4.16.1 SEP Responsibilities and Case Development

Manual Transmittal

June 13, 2017

Purpose

(1) This transmits revised IRM 4.16.1, Special Enforcement Program (SEP), SEP Responsibilities and Case Development.

Material Changes

(1) This IRM has been revised throughout to provide clarifications and more in-depth discussions in several areas. Minor editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary. Significant changes to this IRM are reflected in the table below:

IRM Reference Description of Change
All Update ownership of IRM 4.16.1 from Abusive Transactions–Technical Issues to SB/SE Examination–Field and Campus Policy, Field Examination Special Processes (FESP).
IRM 4.16.1.3.2.2 Deleted redundant information already contained in IRM 4.10.3.3.6.
IRM 4.16.1.3.4 Updated information about when to consider a summons and to consult with Counsel for enforcement information.
IRM 4.16.1.3.5 Updated the list of indirect methods.
IRM 4.16.1.3.7 Guidance added regarding group managers on the 6 (e) list for grand jury cases and tainted civil closings.
IRM 4.16.1.4.1 Updated information on the SEP Information Referral process.
IRM 4.16.1.4.2 Updated Sources for Obtaining Leads listing.
IRM 4.16.1.5.2 Updated source code listing for SEP inventory.
IRM 4.16.1.5.4 Updated project code listing for SEP inventory.
IRM 4.16.1.5.5 Updated activity code listing for SEP inventory.
IRM 4.16.1.5.6 Updated aging reason code listing for SEP inventory.
IRM 4.16.1.6.1 Removed outdated DEA agreements from the background information.
IRM 4.16.1.6.2 Removed obsolete SEP categories and references to DOJ Strike Force.
Former IRM 4.16.1.7 Deleted Management Responsibilities for Strike Force Activity. SEP does not actively participate on Strike Force teams. CI has comprehensive Strike Force information in IRM 9.4.13.

Effect on Other Documents

This material supersedes IRM 4.16.1, dated June 14, 2011.

Audience

Small Business/Self-Employed (SB/SE); Criminal Investigation (CI); Large Business and International (LB&I); Tax Exempt and Government Entity (TE/GE); Wage and Investment (W&I).

Effective Date

(06-13-2017)


Michael W. Damasiewicz
Director, Examination–Field and Campus Policy
Small Business/Self-Employed Division
SE:S:E:HQ:EFCP

Overview

  1. This chapter provides an overview and outlines the purpose and goals of the Special Enforcement Program (SEP). SEP is a specialized compliance program within the Small Business/Self-Employed Operating Division (SB/SE) directed toward that segment of the population which derives substantial income from either legal or illegal activities and intentionally understate their tax liability.

  2. SEP evolved from a "Strike Force" , program focused on organized crime and illegal activity into a compliance program with emphasis on identifying, developing and investigating fraudulent income and expense issues of both legal and illegal entities.

  3. The goal of SEP is to enhance voluntary compliance and to promote public confidence in the tax system. This maximum deterrence is generated by examining those cases which significantly impact the public and assisting in the investigation and prosecution of prominent or notorious individuals who attempt to evade or defeat the tax system.

  4. SEP cases normally involve in-depth income examinations. IRC 7602(e), Limitation on examination on unreported income, of the Internal Revenue Code (IRC) states that the Service is not to use financial status or economic reality examination techniques, such as indirect methods, to determine the unreported income of any taxpayer unless there is a reasonable indication that there is a likelihood of such unreported income.

  5. The examination of income is a mandatory audit issue. The depth of the examination of income and the types of investigative techniques used are dependent on the facts and circumstances of the case. To determine whether unreported income exists, the SEP agent should: conduct the minimum income probes; resolve Large, Unusual and Questionable (LUQ) income items; perform a financial status analysis; and evaluate internal controls in the case of a business return. If the likelihood of unreported income has been established, the use of Financial Status Audit Techniques (FSAT) would be appropriate and are not prohibited by IRC 7602(e).

  6. If the SEP agent has established that there is a reasonable likelihood of unreported income, a more in-depth examination of income is warranted. Any technique or procedure used to determine the amount of unreported income could be labeled a FSAT. A FSAT is, therefore, defined by its purpose which is a technique, analysis or procedure used to determine the specific amount of unreported income. See IRM 4.10.4.5.2, In-Depth Examinations of Income: Individual Taxpayer.

  7. In some instances the SEP agent may have reasonable indications that the likelihood of unreported income exists prior to the start of the actual examination. Examples of such sources could include: information from informants/ whistleblowers; Criminal Investigation (CI); federal, state or local law enforcement; or Information Reporting Program (IRP).

  8. The SEP agent should document in workpapers the sources of information/evidence secured, the analysis of the information/evidence and the conclusions–and also document the dates those events and actions occurred. This step should always take place regardless of the methods used or the information made available to reach the determination that the likelihood of unreported income exists.

