25.1.11 Campus Collection Fraud Procedures

Manual Transmittal

November 29, 2017

Purpose

(1) This transmits revised IRM 25.1.11, Fraud Handbook, Campus Collection Fraud Procedures.

Material Changes

(1) Material changes to this IRM are listed in the table below:

IRM Description of Change
Exhibit 25.1.11-2 Corrected Fraud Referral Summary Check Sheet.

Effect on Other Documents

This material supersedes IRM 25.1.11 dated October 27, 2016.

Audience

Campus Collection Employees

Effective Date

(11-29-2017)

Adina Leach
Director, Business Support Office, Fraud Policy and Operations, SB/SE

Overview

  1. The primary objective of the National Fraud Program is to foster voluntary compliance through recommendations for criminal investigations and/or assertion of civil penalties against taxpayers who evade the reporting or payment of taxes known to be due and owing. This IRM communicates fraud referral procedures to Campus Collection Employees.

  2. The efforts of Criminal Investigation (CI) are directed at the portion of American taxpayers who willfully and intentionally violate their known legal duty of voluntarily filing income tax returns and/or paying the correct amount of taxes (income, employment, excise, etc.). These individuals pose a serious threat to tax administration and the American economy.

  3. The objectives of the Campus Collection Fraud Program are to:

    • Identify cases with potential fraud;

    • Gather evidence and other supporting investigative information;

    • Discuss cases with Campus Fraud Functional Coordinators to assess fraud potential; and

    • Refer potential fraud cases to Collection, Field Exam, and/or Campus Exam for further investigation.

Responsibility of the Campus Collection Employee

  1. Fraud cases begin with Campus Collection employees and their recognition of indicators and affirmative acts of fraud by taxpayers through regular case processing.

  2. The detection and deterrence of fraud is every compliance employee's responsibility and is a top priority when discovered. It is essential to identify and report any potentially fraudulent activities. Questions regarding Campus Collection fraud procedures should be referred to your respective Collection Functional Fraud Coordinator (CFFC). A list of CFFCs is located on the Fraud website.

Role of the Collection Functional Fraud Coordinators

  1. The CFFCs are a resource and assist Campus Collection employees with potential fraud investigations, review potential fraud development cases within their respective functions, and determine whether the cases should be investigated further for potential fraud.

  2. The CFFCs also act as liaisons to ensure the completion of appropriate fraud paperwork, work with the fraud technical advisors (FTAs), and when applicable, cross-functional coordinators and Site Revenue Officers (Site RO), to process potential fraud development cases, and report the case on the Fraud Referral Tracking Report.

Developing Potential Fraud Cases

  1. In all criminal and civil tax fraud cases, the burden of proof is on the Government.

  2. Tax evasion (Title 26 USC 7201) and false returns (Title 26 USC 7206(1)) are two common criminal tax offenses within Collection. Willfulness is a common element of tax crimes. Criminal Violations (Exhibit 25.1.1-1) is a listing of the elements necessary for criminal prosecution. Review the criminal criteria set forth in IRM 25.1.3.1.1, Background, for additional guidance.

  3. Tax avoidance and tax evasion are different. Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce or avoid their taxes by legitimate methods. Tax avoidance is a legal means used to lower tax liability by arranging financial affairs to the best advantage and by claiming rightful deductions, credits, and adjustments. Avoidance does not involve concealment or misrepresentation, but works within the legal parameters to shape events to reduce tax. Tax exasion is the illegal act of not reporting income, underreporting income, or providing false information to the IRS. Fraud may exist when a taxpayer willfully attempts to illegally underreport taxes, not pay taxes, or both.

  4. Common indicators of fraud within Campus Collection involve the following issues:

    Expense/Deductions Related: Substantial personal expenditures that exceed available resources or that are deducted as business expenses.

    Example:

    No apparent explanation is available for how the taxpayer is living each month with a high negative income.

