abusive tax promotions have increased in recent years, creating a significant threat to the nation's revenue. Promoters and return preparers have grown increasingly bold and sophisticated. The internet gives promoters instantaneous and relatively inexpensive access to a wide audience. This has allowed tax schemes and scams to grow at phenomenal rates, often faster than the IRS is able to investigate and stop them. Effective early action against promoters and preparers is needed to reverse this disturbing trend. Criminal Investigation plays an active role in combating abusive tax schemes by targeting the promoters and egregious clients of these schemes. Criminal Investigation and Small Business/Self Employed (SB/SE) are cooperating in an effort to utilize all of the civil and criminal remedies available to stop the proliferation of abusive tax schemes.

  2. Abusive tax scheme investigations encompass violations of Title 26 and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes. These schemes are characterized by the use of trusts, Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex, involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

  3. Abusive tax scheme investigations will often involve the use of parallel proceedings to effectively stop an abusive promotion and protect the revenue of the Treasury (See IRM 9.5.13, Civil Considerations). Parallel proceedings are not joint proceedings; rather, they are distinct separate civil and criminal investigations. Criminal Investigation, SB/SE, and DOJ have developed the methods and means to implement both the civil and criminal statutes available in a coordinated strategy. The benefits of using parallel proceedings against promoters of abusive tax schemes are:

    1. An injunction usually stops the promotion much earlier than possible through criminal enforcement alone.

    2. Filing an injunction, accompanied by a press release, quickly publicizes the government's position on a promoter or promotion.

    3. Parallel investigations enable civil and criminal agents and attorneys for the government to share information where appropriate, thus enhancing efficient use of government resources.

9.5.3.2.1.5  (02-09-2005)
Gaming

  1. During recent years, there has been unprecedented growth in the legalized gaming industry. Criminal Investigation has increased its attention to this industry as it relates to the enforcement of tax, money laundering, currency and other criminal statutes within CI’s jurisdiction. Criminal Investigation also recognizes that traditional gaming investigations involving illegal bookmaking and numbers operations remain areas of concern.

  2. The gaming initiative consists of two primary activities:

    1. traditional investigative efforts directed at persons suspected of violating laws within CI’s jurisdiction

    2. important liaison activity in cooperation with Federal and state gaming boards, commissions, and other regulators (includes participation in writing state gaming regulations, assisting in licensing activities, and developing investigations)

  3. To address concerns regarding the rapid expansion of domestic gaming, Congress passed the National Gaming Impact Study Commission Act, Public Law 104–169, which requires a comprehensive legal and factual study of the social and economic impacts of gambling in the United States upon:

    1. Federal, state, local, and Native American tribal governments

    2. communities and social institutions

  4. Regulations implementing the Bank Secrecy Act (BSA) Title 31 were amended to include casinos operated by or on behalf of Native American tribes within the definition of a financial institution as set forth in those regulations. The amendments extend the reporting and record-keeping requirements and anti-money laundering safeguards of the BSA to tribal casinos.

9.5.3.2.1.5.1  (02-09-2005)
Gaming Investigations

  1. Gaming investigations differ from wagering excise tax investigations. In a gaming investigation, a subject is typically under investigation for income tax, money laundering, or currency violations. Similar to wagering tax investigations, gaming investigations can be joint efforts with other agencies. These joint investigations would then become part of the illegal source income program.

  2. Title 18 USC §1955 (Prohibition of Illegal Gambling Businesses) is no longer one of the charges for which CI can recommend prosecution; however, it is one of the specified unlawful activities set forth in 18 USC §1956, money laundering.

9.5.3.2.1.5.2  (02-09-2005)
Information Available From State Regulatory Agencies on Gaming

  1. A number of states gather and maintain substantial information relating to individuals and/or entities associated with the gaming industry. Much of the information is readily available to law enforcement and may be helpful when conducting an investigation. As an example of the type of information available from local or state regulatory agencies, the State of New Jersey, Department of Law and Public Safety, Division of Gaming Enforcement, completes a financial investigation on all individuals associated with casino operations, See 9.4.4, Request for Information.