Introduction

  1. The core roles and responsibilities of SEP examiners are to:

    1. Identify and develop those issues, which have significant fraud potential, through the examination of complex financial transactions.

    2. Assist in financial investigations of taxpayers who derive legal and illegal income, but choose to evade their tax liability through one or more violations of the tax law.

    3. Serve as the cooperating agent in administrative and grand jury investigations.

    4. Provide trial assistance as expert and/or summary witness in criminal prosecutions.

    5. Assist Area Counsel in trial preparation.

    6. Protect the Government's interest through the use of jeopardy and/or termination assessments.

    7. Ensure the civil disposition of closed criminal prosecutions.

  2. The objectives of SEP are to:

    1. Perform timely and effectively planned and managed examinations of returns filed notwithstanding obstacles created by complexity, diversification, scarcity of audit records and evidence, difficulty in securing records and testimony or geographic dispersion of operations.

    2. Accumulate at the Headquarters' level and disseminate novel examination techniques, issues unique to legal or illegal income sources, avoidance and evasion schemes, and all other information useful in planning and executing examinations.

    3. Encourage and promote communications and exchange of techniques and procedures between compliance officers as an aid in achieving the most effective examination.

  3. Elements of SEP cases include, but are not limited to:

    1. Unreported income

    2. False expenses/credits

    3. Abusive return preparers

    4. Frivolous filers/non-filers

    5. Abusive trusts/abusive trust schemes

    6. Tax Shelters

    7. Fraudulent specialty tax investigations (for example, Employment Tax and/or Excise Tax Investigations)

    8. Health care fraud

    9. Racketeering/organized crime

    10. Narcotic trafficking

    11. Illegal gambling operations

    12. Prostitution

    13. Pornography

    14. Embezzlement and theft

    15. Political corruption

    16. Credit card fraud

    17. Bank fraud

    18. Currency violations (FinCEN/SAR)

    19. Offshore activities

    20. Internet fraud

    21. Compliance Initiative Projects (CIP)

    22. Whistleblower cases

    23. Promoter Investigations

    24. Voluntary Disclosure Program cases

    25. Identity Theft

SEP Agent Duties and Responsibilities

  1. Revenue Agents in SEP are financial investigative specialists and forensic accountants. In addition to general tax law knowledge and auditing skills, SEP agents are experts in the identification and development of cases with fraud potential.

General

  1. SEP agents:

    1. Identify fraud issues and recognize indicators of fraudulent activity.

    2. Conduct in-depth examinations of cases with fraud potential.

    3. Conduct detailed interviews of taxpayers and third party witnesses.

    4. Secure evidence, with a summons if necessary, to determine taxable income.

    5. Submit referrals to CI on cases meeting criminal criteria.

    6. Participate as a tax law expert in joint investigations and assist in computing the criminal tax liability.

    7. Balance civil and criminal aspects in joint investigation cases, including the protection of the statute of limitations.

    8. Prepare examination reports, compute tax liability and propose applicable civil penalties.

    9. Act as technical advisor and assist the U. S. Attorney's office with grand jury investigations.

    10. Assist U. S. Attorney's office and Area Counsel in preparing tax computations and special schedules for judicial purposes.

    11. Testify as an expert or summary witness in criminal and civil tax trials.

    12. Develop leads by networking with local, state and federal agencies.

  2. SEP agents who serve as the Subject Matter Experts (SME) are resource persons for SB/SE Examination and other Service functions in the following areas:

    1. Indirect methods of reconstructing income.

    2. Preparation, use and enforcement of summonses, IRM 25.5, Summons Handbook.

    3. Effective interviewing techniques and documentation.

    4. Development and application of civil fraud penalty, IRC 6663, and fraudulent failure to file penalty, IRC 6651(f). See IRM 25.1.6, Civil Fraud, and IRM 20.1, Penalty Handbook.

    5. Recommendation of jeopardy and termination assessments. See IRM 4.15.1, Jeopardy and Terminations.

    6. Expert witness and trial preparation.

    7. Accumulation and dissemination of novel examination techniques unique to income tax examinations and tax evasion schemes.

    8. Provision of face-to-face and virtual learning on topics such as auditing income, investigative techniques, and management of administrative joint investigations as well as grand jury investigations with IRS-CI.

Interviews

  1. An in-depth interview is one of the most important aspects of a SEP examination. Interviews are used to obtain leads, develop information and establish evidence. The testimony of witnesses and the admissions of alleged violators are major factors in resolving tax cases.

  2. In an initial interview, the SEP agent should obtain as much information as possible to evaluate the taxpayer's complete financial situation, since this may be the only contact with the taxpayer.

  3. SEP agents should interview the taxpayer and every pertinent witness connected with the case. See IRM 4.10.3.3.1, Who To Interview.

  4. As additional information and facts are uncovered, follow-up interviews may be critical to issue development. The use of a Summons to secure testimony should be considered as appropriate.