    Income Related: Bank deposits from unexplained sources that substantially exceed reported income or concealment of bank accounts, brokerage accounts, and other property.

    Example:

    Income or other revenue reported by payers to the IRS do not account for the amount of bank deposits, or there are no bank accounts or investments reported by the taxpayer, although payers report interest to the taxpayer.

    Conduct of the Taxpayer: Patterns of consistent failure to file or to report income, although substantial amounts of taxable income were received.

    Example:

    Payers report substantial income to the IRS paid to the taxpayer, however, no returns are filed by that taxpayer for those years in which payments were made.

    Methods of Concealment: Assets are placed in another's name, or there is a close relationship between the parties to a transfer, rendering tax not due, not payable, or substantially reduced.

    Example:

    No real property reported, but lenders report mortgage interest paid by the taxpayer to the IRS, or taxpayer maintains control of assets or income but claims not to be the owner.

  5. Refer to IRM 25.1.2.3, Indicators of Fraud, for additional information on fraud indicators.

  6. When a potential fraud indicator is identified, fraud development must be considered. The CFFC will assist with assessing the fraud development potential and determine an appropriate plan of action.

  7. Further development of the fraud indicators is necessary to document firm indications (affirmative acts) for successful fraud cases.

Interviewing the Taxpayer

  1. Campus Collection employees should interview the taxpayer similar to normal case processing to gather information on his/her ability to pay and on the filing of delinquent returns.

    1. DO NOT SOLICIT TAX RETURNS. If returns are submitted, they should be accepted. Ask questions that could help determine the potential liability. For example, marital status, dependents, estimated income and expenses, etc. are all types of information used to determine the actual tax loss to the government;

    2. DO NOT VOLUNTEER ADVICE to the taxpayer concerning any course of action he/she should follow;

    3. DO NOT DISCUSS tax liabilities, penalties, fraud, or referral possibilities with the taxpayer; and

    4. DO ANSWER ANY LEGITIMATE TAX QUESTIONS posed by the taxpayer (such as due dates, filing requirements, etc.). In addition, refer the taxpayer to appropriate publications, (i.e. Pub 17, Your Federal Income Tax (For Individuals), Pub 530, Tax Information for Homeowners, etc.) and document their questions and your responses.

  2. When the taxpayer asks if a fraud referral is being considered or whether CI is involved, the compliance employee must not give a false or deceitful response. Guidance from the courts provides that compliance employees:

    • May decline to answer questions about criminal potential

    • May not deceive taxpayers when asked specifically about the character or nature of an investigation

    • Are not required to initiate disclosure about developing indicators of fraud or a potential referral to CI, or

    • May simply advise that when firm indicators of fraud are present, a referral to CI is required

  3. When interviewing the taxpayer with potential fraud indicators, it is critical for the employee to secure the taxpayer's explanations for any discrepancies. If possible, review the taxpayer's explanations with him or her and get a written signature that the summary is fair and accurate.

  4. Suspend any attempts to resolve the case. If the taxpayer initiates an installment agreement on a potential fraud case, advise the taxpayer the case is subject to review and to make voluntary payments in the interim. Convey to the taxpayer that the acceptance of these interim payments by the IRS should not be construed as acceptance of the proposed installment agreement. The IRS will send written notification regarding the acceptance or rejection of the request for installment agreement.

Case Documentation

  1. Documentation is critical for the development of fraud referrals. Maintain complete and accurate case notes that include the following:

    1. All case actions taken;

    2. All documents received;

    3. All contacts adequately documented (e.g., changes to entity information were recognized/updated); and

    4. All conversations with the taxpayer, representative, return preparer, and/or third parties documented (e.g., specify the discussions and responses). Review the responses with the taxpayer, if possible.

  2. Date stamp documents received from taxpayers but do not otherwise write on the documents. If documents are obtained from third parties, the source of the documents should be identified. For example, if received by mail, attach the envelope to the document or make a notation on the back of the document.