9.5.3.2.2  (02-09-2005)
Refund Fraud Investigations

  1. Fraudulent refund schemes fall within two categories:

    1. Questionable Refund Program (QRP) - These investigations generally consist of one or more tax returns that are determined to be false and involve violations of 18 USC §286 and 18 USC §287. The returns appear to be prepared by the same individual or group of individuals based on similar return characteristics or the same "modus operandi."

    2. Return Preparer Program (RPP) - These investigations are generally perpetrated by unscrupulous return preparers who knowingly add false expenses, deductions, credits, or exemptions to a client’s tax returns to decrease that client’s tax liability, resulting in a larger refund or significantly less tax, due and owing. The investigations generally involve violations of 26 USC §7206(1) and 26 USC §7206(2).

9.5.3.2.2.1  (02-09-2005)
Fraud Detection Center

  1. The Fraud Detection Centers (FDC) are responsible for detecting, developing and referring information involving questionable refunds (QRP) and unscrupulous return preparers (RPP) to the appropriate field office. Therefore, all information relative to QRP and RPP schemes is to be sent to the FDC. Fraud Detection Centers will work with field offices to select, evaluate, develop and number as primary investigations (PIs), QRP and RPP investigations. Fraud Detection Centers will assign a fraud scheme code to each QRP/RPP investigation (See IRM 9.9.4, Criminal Investgation Management Information System).

9.5.3.2.2.2  (02-09-2005)
Sources of Refund Fraud Investigations

  1. Refund fraud investigations can originate from a variety of sources, including:

    1. information forwarded to the FDC by the IRS Campus regarding multiple returns filed by the same taxpayer

    2. fraud referrals from the other operating divisions that were secured during collection activity or involve a nonexistent address, taxpayer, employer, or excessive deductions

    3. information provided by the US Postal Service regarding delivery of numerous government checks to an address or a person showing unusual interest in the mail

    4. information regarding an excessive number of mail-forwarding requests

    5. information provided by an informant regarding an individual boasting about the amount of refunds received or a suspicious return preparer

    6. information provided by a private-sector return preparer who suspects return information submitted is false

    7. information provided by financial institutions relative to unusual deposit amounts either from electronic transfers or paper checks

    8. information provided by internet providers relative to numerous returns from the same IP address

    9. returns identified by the FDC that are linked by similar characteristics to returns identified as false as to a material item(s) and/or profiled based on similar schemes and then proven to be false as to a material item(s)

    10. information provided by prison officials regarding the delivery of numerous government checks, correspondence and/or suspicious activity involving inmates

    11. information provided by state and local authorities or other Federal agencies

9.5.3.2.2.2.1  (02-09-2005)
Potential Violations

  1. When conducting refund fraud investigations, the following violations may be applicable (See IRM 9.1.3, Criminal Statutory Provisions and Common Law):

    1. 18 USC §287

    2. 18 USC §286

    3. 26 USC §7206(1)

    4. 26 USC §7206(2)

    5. 18 USC §371

    6. 18 USC §1028

    7. 18 USC §2

  2. If there are any indications of substantive tax violations, i.e., the preparation, filing, or assisting in the preparation or filing of false documents or returns by an IRS employee, the Office of the Treasury Inspector General for Tax Administration (TIGTA) is to be notified immediately and the investigation will be conducted jointly by CI and TIGTA.

  3. Investigations involving counterfeiting and forgery statutes are the jurisdiction of the US Secret Service (see IRM 9.3.1, Disclosure).

  4. Investigations involving the use of the mail to defraud the Federal government are within the jurisdiction of the US Postal Service (see 9.3.1, Disclosure).

  5. Early detection of refund fraud enables the IRS to stop the issuance and delivery of refund checks to fraudulent claimants.