  5. Interviewing taxpayers in custody:

    1. Before interviewing a taxpayer confined in prison or otherwise detained by federal, state or local authorities, the SEP agent will first evaluate the case for fraud potential.

    2. If the case has no fraud potential, the SEP agent may conduct the interview without the assistance of a Special Agent (SA).

    3. If the case has firm indications of criminal fraud, the SEP agent will refer the case to CI without interviewing the taxpayer in custody.

    4. If the evaluation of fraud potential is not possible without interviewing the taxpayer in custody, the SEP agent will prepare a memorandum to the Special Agent in Charge (SAC), CI. This memorandum will request the assignment of a SA to assist in the interview and to inform the taxpayer in custody of their constitutional rights in accordance with the decision of Miranda v. Arizona, 86 S. Ct. 1602 (1966).

    5. After the interview, the assigned SA may assist the SEP agent in evaluating any possible fraud implications. If firm indications of criminal fraud are not present, the SEP agent will continue to work the case.

    6. It is not necessary for a SA to be present when interviewing a third party witness in custody.

  6. The SEP agent must prepare a permanent record of every interview using one or more of the following:

    1. Memorandum of interview;

    2. Transcript of interview or Question and Answer Statement;

    3. Affidavit; or

    4. Audio recording.

  7. Interviews of members of a federally recognized Indian tribe should be in accordance with protocols set forth by relevant Presidential Executive Orders. See IRM 5.1.12, Cases Requiring Special Handling.

Securing Affidavits
  1. One of the principal responsibilities of a SEP agent is to obtain early and accurate information.

  2. SEP agents must initiate and proceed with in-depth examinations on the assumption that cases will result in litigation. It is, therefore, incumbent upon the SEP agent to obtain as much testimonial and documentary evidence as possible.

  3. During the examination, the SEP agent may obtain oral testimony which may significantly affect the outcome of the case. The SEP agent should have the individual attest to the accuracy of their statements by preparing and signing an affidavit or statement.

  4. The average individual is not familiar with the law, therefore, the SEP agent should advise them that preparing or giving a false statement is a criminal offense. Therefore, an attested statement has greater validity when properly prepared and voluntarily given.

  5. Affidavits and statements are used to:

    1. Record the testimony of a witness;

    2. Refresh the memory of a witness;

    3. Deter a witness from becoming hostile and changing their testimony;

    4. Impeach a hostile witness;

    5. Be used as evidence; and/or

    6. Help accumulate complete and accurate information.

  6. SEP Agents may use some of the following methods to record statements:

    1. Affidavit—See IRM 9.4.5.7.1, Affidavit.

    2. Narrative Affidavit—Primarily is used by SEP agents. Variations are accepted as long as the basic elements remain unchanged. If feasible, the subject should be requested to examine, make corrections and sign the document. If they refuse to sign, the following legend should be inserted at the end of the statement: "This statement was read by [subject's name] on [date], who stated that it is true and correct, but refused to sign it."

    3. Summarized Narrative—A summary of a conversation or statement made by a taxpayer or witness who should be requested to examine, make corrections and sign the document. The SEP agents present at the interview should always sign the statement.

    4. Question and Answer—The witness should attest to its accuracy.

    5. Reports of Interview—A summary of an interview that is not signed by the taxpayer or witness, but attested to by the SEP agent.

  7. The SEP agent may decide to administer an oath to the taxpayer and/or witness at the start of the interview. The authority to administer oaths and affirmations, whether pursuant to the issuance of a summons or a request for information, is in IRC 7602, Examination of books and witnesses and IRC 7622, Authority to administer oaths and certify. While CI may normally administer oaths on a regular basis, it is recommended that SEP agents seek Area Counsel guidance prior to the creation of an oath to record statements. For additional information on oaths and the waiver of constitutional rights, see IRM 9.4.5.11.3.2.2, Waiver of Constitutional Rights, and related exhibits.

Electronic or Verbatim Recording of Interviews
  1. Requests to make audio tape, audio disk, stenographic or other verbatim recordings of interviews will ordinarily be allowed except where the taxpayer or representative's behavior is disruptive.

  2. Recording an interview of a taxpayer or witness should be considered when the SEP agent has concerns that testimony may later change. The Service can record an interview of a taxpayer or witness. In instances where the Service initiates the recording, the interview does not have to occur at an IRS office.

  3. For comprehensive information on the recording of interviews, see IRM 4.10.3.3.6, Requests to Audio Record Interviews.

Evidence

  1. SEP examinations are unique because of the significant potential for fraud and litigation. Many SEP cases result in recommendations for criminal prosecution and an even greater number involve assertions of the civil fraud penalty.

  2. The nature of SEP cases increases the likelihood that the burden of proof will rest with the government. SEP agents must gather the evidence necessary to sufficiently substantiate and prove the facts of the case.