  3. Do not indicate whether the taxpayer has committed fraud, just document the facts uncovered during the investigation.

Discussion with the Collection Functional Fraud Coordinator

  1. When initial indications of fraud are discovered, Campus Collection employees should initiate a discussion with their CFFCs.

  2. The CFFCs will review the case and determine whether the case should be investigated further for potential fraud. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Cases with fraud potential should also be reviewed by the Site Revenue Officers (Site ROs). See IRM 5.19, Liability Collection, for specific assignment controls.

  3. Upon concurrence of potential fraud, the Campus Collection employee should suspend case resolution and proceed with the potential fraud investigation.

  4. The CFFCs will document the Fraud Referral Summary Check Sheets (see Exhibit 25.1.11-2) to approve the potential fraud investigation.

Potential Fraud Investigation

  1. After the concurrence of the CFFCs, the Campus Collection employees work the potential fraud investigation within their normal scope of duties.

    Note:

    Site ROs complete the development of the Compliance Services Collection Operations (CSCO) cases.

  2. The Campus Collection employees will secure research prints from the Integrated Data Retrieval System (IDRS), including SUMRY, TXMOD, ENMOD, BMFOLI, IMFOLI, AMDIS, and Information Return Processing (IRP) documents.

    Note:

    Only the IRP Summary is required if more than 20 documents exist.

  3. Campus Collection employees will retain copies of original or amended returns secured.

  4. Asset/locator research should be obtained, if it is within the normal process and authority of the workgroup.

  5. If no contact has been established with the taxpayer (or authorized representative), a minimum of three attempted phone contacts must be documented. The taxpayer interview is especially important if records are inadequate, nonexistent or false.

  6. For cases with only unfiled return modules, Form 3449, Referral Report, is also required. Note in block 7 that fraud indications are present.

Case Evidence

  1. Original documents are the best evidence. Always strive to view or obtain original documents. If doubts exist about the authenticity of a document, firmly request that the original be produced.

  2. Documents and correspondence obtained from the taxpayer, or other third parties must be retained as potential evidence. Copies of all documents provided by the taxpayer should be made as soon as practicable.

  3. Never write on or alter original documents in any way. Work papers are secondary evidence. Make another copy of the document to make notes or highlight discrepancies.

  4. Contact local counsel if the taxpayer requests the return of any records. Counsel will advise on the retention of any existing copies.

  5. The following is a listing of some examples of possible fraud indicators; however, this list is not all inclusive:

    Suspicious or unusual patterns on tax returns:

    • Identical names on different returns

    • Numerous or similar post office box addresses

    • Suspicious looking or similar hand written documents

    • Similarities on multiple returns, e.g. refund amount, withholding amount, credits, losses, dependents, etc.

    • Mail includes several returns in the same envelope

    False W-2s:

    • Excessive withholding in comparison to wages

    • Typewritten

    • Inconsistent typing format

    • "Applied for" annotated in lieu of EIN

    • EIN/company name mismatch

    • Computerized W-2s in different format

    • Erasures or white outs

    • Substitute W-2

    • Sloppy typing

    • Upper and lower case typing

    • Missing information such as EIN, SSN, FICA, address, State EIN, etc.

    Inconsistent 1040 Income and Deductions:

    • Questionable dependent information, e.g., relationship, dates of birth, dates of death

    • Occupation in relation to income

    • Refund amounts

    • Age and income inconsistencies

    • Excessive itemized deductions (50% or more) in comparison to AGI

    • Unusual deductions for the taxpayer's occupation

    • Multiple returns with similar deductions

      Schedule C Discrepancies:

    • Business income with little or no expenses

    • Unreported self-employment tax

    • EITC claimed

    • Multiple returns with similar characteristics

    • Unrealistic occupation

    Questionable Amended Returns:

    • Analyze amended returns using the same techniques recommended for Form W-2, Wage and Tax Statement, Form W-2G, Certain Gambling Winnings, Form 1040, U.S. Individual Income Tax Return, as well as, forms in the 1099 series, Miscellaneous Income.