9.5.3.2.2.2.2  (02-09-2005)
False Claims Violations

  1. A violation of 18 USC §287 occurs upon the filing of a fabricated Federal income tax return wherein a false representation is made that the tax has been overpaid and there is a claim made for a refund of the overpayment.

  2. Special agents should understand the provisions of 18 USC §287 and 18 USC §286 and be prepared to coordinate their investigative activities with investigations conducted by the US Secret Service, the US Postal Service and/or another government agency. It is not unusual for individuals involved in refund fraud investigations to be involved in violations of other Federal statutes.

  3. There are circumstances when grand jury authorization for violations of 18 USC §287 and 18 USC §286 can be directly referred to the attorney for the government. See Department of Justice, Tax Division Directive No 96. Criminal Tax Counsel should be consulted.

  4. False claim investigations are considered tax related investigations and are subject to 26 USC § 6103 disclosure restrictions and the Department of Justice (DOJ), Tax Division, must approve prosecution recommendations.

9.5.3.2.2.2.3  (02-09-2005)
Identity Fraud Violations

  1. In the context of tax violations, 18 USC §1028 could be applicable where a subject steals another person's identity for the purpose of falsely representing his/her identity to the IRS. In such investigation(s), the individuals who steal the identities may be different from the individual(s) who actually file the tax return and ultimately obtain the false refund.

  2. Identity fraud must have a direct link to the substantive tax or conspiracy violation which is the focus of the criminal investigation.

  3. These are tax-related investigations and must be referred to DOJ, Tax Division, for authorization.

9.5.3.2.3  (02-09-2005)
Potential Forfeiture Provision

  1. 26 USC §7302

  2. 18 USC §981

  3. 18 USC §982

9.5.3.2.3.1  (02-09-2005)
Title 18 Forfeitures in Tax or Tax-Related Investigations

  1. The use of Title 18 seizure/forfeiture authority in tax or tax-related investigations will be limited to egregious situations where no reasonable alternative is available. Forfeitures in tax and tax-related investigations must be reviewed by Criminal Tax (CT) Counsel, have the concurrence of the Director of Field Operations and be approved by the Chief, Criminal Investigation. If approved, the Chief, CI, will then refer the matter to DOJ, Tax Division for authorization to pursue the forfeiture action pursuant to Directive 99 (see IRM 9.7.13, Title 26 Seizures and Forfeitures).

9.5.3.2.3.2  (02-09-2005)
Indicators of Refund Fraud

  1. Refund fraud investigations may be confined to a single field office or may extend to multiple field offices. The following are indicators of refund fraud:

    1. The name used on a fraudulent return(s) may be an alias, a fictitious name, a deceased person, a stolen identity or a variation of a preparer or filer's name.

    2. The address is usually the address of a hotel, a motel, a rooming-house, a post office box number, a non-existent address or general delivery. However, residential street numbers have been used on occasion. It is rare for the address used to be a legitimate address for the individual whose name is shown on the return.

    3. Form(s) W-2 (sometimes handwritten) are fabricated and false showing fictitious employer(s), false or inflated salary, and/or false or inflated tax withheld.

    4. The name of the employer shown on the Form(s) W-2 may or may not be an existing firm or person.

    5. Returns filed with false Schedule C(s) (see subsection 9.5.3.2.1.6.1.5.2).

    6. A substantial refund is claimed solely on the basis of the number of exemptions listed.

    7. An unrealistic amount is shown as tax withheld.

    8. Absence of or unrealistic social security information reflected on the Form(s) W-2. Unless an exempt occupation, such as state government employment is involved, the percent and maximum amounts of Social Security taxes withheld should agree with the law for the year involved.

    9. Absence of or unrealistic Employer's Identification Number shown on Form(s) W-2.

    10. Unusual delivery instructions such as different addresses being shown on Form(s) W-2 and the tax return, a boulevard address in small towns, a taxpayer's use of a post office box, general delivery, and/or mail forwarding service.