  3. SEP agents should be familiar with the Federal Rules of Evidence (FRE) particularly:

    1. Best evidence rule (FRE 1001, Definitions That Apply to This Article through 1006, Summaries to prove content);

    2. Hearsay rule and exceptions (FRE 801, Definitions That Apply to This Article; Exclusions from Hearsay through 806, Attacking and Supporting the Declarant); and

    3. Attorney client and accountant client privilege rules (FRE 501, Privilege in General).

  4. SEP agents should also be familiar with case law interpretations of evidential principles and the law of privileges, such as the attorney-client privilege and the practitioner privileges of IRC 7525, Confidentiality privileges relating to taxpayer communications. See IRM 4.10.1.6.2, Confidentiality Privileges Relating to Taxpayer Communications—Accountant/Client Privilege and IRM 5.17.6, Summonses.

  5. When securing evidence, SEP agents must always be aware of the secrecy provisions of Rule 6 of the Rules of Federal Criminal Procedure. SEP agents must always verify that the information received was not grand jury information.

Search Warrant Secured Evidence
  1. SEP agents can utilize evidence secured by federal, state or local law enforcement agencies in securing leads and developing cases.

  2. SEP agents should obtain a copy of the search warrant and/or inventory to document how the evidence was obtained.

  3. Consult Area Counsel if there is a motion to suppress the search warrant or other technical problems with the search warrant evidence. In U.S. v. Janis, 76-2 USTC 16,299, 428 U.S. 433, 96 S. Ct. 3021, the Service was allowed to use evidence for civil purposes that was suppressed from criminal usage by the local authorities.

Electronic Communications Monitoring (Wire Tap) Evidence
  1. Evidence developed from a court ordered electronic monitoring can be an important source of information in SEP cases. The evidence may support a computation of income for a period of time in cases such as wagering or narcotics as well as links to assets, expenditures, associates of a taxpayer or other leads. Generally, the evidence will consist of tapes of actual telephone conversations, listing of telephone numbers called (Pen Register) and places from which calls were received (Trap and Trace).

  2. Title 18 U.S. Code section 2517, Authorization for disclosure and use of intercepted wire, oral, or electronic communications, sets forth a statutory theme under which disclosure and use of intercepted oral and wire communications are permitted. Section 2517(1) permits law enforcement officers who obtain wiretap evidence to turn such evidence over to other law enforcement officers for the latter's use. Section 2517(2) permits the receiving law enforcement officer to use wiretap evidence in their official duties, such as issuing summonses; obtaining jeopardy assessments; investigating tax offenses or preparing a Special Agent's Report (SAR).

  3. Caution:

    Title 18 U.S. Code section 2515, Prohibition of use as evidence of intercepted wire or oral communications prohibits the use of evidence derived from intercepted wire communications, if that information is in violation of the law. Before receiving such evidence, SEP agents must obtain the subsequent court order releasing the evidence to the IRS for use in an income tax examination. Follow the procedures set forth below to preserve the IRS's right to use this evidence.

  4. The SEP agent is responsible for initiating an application for disclosure. On a U.S. District Court approved case the application should be made through Area Counsel to the U.S. Attorney's office. On a state court approved case, the application will be made through Area Counsel to either the District Attorney's office or the U.S. Attorney's office. When the order is obtained through the District Attorney's office, the final order should be forwarded to Area Counsel after receipt for its approval of the order.

  5. Once approval of the court and/or Area Counsel is secured, the SEP agent will make arrangements for a SA to be assigned to accompany the SEP agent to secure the evidence. The SA will make a determination about the criminal aspects of the evidence received. If none is found or prosecution is declined due to dual prosecution or other reasons, the SA will refer the evidence to the SEP agent for civil purposes.

  6. Disclosure by the SEP agent should be limited to those named on the order. Title 18 U.S. Code section 2517(3) allows disclosure of such evidence while giving testimony under oath in any proceeding held under the authority of the United States.

  7. When closing an unagreed case, the electronic communications evidence must be removed from the case file and stored in a secured access storage area within an IRS office to prevent unauthorized disclosure. The workpapers should indicate that additional evidence is under the control of the SEP agent and would be available for litigation. On an unagreed case, the evidence should be held in the secured area until the statutes for any claims have expired at which time the evidence should be destroyed.

  8. See Chief Counsel Directives Manual (CCDM) 38.1.1.5 dated June 27, 2013 for further information on electronic surveillance.

Summons

  1. The summons is an important tool for obtaining the records and testimony needed to complete in-depth examinations. SEP cases frequently involve uncooperative taxpayers who do not agree to be interviewed or provide available records to which they have access or control. When lack of cooperation occurs, serious consideration should be given to summonsing the taxpayer for relevant testimony and records. Third party summonses should also be used to obtain necessary testimony and records.

  2. SEP agents should be familiar with provisions of the law relating to the use and enforcement of a summons. SEP agents should use good judgment when considering the issuance of a summons. Consult with SBSE Counsel for guidance specific to your individual case.