    Unscrupulous Return Preparer Patterns:

    • Pattern by the same return preparer using same/similar deductions, credits, expenses, etc., on multiple returns including but not limited to:
      Filing status
      Occupation
      Child care provider or educational institution expenses
      Excessive deductions/losses
      Different businesses at the same address

Preparation of Case for Potential Fraud Evaluation

  1. Once the Campus Collection employees (or Site ROs for CSCO cases) completes the investigation and gathers the required evidence, the employee will complete the Fraud Referral Summary Check Sheet (see Exhibit 25.1.11-2).

  2. The referring employees will meet with the CFFC to review the case.

  3. Except for CSCO, the CFFCs will send the case file and supporting documents to Site ROs. If the Site ROs determine that the cases have fraud potential, the Site ROs will contact the FTAs, who will evaluate whether the cases have sufficient information to refer directly to CI.

  4. If the cases have fraud potential but needs further development, the FTA will recommend transferring the case to Field Collection or Examination to continue the investigation. If the cases do not have criminal fraud potential, the FTAs will consider whether the civil fraud penalty should be pursued through Campus or Field Examination.

Referrals to Criminal Investigation

  1. When firm indicators of fraud are present, referrals to CI will be completed by the controlling office with the concurrence of the FTAs.

  2. All criminal referrals must be routed through the FTA group managers for review, concurrence, and forwarding to CI. Refer to your functional chapter of IRM 5.19, Liability Collection, for referral procedures.

CI Referral Evaluation

  1. CI will screen incoming referrals to determine if they meet established criminal criteria and if any barriers exist to prosecution. If the referral does not meet the criminal criteria, or if CI has identified barriers to prosecution, the referral will be returned to Campus Collection via the FTA group managers. If the referrals meet the criminal criteria and supports CI's workplan, and no identified prosecution barriers are identified, the referrals will be forwarded to the appropriate CI Field Offices for further evaluation.

  2. Within 10 work days of the evaluating field office receiving the referral, CI will contact the CFFCs to schedule and conduct an initial conference. Within 30 work days of the receipt of the referral by the evaluating field office, the parties will meet again for a disposition conference. The purpose of the disposition conference is to discuss CI's decision to accept or decline the referral and provides CI the opportunity to provide feedback to Campus Collection regarding that decision. If the referral is accepted, follow the guidance in your functional chapters of IRM 5.19, Liability Collection, to close the case. If declined, the FTA may recommend pursuing civil fraud penalties. Otherwise, Campus Collection will resume normal case processing to include alternative enforcement actions such as routing frivolous returns or adjusting collection determinations based on available information. Feedback to the originating employee should be included with the returned evaluation.

Transfers to Field Collection

  1. Once the FTAs agree that the cases have criminal fraud potential, Form 11661-A, Fraud Development Recommendation - Collection, must be completed by the Campus Compliance Collection employees with the FTA's assistance. The FTAs will sign the Form 11661-A, documenting the recommendation to transfer to Field Collection for further development.

  2. The CFFC ensures the assembled case file being transferred includes the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , and the Fraud Referral Summary Check Sheet. All available supporting documentation, listed on the Fraud Referral Summary Check Sheet must also be included in the file.

  3. The CFFC or Site RO will send the case file to the Collection Fraud Policy Analyst for potential transfer to Field Collection. See Fraud Website for the current Collection Fraud Analyst contact. The physical transfer of the case file must be sent by traceable overnight service or other approved method. See IRM 10.2.13.4.4.1, Shipping Personally Identifiable Information (PII), for further handling requirements.

  4. Case activity should be suspended according to procedures in your functional chapter of IRM 5.19, Liability Collection, with a 60-day follow up.