    11. Similarity of information, format, or writing on several returns. Frequently, investigations involving numerous false returns being filed by one person or group of persons can be detected by his/her continued use of similar names as to taxpayers, employers, exemptions, and types of deductions claimed; or similarity in the arrangement of the information and the printing, handwriting or typewriting appearing on the returns.

    12. Undeliverable refund checks resulting from the taxpayer's miscalculations.

    13. In instances where the taxpayer plans to receive the refund check at an address other than the one listed on the return, the scheme may be to file a change of address with the US Postal Service prior to delivery of the check. The scheme may also be to recover the check after it has been returned to the IRS by later providing forwarding instructions.

    14. Undeliverable refund checks frequently include the refund checks the perpetrator failed to intercept. Refund checks retrieved by the perpetrator after they have been returned to the IRS leave a trail of forwarding instructions.

    15. Multiple refunds are going to the same bank account as direct deposits and/or refund transfers. These accounts may or may not be associated with a return preparer.

9.5.3.2.3.2.1  (02-09-2005)
Characteristics of Taxpayer Identification Numbers

  1. Characteristics of Social Security numbers (SSN) are:

    1. Social Security numbers should appear 000-00-0000.

    2. The SSN always begin with a number 0 to 7; never begin with an 8 or a 9.

    3. Prior to January 1966, the middle two digits had to be odd if the number was under ten (01, 03, 05, 07 or 09) and even for higher numbers (10, 12, 14, etc.). Presently, as each area exhausts their sequence of numbers in the odd and even categories, they will start using the even numbers under ten then the odd numbers above ten.

    4. The first three digits of the Social Security number identify the area of issuance. A list of numbers and their assigned areas of issuance are shown in Exhibit 9.5.4-1.

  2. Employer's Identification Number (EIN) shown on Form(s) W-2 should always appear 00-0000000 with the first two digits being the code number of the IRS field office. For example, a Tennessee Employer's Identification Number should ordinarily begin 62- and the following 7 digits should be within the limits of the numbers assigned thus far.

  3. An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the IRS. It is a nine-digit number that always begins with the number 9 and has a 7 or 8 in the fourth digit, example 9XX-7X-XXXX.

    1. IRS issues ITINs to individuals who are required to have a US taxpayer identification number, but who do not have and are not eligible to obtain a SSN from the Social Security Administration (SSA).

    2. Individual Taxpayer Identification Numbers are issued regardless of immigration status because both resident and nonresident aliens may have US tax return and payment responsibilities under the Internal Revenue Code (IRC).

    3. Individuals must have a filing requirement and file a valid Federal income tax return to receive an ITIN, unless they meet an exception.

    4. Individual Taxpayer Identification Numbers are for Federal tax reporting only, and are not intended to serve any other purpose. An ITIN does not authorize the individual to work in the United States or provide eligibility for Social Security benefits or the Earned Income Tax Credit (EITC). Individual Taxpayer Identification Numbers are not valid identification outside the tax system.

    5. IRS issues ITINs to help individuals comply with the US tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for SSNs.

9.5.3.2.3.2.2  (02-09-2005)
Characteristics of Schedule C Schemes

  1. The following are characteristics of questionable Schedule Cs:

    1. Returns with zero or minimal/similar expense deductions on Schedule C claiming 90% or more of maximum earned income credit (EITC); and

    2. One or more of the following items:

      • Multiple returns at the same addresses some of which may be non-existent
      • Multiple years filed at the same time
      • Multiple returns with the same direct deposit bank account
      • First time filer
      • Filers under the age of 15 or over the age of 45

9.5.3.2.4  (02-09-2005)
Refund Fraud Investigations

  1. In refund fraud investigations, the investigation is directed towards ascertaining:

    1. the authenticity of return(s) and supporting document(s)

    2. the responsibility of the return preparer(s) and filer

9.5.3.2.4.1  (02-09-2005)
Investigative Techniques for Refund Fraud Investigations

  1. Criminal Investigation may make limited third party contacts at the general investigation (GI) and PI stage of QRP/RPP investigations under the exception provided in 26 USC §7602(c)(3) (see IRM 9.4.1, Investigation Initiation). Title 26 USC §7602(c)(3) exempts contacts made with respect to a pending criminal investigation from the notice requirement. These inquiries may only be made for the purpose of determining the criminal potential of the investigation and to identify persons responsible for the scheme. Once these determinations are made, third party contacts must immediately cease until a Subject Criminal Investigation (SCI) is initiated.