  3. A summons should be prepared and issued in accordance with the IRM 25.5, Summons Handbook.

Specific Item and Indirect Methods

  1. SEP cases often involve taxpayers who do not maintain adequate books and records. Therefore, SEP agents must be well versed in the various methods of reconstructing income. The two basic approaches in determining correct taxable income are:

    1. Specific item method; and

    2. Indirect method.

  2. The specific item method uses specific items to identify unreported income from both legal and illegal sources. This preferred method limits the taxpayer's ability to challenge the government's determination since this method is based on information personal to the taxpayer.

  3. When specific items are not traceable, it may be necessary to use indirect methods to reconstruct income based on circumstantial evidence. The use of indirect methods is allowed by IRC 446, General rule for methods of accounting, and has been upheld by the courts in civil and criminal tax cases.

  4. The court tested methods of reconstructing income include:

    1. Bank deposits and cash expenditures;

    2. Expenditures method (commonly known as Source and Application of Funds);

    3. Net worth;

    4. Percentage mark-up;

    5. Unit and Volume.

  5. The indirect method used must include evidence of a likely source of taxable income. In addition, the SEP agent must always address and refute possible defenses such as nontaxable sources of income and cash hoard regardless of whether the taxpayer raised such defenses.

  6. IRM 4.10.4.6, Formal Indirect Methods of Determining Income, provides guidance on the use of various indirect methods.

Joint Investigations

  1. SEP agents devote a significant amount of time working joint investigations with CI. Joint investigations are also known as administrative tax cases.

  2. Joint investigations are comprehensive investigations conducted jointly by CI and Examination. The primary purpose of a joint investigation is to determine if criminal tax fraud is involved and whether criminal prosecution should be recommended. In addition to assisting with the criminal tax computation, SEP agents are responsible for the civil aspects of the case including, but not limited to, the following:

    • Statute protection (see IRM 25.1.4.3.8, Statute Protection)

    • Consideration of subsequent year and related returns

    • Preparation of the Revenue Agent workpapers and examination report of adjustments for prosecution and non-prosecution years

    • Civil closing.

  3. Joint investigations can originate from the following:

    1. Form 2797, Referral Report of Potential Criminal Fraud Cases or

    2. Form 6544, Request for Cooperating Examiner.

  4. Upon assignment, the SEP agent should verify that the case is an administrative tax case rather than a grand jury case. Different procedures apply for grand jury cases as explained in the following section.

  5. SEP agents and SA's have separate, clearly defined roles in joint investigations. SEP agents must not participate in law enforcement activities nor be placed in situations for which they are not trained and/or which may put them or others at risk.

  6. SEP agent responsibilities and detailed procedures regarding joint investigations can be found in IRM 25.1.4, Administrative Joint Investigation.

Grand Jury Investigations

  1. A grand jury is a powerful investigative tool for the government used to investigate allegations of criminal wrongdoing. SEP agents are frequently involved with grand jury investigations and grand jury material.

  2. Proceedings of a grand jury are secret and are governed by Rule 6(e) of the Federal Rules of Criminal Procedure. The use of grand jury information for civil purposes is further restricted by the decisions in United States v. Baggot, 103 S. Ct. 3164 (1983) and United States v. Sells Engineering Co., Inc., 103 S. Ct. 3133 (1983).

  3. The group manager (GM) of an agent assigned to a grand jury case should request they be added to the grand jury access list (6(e) list) in order to effectively participate in discussions involving case actions and provide experienced feedback. The GM should evaluate the employee on current assignments, manage workload and balance grand jury inventory.

  4. The SEP agent assigned to a grand jury assists the U.S. Attorney's office, which controls the investigation. The SEP agent is primarily concerned with the consideration, resolution and review of issues as they relate to the criminal charges being investigated.

  5. Although the SEP agent involved in the grand jury case will not complete the final civil tax liability, they must be aware of the civil ramifications of information received or developed during the grand jury investigation. Only information made a matter of public record or obtained prior to or independent of the grand jury can be used in a subsequent civil case.

  6. SEP agents may use their credentials for identification, but must make it clear that they are assisting in a grand jury investigation as a grand jury agent.

  7. IRS summonses are not used in a grand jury investigation. Documents and testimony are obtained by the U.S. Attorney's office through the use of grand jury subpoenas.

  8. The grand jury SEP agent is considered tainted and is prohibited from participating in any civil aspects of the case resulting from the grand jury. Managers on a 6(e) list are also considered tainted and must refer the civil closing to another group.

  9. Guidance for grand jury investigations can be found in IRM 25.1.5, Grand Jury Investigations.

Expert Witness and Trial Preparation

  1. SEP agents often assist and/or testify in civil and criminal court proceedings. Examples include:

    1. Criminal tax trials;

    2. Tax court cases;

    3. Grand jury proceedings;

    4. Bankruptcy hearings;

    5. Summons enforcement hearings; and

    6. Judicial reviews of jeopardy and termination assessment cases.

  2. SEP agent responsibilities will vary depending on the issues of the case. The government attorney will determine the role of the SEP agent.