  5. Upon approval of the transfer to Field Collection, the CFFCs will use IDRS command code ASGNI/ASGNB to assign the case to the appropriate Field Collection group as indicated by the Collection Fraud Analyst. The eight-digit RO assignment number would include the appropriate Area Office/Territory Office designation followed by one of the following:

    • 6401 - CSCO, TP Request Contact - no correspondence

    • 6501 - ACS, TP Request Contact - no correspondence

    • 6466 - CSCO, TP Request Contact - correspondence

    • 6566 - ACS, TP Request Contact - correspondence

  6. ICS will assign the sub code 601 for IMF, 602 for BMF, and 603 for Other Cases. These temporary sub codes will enable Field Collection to assign the cases for further development. Field assignments prompt systemically the Integrated Collection System (ICS) to assign sub code 601 for Individual Master File cases, sub code 602 for Business Master File cases, and sub code 603 for Other Cases. These temporary ICS sub codes enable Field Collection to further assign a case to an RO for potential fraud development.

  7. The Collection Fraud Policy Analyst will send the approved case file to the Field Group Manager for assignment. Field Collection will work the case as a potential fraud development case in accordance with IRM 25.1.8, Field Collection.

OIC Fraud Investigation to Field Collection

  1. Upon concurrence of the CFFCs or Site ROs, and the FTA, potentially fraudulent Centralized Offer In Compromise (COIC) cases should be sent to Field Collection groups for further investigation.

  2. The CFFCs or the Site ROs and FTAs will complete the Form 11661-A. When firm indications of fraud in the offer investigation are present, referrals to CI will be completed by the Campus Collection employees with the concurrence of the FTAs (see IRM 25.1.11.12 on CI Referral Evaluation).

  3. After FTA approval of the Form 11661-A, the COIC case referrals will be transferred to the Field Collection groups nearest the taxpayers' addresses. The COICs will issue an outgoing OI on ICS (sub code 106) to the Field Collection Group per the ICS parameter tables. Then, the COIC managers assign the case on the Automated Offer in Compromise (AOIC) system to xxxx9998.

  4. Retain the OIC case files within COIC. Send copies of the Form 656, Offer in Compromise; however, all other documents sent with the OIs can be originals. DO NOT WRITE ON ORIGINAL DOCUMENTS. Retain copies of all documents sent for the offer file.

  5. The OI will be assigned to an RO who will work with the local FTA to make a determination if the potential for fraud development exists. See IRM 5.8.4.18, Potential Fraud Referrals, for additional actions.

Potential Civil Fraud Development Cases

  1. Recommendations for asserting the civil fraud penalty should be carefully reviewed to establish that the evidence supports the assertion.

  2. Fraud must be proven by clear and convincing evidence, and the statutory notice asserting the fraud penalty must be reviewed by Area Counsel.

Transfers to SB/SE Campus Exam

  1. When cases have criminal fraud potential relating only to unfiled returns or have civil fraud potential, the cases will be directed to Campus Examination for transfer to Field Examination for further development, or sent to Campus Examination for the assertion of the civil fraud penalty.

  2. Upon concurrence of the FTA, the CFFCs send the completed Form 13549, Campus Fraud Leadsheet, and the corresponding documentation to the local Examination Campus Fraud Coordinator.

  3. Case activity should be suspended according to procedures in your functional chapters of IRM 5.19, Liability Collection, and schedule follow up in 60 days.

  4. Campus Examination will determine to accept or decline a fraud lead within 21 days of receipt in accordance with IRM 4.19.10.4.5, Responsibilities of the Campus Fraud Coordinator (CFC).

  5. If the lead is declined, the reason for the declination will be provided to the CFFC and returned to the initiator through the employee's manager. The normal case processing will resume.

  6. If the Campus Examination Fraud Coordinator accepts the fraud lead for further development of the fraud issue(s), the case resolution will be suspended pending the assertion of the civil penalty. Refer to your respective functional chapter of IRM 5.19, Liability Collection, for procedures.

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Fraud Referral Summary Check Sheet

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