  2. General investigation authorized information gathering techniques are listed in IRM 9.4.1, Investigation Initiation.

  3. Primary investigation authorized information gathering techniques are listed in IRM 9.4.1, Investigation Initiation.

  4. Additional investigative responsibilities for refund fraud investigations may include the following:

    1. Special agents must analyze false documents to determine if a specific scheme or technique is being used and if there are any additional false returns. Computer generated extracts of refund information are available to help special agents identify additional returns having similar characteristics to those already discovered. These extracts (routines) are described in the LEM 9.14.1, Criminal Investigation Official Use Only Procedures, LEM 9. Coordination with the Fraud Detection Centers (FDC) is necessary for the development of schemes and the identification of the full scope of returns involved. It is also a vital step in CI’s responsibility to reduce the loss to the government by blocking refunds and identifying similar and/or related schemes in a timely manner.

    2. Special agents must be familiar with surveillance techniques (see IRM 9.4.6, Surveillance) to identify and locate perpetrators.

    3. Special agents must understand the meaning of Probable Cause and be acquainted with IRM 9.4.12, Arrest; IRM 9.4.9, Search Warrant, Evidence and Chain of Custody; and 9.6.4, Pre-Trial Procedures. Search warrants, arrest warrants and complaints are obtained through the US Attorney's Office. A complaint should be used only in extraordinary circumstances.

    4. Special agents may ask the postmaster or US Postal Inspector for a description of the renter of each postal box and, with the postmaster's cooperation, arrange a surveillance of the postal box. The US Postal Inspection Service will make equipment available that gives a signal when the postal box is opened. Special agents should discuss with their Supervisory Special Agent (SSA) and CT Counsel whether they should arrest the person opening the box and picking up the check, or delay the arrest until an arrest warrant can be obtained.

    5. Special agents should utilize the services of the Office of Forensic Science and Support for handwriting and typewriting comparisons. Special agents should be acquainted with the procedures prescribed in IRM 9.4.11, Investigative Services.

    6. Special agents must determine if employers' names correspond with those on Form(s) W-2 and tax returns filed. These employers should be contacted to determine if the persons listed on the returns were on their payroll.

    7. Special agents should contact the State Unemployment Compensation office to verify information on the Form(s) W-2. The State Unemployment Compensation office maintains records pertaining to Federal Unemployment Taxes Act (FUTA) tax information on employers and their insured employees. This office can determine if an employer, employee, or social security number listed on a tax return exists in that state. This state office can also supply, by telephone, all information shown on the application for the social security number.

9.5.3.2.4.1.1  (02-09-2005)
Identification of Handwriting and Typewriting

  1. To identify and compare the subject's handwriting and typewriting to the returns filed, special agents should:

    1. Obtain copies of refund checks which may have been cashed; have handwriting analyses made of the endorsements; and follow through with inquiries. Such inquiries may lead to the identification of the negotiator of the checks by disclosing the name of the person or firm that cashed or deposited the checks. The Payment, Claims, and Enhanced Reconciliation (PACER) program will produce a copy of the front and back of a cancelled IRS refund check. This will provide the special agent with information regarding who signed the check, where the check was cashed, the account the check was deposited into, and whether the check cashing institution has imaged the driver’s license of the person cashing the check onto the back of the refund check. A PACER request must be submitted through the SSA to the FDC. Original refund checks must be requested from the US Secret Service (see IRM 9.4.4, Requests for Information).