  3. Government prosecution cases require extensive time for preparation and trial. SEP agents should be prepared to spend any additional time necessary to assist the government attorney in the case.

  4. The SEP agent should contact the local Disclosure Office to determine whether a testimony authorization is required pursuant to 26 CFR 301.9000-1. See IRM 1.2.49.3, Delegation Order 11-2 (Rev. 2) (formerly DO-11-2). In general, a testimony authorization is not required in a case referred by the Service to the government where the government is calling the SEP agent as a witness.

  5. The most common duty as a SEP agent in courtroom proceedings is testifying during a criminal trial as an expert witness or as a summary witness.

  6. An expert witness is a person skilled in some area or who has experience or knowledge not generally known to ordinary persons (Federal Rules of Evidence, Rule 702). Under Rule 16(e) of the Federal Rules of Criminal Procedure, the defense can ask for the witness's qualifications. It is imperative that SEP agents maintain all professional requirements and a current resume.

  7. Once qualified before the court, the expert witness is called upon to express an opinion based on facts presumably in the record of the case. The expert witness reviews the government's evidence and expresses an opinion as to the issue needing expert assistance. Generally, the expert witness is called to testify immediately prior to the government's final witness and is excluded from hearing testimony during the trial.

  8. A summary witness listens to all evidence presented during the trial and is the final witness called in the government's case to convince the jury there was harm to the government. A summary witness will be qualified as an expert in federal income tax computations. Generally, the summary witness is a SEP agent or a compliance officer with no prior involvement in the investigation.

  9. Occasionally, SEP agents will be used as both the expert witness and the summary witness. In this situation, the SEP agent renders an expert opinion and prepares the tax computation.

Ex Parte Orders for Disclosure of Tax Returns and Tax Return Information

  1. SEP agents may obtain information during an income tax investigation indicating that non-tax criminal violations have occurred or may witness criminal acts falling under the jurisdiction of another federal agency. Except in rare and unusual cases, this information is considered tax return information as defined under IRC 6103, Confidentiality and disclosure of returns and return information. See IRM 11.3.34, Disclosure for Non-tax Criminal Violations, for situations where observing a criminal act would not be tax return information and could be disclosed to local, state or federal law enforcement agencies.

  2. In general, tax returns and tax return information cannot be disclosed to other federal law enforcement agencies. However, other federal law enforcement agencies pursuing potential non-tax federal criminal charges may obtain an ex parte order through the U. S. Attorney's office in accordance with the requirements set forth in IRC 6103(i), Disclosure to Federal offices or employees for administration. See IRM 11.3.28, Disclosure to Federal Agencies for Administration of Non-Tax Criminal Laws, for IRC 6103(i), procedures. The ex parte order is forwarded to the Disclosure Office to obtain the necessary documents.

  3. The Disclosure Office will only provide the information specified in the ex parte order to the specified parties.

  4. For disclosure of Bank Secrecy Act Information (Title 31), refer to IRM 11.3.28.5.1, Disclosure of Bank Secrecy Act Information. Information will not be released through an ex parte order if it is determined by the Service that disclosure would identify a confidential informant or seriously impair a civil or criminal investigation. See IRM 11.3.28.4, Procedures for Access to Returns and Return Information, paragraph (1) (c).

  5. The SEP agent should consult with the Disclosure Office as to whether material developed subsequent to the ex parte order may be disclosed on a continuing basis. Such subsequent disclosure may be made only if the ex parte order provides for further disclosures and designates a specific cutoff date. See IRM 11.3.28.5, Disclosures in Conformity with an Ex Parte Court Order, paragraph (19).

  6. State and local law enforcement agencies cannot obtain an ex parte order.

Sources and Development of SEP Cases

  1. The following overview reflects the restrictions on SEP agents in identifying and developing their casework.

Overview

  1. This section provides guidelines for the identification and development of leads for SEP cases. The leads can be obtained from internal and/or external sources. These leads can then be developed into potential fraud cases using all available resources.

  2. To properly develop a case, SEP agents must go beyond examining and interpreting taxpayer records. It is often necessary to go to third parties to obtain and/or verify information to determine the correct tax liability.

  3. SEP agents must always follow the third party contact provisions of IRC 7602(c), Notice of contact of third parties, when identifying and developing cases.

  4. SEP agents must follow current Service guidelines relating to case development and case assignment. SEP agents may not develop their own cases from leads received from internal or external sources. SEP leads received through internal and external sources will go through an independent arm’s length selection and classification process. All leads should be forwarded electronically to the approved Area Planning and Special Programs (PSP) coordinator via Form 5346, Examination Information Report. SEP information referrals may include, but not limited to, informant information, information received from federal, state and local law enforcement agencies, court documents, public databases, newspaper articles, internet and Suspicious Activity Report (SAR) Review Team Referrals. Case building actions will be completed by Brookhaven Campus (BC). See IRM 4.1, Planning and Special Programs, for an expanded explanation on case development, case assignment and workload delivery.