  2. Examine all post office records where the boxes are rented in order to obtain a specimen of the renter's handwriting.

  3. Identify references given by the renter applying for a box and determine, in the investigation of fake references, how the renter arranged to intercept and reply to the postal authorities' inquiry.

  4. Obtain printed, typewritten, and handwritten examples in order to have an expert compare these specimens with the handwriting, printing, and typewriting on tax returns, check endorsements, and forwarding instructions.

  5. Obtain prior and subsequent years' returns, if any.

9.5.3.2.4.1.2  (02-09-2005)
Decoy Refund Check Procedures

  1. A decoy refund check is a check made in the name of an individual identified in a refund fraud scheme. The check is used to gather evidence regarding an individual’s participation in a false refund scheme.

9.5.3.2.4.1.2.1  (02-09-2005)
DECOY CHECK REQUEST

  1. A request for decoy refund checks is initiated and processed as follows:

    1. a memorandum from the SAC or RAC will be forwarded to Director, Administrative Service Center, PO Box E, M:CFO:F:B, Beckley, WV 25802, and will include the following information:

      • name, address and SSN to be placed on the check
      • amount of the refund
      • accounting string
      • FY, Appr, OFP, Office, Activity and subobject code
      • any special instructions

9.5.3.2.4.1.2.2  (02-09-2005)
UNCLAIMED DECOY CHECKS

  1. Decoy refund checks will be forwarded to Beckley for cancellation within 30-days of issuance. If circumstances warrant, and an extension of the 30-day period is granted, the SAC or RAC will advise Beckley of the check’s status at the end of each subsequent 30-day period, until the check, along with cancellation memorandum, is forwarded to Beckley for cancellation. A decoy check will not be retained beyond 90-days from the date of issue.

9.5.3.2.4.1.2.3  (02-09-2005)
DECOY CHECKS AS EVIDENCE

  1. When a decoy check is recovered and is to be held as evidence, the SAC or RAC will forward a memorandum to Beckley reflecting the payee’s name, address, check amount, check number and date. The memorandum will also specify the need for the check to be used as evidence and request that a stop payment be placed on the check. There is no need to return the check.

9.5.3.2.4.1.2.4  (02-09-2005)
FUNDING OF CHECKS

  1. When Beckley issues a decoy refund check, the check is prepared and the amount is charged against the funds of the requesting field office, Sub Object Code (SOC) 2505. When the check is returned or when a stop payment request is forwarded to Beckley, the amount of the check is returned to the field office's funds. If the check remains outstanding more than one year without a stop payment request being forwarded, it is cancelled by Treasury and the funds are returned to Beckley. Funds which remain outstanding for over one year may be lost to the field office because of the difference in appropriated funds between fiscal years.

9.5.3.2.4.2  (02-09-2005)
Investigations Involving Refund Checks

  1. Once a check is deposited into a filer's mailbox, CI cannot retrieve the check without a search warrant.

  2. Copies of the refund check can be obtained from the PACER program. Original checks must be obtained from the US Secret Service (see IRM 9.4.4, Requests For Information).

9.5.3.2.4.3  (02-09-2005)
Investigations Involving Direct Deposit Refunds

  1. A Refund Anticipation Loan (RAL) is a separate business transaction between the filer and a lending institution. If the RAL has not been issued, in most instances, the bank will return the refund to the IRS electronically. The full amount is refunded to the IRS, as the lending institution is not entitled to deduct any fees from the refund. If the RAL has been issued, the refund will generally not be returned to the IRS.

  2. If a RAL is not involved, the filer is in control of the refund once the direct deposit is made and financial institutions will generally not return the refund to the IRS. However, some financial institutions will return the funds if IRS provides a letter requesting the return of the refund.