  5. Brookhaven will identify SEP referrals with Project Code 1261, Tracking Code 8306 and Aging Reason Code (ARC) 19.

Sources for Obtaining Leads

  1. Internal sources may include:

    1. Form 3949, Information Report Referral;

    2. Form 3449, Collection Referral Report;

    3. Form 5666, TE/GE Referral Information Report;

    4. Information pertaining to illegal income or jeopardy and termination assessments;

    5. Compliance Initiative Project (CIP) information;

    6. Title 31 and Form 8300, Report of Cash payments Over $10,000 Received in a Trade or Business leads; and

    7. Closing Agreements and Revenue Agent Reports on closed criminal cases;

    8. Referrals from other operating divisions;

    9. Whistleblower Informant claims (Form 211, Application for Award For Original Information).

  2. External sources may include:

    1. Informant information;

    2. Information received from federal, state and local law enforcement agencies; and

    3. Court documents, public databases, newspaper articles, internet and others.

Internal Resources for Case Development

  1. Prior year Revenue Agent Reports (RAR) and workpapers.

  2. Prior year Special Agent Reports (SAR) and exhibits for administrative cases only.

  3. CI information and case development files including prime leads.

  4. Collection files containing financial information.

  5. Transcript of accounts (IDRS).

  6. Information Return Processing (IRP) transcripts.

  7. Bank Secrecy Act Information (Currency Transaction Reports and Suspicious Activity Reports).

  8. International Revenue Agent Reports.

  9. Treasury Enforcement Communication System (TECS) records.

External Resources for Case Development

  1. Research databases (for example, Lexis-Nexis, Accurint, Westlaw and others).

  2. Asset locator services.

  3. Records of civil and criminal cases from federal, state and local courts.

  4. Records of parole and from probation officers.

  5. Bankruptcy filings.

  6. U.S. Coast Guard (vessels registered with the Coast Guard may not be registered with a state).

  7. Drug Enforcement Administration (DEA).

  8. Federal Bureau of Investigation (FBI).

  9. U.S. Immigration and Customs Enforcement (USICE).

  10. U.S. Secret Service.

  11. Bureau of Alcohol, Tobacco Firearms, and Explosives (ATF).

  12. National Crime Information Center (NCIC) through CI.

  13. Department of Homeland Security (DHS).

  14. Department of State.

  15. Treasurer of the United States.

  16. Federal Aviation Agency (FAA).

  17. Securities and Exchange Commission (SEC).

  18. U.S. Postal Service.

  19. State and local law enforcement agencies.

  20. Department of Motor Vehicles (DMV).

  21. Department of Agriculture.

  22. Health and Human Services (HHS).

Third Party Contacts

  1. When obtaining information from outside sources, SEP agents must follow third party contact procedures in accordance with IRC 7602(c), Notice of contact of third parties, and IRM 4.10.3.3.1.4, Third Party Interviews.

  2. Before making a third party contact, SEP agents must determine which advance notification letter is appropriate. Because of the nature of their cases, SEP agents are authorized to use Letter 3164-E, (Exam-1) Third Party Contact, letter except for non-filers. See IRM 25.27.1, Third Party Contact Program.

  3. Contact with the Service, initiated by a third party such as a member of law enforcement or an informant, is not considered a third party contact. However, if the SEP agent contacts a third party regarding a specific taxpayer, the contact requires advance notification to the taxpayer and a recordation of the contact.

  4. Advance taxpayer notification requirements do not apply when:

    1. The taxpayer authorizes the third party contact;

    2. Such notice would jeopardize collection of any tax; or

    3. There is a pending criminal investigation.

  5. In jeopardy/termination assessment cases no advance notification is required. However, Form 12175, Third Party Contact Report Form, must be prepared for each contact and submitted to the Third Party Coordinator when the jeopardy situation no longer exists. If additional contacts will be made, the SEP agent will also prepare and send the appropriate Letter 3164 if one has not already been provided to the taxpayer.

  6. Advance notification requirements do not apply when the third party has a reprisal concern. Therefore, it is important to make a reprisal determination during the initial contact with third parties. Form 12175, is submitted with the reprisal block marked rather than listing the name of the third party.

  7. Advance notification requirements do not apply to any general, primary, subject criminal or subject seizure investigation initiated by CI. Form 12175, is not required in these cases.

  8. For additional guidance, see IRM 4.10.3.3, Interviews: Authority and Purpose. See IRM 4.11.57, Third Party Contacts.

AIMS

  1. The following overview should be used in conjunction with the material located in the AIMS portion of the IRM.

Overview

  1. This section identifies the various source codes, status codes, activity codes and project codes unique to SEP.

Source Codes

  1. Source Code 88 (Special Enforcement) is used to request returns and/or AIMS control on case(s) involving illegal activity.