9.5.3.2.4.4  (02-09-2005)
Investigation Involving Electronic Returns

  1. IRS is not legally authorized to seize RAL checks unless they are part of a search warrant related to an open SCI.

  2. Neither the FDC nor field office personnel should provide instruction to an Electronic Return Originator (ERO) regarding transmission or non-transmission of a return (valid or false).

  3. The FDC management personnel should be the designated contact points for EROs who have information concerning false electronically filed returns. However, the information can be furnished to the field office QRP Coordinator or other special agent. Issues regarding the actual return cannot be discussed with the ERO due to disclosure restrictions (26 USC §6103).

  4. If the false information involves false Form(s) W-2, a request for copies of the Form(s) W-2 can only be made by a special agent or the designated FDC manager.

9.5.3.2.4.5  (02-09-2005)
Multiple Refund Identification by Electronic Fraud Detection System (EFDS)

  1. One ability of EFDS is to assist in identifying returns filed by individuals filing multiple false claims for refund and returns prepared by unscrupulous tax practitioners (refund mills).

  2. To request an EFDS run, contact the field office QRP or RPP coordinator who will coordinate with the FDC.

  3. The following indicates information that can be obtained from EFDS:

    1. Tax year to be checked.

    2. Which of the routines is to be used (1), (2), (3) or (4) (See LEM 9.14.2, The Questionable Refund Program).

    3. Lowest zip code number (five digits) or the geographic area to be checked.

    4. Highest zip code number (five digits) of the geographic area to be checked. (High zip code need not be furnished for Routine (3). Only one zip code is used for Routine (4).

9.5.3.2.4.5.1  (02-09-2005)
Assistance of the United States Postal Service in Multiple Refund Schemes

  1. Part 232.3d of the US Postal Service Manual instructs postal employees to report to their Inspection Service suspicious activities engaged in by the holders of post office boxes. Should an employee note such suspicious activity, i.e., a quantity of Federal tax refund checks directed to a post office box in the normal course of his/her duties and volunteer this information to a US Postal Inspector, the information would be made available to the IRS, if apparently indicative of criminal activity.

  2. The situation in (1) above is to be distinguished from the process of systematically scanning or watching incoming mail for the purpose of identifying alleged violators of the Internal Revenue Code and notifying the IRS of the names of the alleged violators. This was determined to sufficiently satisfy the definition of a mail cover and, therefore, local US Postal officials should not be requested to have employees institute such a watch on the mail without an official mail cover. See IRM 9.4.10, Miscellanous Investigative Techniques regarding mail cover request.

  3. The special agent will make a request to the local US Postal Inspector for delivery of a refund check to a specific address. The US Postal Inspector will arrange to have an employee of the US Postal Service put the refund check in the post office box or deliver the check to a residence address in a regular delivery. The US Postal Inspector will notify CI of the approximate time the check will be delivered to the desired address.

9.5.3.2.4.5.2  (02-09-2005)
Prisoner Multiple Refund Schemes

  1. It has been determined by the Legal Liaison Officer, Chief Inspector's Office, US Postal Service, that a prison mailroom is not part of the US Postal system. Consequently, prison officials can make additions to addresses without violating postal regulations. In this regard, it is possible to request from prison officials that all of a prisoner's mail going to the IRS be directed to the RAC at the FDC of the appropriate IRS Campus. The SAC makes the request to the prison executive. As appropriate, CI should coordinate with the RAC and the local prison officials concerning assistance in redirecting any mail leaving the prison.

9.5.3.2.4.5.3  (02-09-2005)
Electronic On-Line Filing Fraud

  1. Electronic on-line filing fraud can be either a QRP or a RPP Investigation. It is necessary for the special agent to work these on-line investigations expeditiously. It is crucial to timely coordinate with the field office and the FDC. Upon identification of an on-line fraud scheme, it is the RAC's responsibility to initiate a preservation letter for the internet service provider (ISP) to maintain ISP address records. The initial request allows the records to be maintained for 90-days. One extension can be granted for an additional 90-day period. Careful attention must be paid to the expiration date of the preservation letter and a summons or subpoena should be issued prior to the expiration date or the information may be lost. The extension letter can be authorized by either the RAC or special agent. Internet service providers are not considered third party record keepers and, therefore, do not require notice.

9.5.3.2.5  (02-09-2005)
Questionable Refund Program

  1. The purpose of the QRP is to detect and stop fraudulent and fictitious claims for refunds on income tax returns. These investigations often involve returns filed with fictitious or stolen identities.

  2. The goal of the QRP is to investigate and prosecute promoters and conspirators to foster confidence in the tax system and enhance voluntary compliance. Investigative priorities are the responsibility of the SAC based upon the local prosecution standards. Emphasis should be given to investigations with the greatest potential for preventing continued loss.

  3. Special agents, working in conjunction with FDC personnel at the appropriate IRS Campus, should take reasonable steps to ascertain the magnitude of the scheme and the number of participants involved.

  4. Investigative steps should include the following:

    1. contacting the preparer or transmitter

    2. identifying the person controlling the refund address

    3. determining the existence of mail forwarding instructions

    4. contacting lending institutions and establishing the falsity of wage and income documents

9.5.3.2.5.1  (02-09-2005)
Procedures for Fraud Detection Center Identified Questionable Refund Program Schemes

  1. All QRP schemes referred to a field office will be inputted as PIs into the CIMIS database by personnel in the FDC at the IRS Campuses.

  2. The Form 4930 will be prepared at the IRS Campus and entries will be made in items 1-10, 12-18, 23, 24, 27, 29, and 71. The original Form 4930 will accompany the referral to the field office. A copy of the Form 4930 will be retained in the scheme file maintained at each FDC.

  3. The investigation number for each of these investigations will contain a specific identifier for each FDC.

  4. The first two digits, normally the field office number, will identify the IRS Campus where the investigation was initiated.

  5. After the PI is initiated, the investigation will be placed in the field office’s QRP group investigation pool. Each field office is assigned a group pool number for QRP referrals and this number will appear in the Lead SSN field (Item 1) of the Form 4930 (see IRM 9.9, Criminal Investigation Management Information System).

  6. The QRP assigned pool number is 9999. For example, the group pool number for Los Angeles will be 000-95-9999.

  7. Questionable Refund Program PIs will appear in the field office’s inventory and on their CIMIS reports and statistical summaries as with any other open PI.

  8. All QRP schemes developed by the FDCs must be linked to one national GI. The GI number (009910003) is assigned to all FDCs.

9.5.3.2.5.1.1  (02-09-2005)
Field Office Procedures for IRS Campus Identified Questionable Refund Program Schemes

  1. Upon receipt of the QRP scheme referral from the FDC, the receiving field office will promptly assign a special agent to evaluate the referral, and he/she will update the Form 4930 to reflect the investigation assignment and the due date of the evaluation of the referral.

  2. The due date is 90-days from the receipt of the referral by the field office.

  3. The name of the PI is the scheme number and should not be changed. If a SCI is initiated as a result of the evaluation of the QRP PI, the Form 4930 initiating the SCI should reflect the name of the subject of the investigation. This will not be consistent with the name on the PI. Even though they are not consistent, the PI will still be linked to all SCIs initiated.

  4. During the course of the investigation, identities identified as part of the QRP scheme should be linked to the PI in CIMIS as Associate Identities (AI).

  5. The field office is responsible for closing QRP PIs, as well as any SCI initiated as a result of the evaluation of the QRP scheme referral. These investigations should be closed in a manner consistent with all other PI and SCI investigations (see IRM 9.5.14, Closing Procedures).

  6. At the conclusion of the criminal aspects of a QRP investigation, the SAC will forward a Criminal Investigation Closing Report with attachments to the RAC. The RAC will forward the Closing Report to the Territory Manager, Technical Services, for notification and initiation of civil action. This process is the same for declined or discontinued investigations (see IRM 9.5.14, Closing Procedures).


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