  2. Source Code 89 (Special Enforcement Related Pick-ups) is used to request a multi-year or related return and or AIMS control on case(s) involving illegal activity.

  3. Source Code 90 (Fraud Regular) is used to request returns and AIMS/or AIMS control on case(s) for a joint investigation or for the purpose of referring such returns to CI. In general, returns already open on AIMS with another source code should not be updated to Source Code 90. A fraud project code should be used to identify the case.

Status Codes

  1. Status Code 17 is used when the revenue agent, the group manager and the Fraud Technical Advisor (FTA) agree that fraud potential exists.

  2. Status Code 18 is used when CI accepts a criminal fraud referral.

  3. When returned from CI for civil settlement, Status Code 17 is used for civil fraud development if concurrence was reached by the revenue agent, the group manager and the FTA. If no fraud potential exists, Status Code 12 is used.

Project Codes

  1. Project Code 0001 - Drug Enforcement Task Force Case - Termination.

  2. Project Code 0002 - Drug Enforcement Task Force - Jeopardy.

  3. Project Code 0003 - Drug Enforcement Task Force - Other.

  4. Project Code 0004 - Regular Narcotics Case - Termination.

  5. Project Code 0005 - Regular Narcotics Case - Jeopardy.

  6. Project Code 0006 - Regular Narcotics Case - Other.

  7. Project Code 0017 - Conditions of Probation Cases.

  8. Project Code 0076 - Fraud Development (Campus).

  9. Project Code 0095 - Request for Cooperating Agent Exam Referral.

  10. Project Code 0096 - Request for Cooperating Agent Non-Exam Referral.

  11. Project Code 0133 - CI - Non EITC Referral.

  12. Project Code 0146 - Form 8300, Report of Cash payments Over $10,000 Received in a Trade or Business fraud.

  13. Project Code 0147 - Title 31 fraud.

  14. Project Code 0216 - Civil Disposition - Grand Jury.

  15. Project Code 0217 - Civil Disposition - Administrative.

  16. Project Code 0218 - Other Fraud.

  17. Project Code 0442 - Questionable Refund Detection Teams (QRDT).

  18. Project Code 1168 - Criminal Restitution.

  19. Project Code 1261 - Referral generated by a SEP group agent.

Activity Codes

  1. SEP Non-Case Time (597) - To develop contacts for potential leads.

  2. Narcotics/Information Gathering Projects (592) - No return examined; to gather information and develop leads.

  3. Grand Jury Non-Narcotics Related (815).

  4. Grand Jury Drug Enforcement Task Force Case (816).

  5. Grand Jury Narcotics Related (817) - Other.

  6. Details to CI/CAS (818).

  7. Trial Assistance (821).

Aging Reason Codes

  1. Aging Reason Code (ARC) 16 - Conditions of Probation.

  2. Aging Reason Code (ARC) 17 - Civil Disposition - Grand jury cases no conditions of probation.

  3. Aging Reason Code (ARC) 18 - Civil Disposition - Administrative cases no conditions of probation.

  4. Aging Reason Code (ARC) 19 - For tax return being examined by a SEP agent and the source code (SC) is not 88, 89 or 90. ARC -19 would be placed on both the original return and related pick-up examinations. ARC -19 should be placed on all referrals generated by a SEP agent.

Illegal Source Income

  1. SEP work includes legal source income, however, initially SEP was directed only toward illegal income sources. The following subsections provides a background on initial source of SEP work.

Background

  1. SEP is directed toward that segment of the public who derives substantial income from illegal activities. The very nature of these illegal activities requires close cooperation with the Department of Justice (DOJ) and other federal, state and local law enforcement agencies.

  2. The DOJ agreement established guidelines which were compatible with the Service's policy of fair and effective administration and enforcement of tax laws and the objective of DOJ to give priority to the investigations and prosecution of organized criminal activity, corruption in government, narcotics trafficking, and all forms of white-collar crimes. Provisions were also made for continued cooperation between the Service and DOJ on Strike Force matters. The document also established a Coordinating Committee to resolve any disagreements that may arise.

Definitions

  1. IRS Racketeer—A taxpayer identified as being engaged in organized crime activities; notorious or powerful with respect to local criminal activities; receiving substantial income from illegal activities as a principal, a major subordinate, or an important aider or abettor; or infiltrating legitimate businesses through illegal means or through loaning or investing therein the proceeds from illegal activities.

  2. Wagering—Taxpayers engaged in an occupation requiring registration or one who is engaged in receiving wagers.

  3. Illegal Income—Includes any person who is reasonably believed to be receiving substantial income from an illegal activity that is separate and apart from the alleged tax violations, such as corruption in government, welfare fraud or commercial bribery.