4.32.2 The Abusive Transactions (AT) Process

Manual Transmittal

June 08, 2012

Note:All future releases of IRM 4.32.2 will be electronic only.

Purpose

(1) This transmits revised IRM 4.32.2, Abusive Transactions, The Abusive Transactions (AT) Process.

Material Changes

(1) This update primarily includes updates to Large Business and International (LB&I) titles, references, processes and procedures. Significant changes to this IRM are reflected in the table below:

Reference Description
IRM 4.32.2.2 Added paragraph (2), IRC definition of a tax shelter
IRM 4.32.2.2.1 Modified table
IRM 4.32.2.3.3 Corrected descriptions of LB&I programs
IRM 4.32.2.3.3.1 Expanded description of the role of Office of Tax Shelter Analysis (OTSA)
IRM 4.32.2.3.3.1.1 Expanded information regarding OTSA's role regarding disclosures of reportable transactions
IRM 4.32.2.3.3.1.2 Described process for evaluating taxpayer disclosures
IRM 4.32.2.3.3.5.1 Added information regarding LB&I process of evaluating promoter/material advisor activity
IRM 4.32.2.3.7 Added information regarding Joint International Tax Shelter Information Centre (JITSIC) membership and procedures
IRM 4.32.2.7.2.2 Clarified procedures for beginning LB&I Material Advisor Investigations
IRM 4.32.2.7.2.2.1 Clarified procedures regarding promoter's responses to audit letters
IRM 4.32.2.7.2.2.2 Added this section to provide instructions for issuance of IRC 6112 letter
IRM 4.32.2.7.2.2.3 Added this section to provide instructions for responses to IRC 6112 letters
IRM 4.32.2.7.2.2.4 Updated table describing types of reportable transactions
IRM 4.32.2.7.2.2.4.1 Updated citations and descriptions
IRM 4.32.2.7.5.1 Updated procedures regarding summons for foreign records
IRM 4.32.2.7.7.3 Added section regarding LB&I use of Appeals Fast Track procedures
IRM 4.32.2.8.3 Clarified LB&I discontinuation procedures
IRM 4.32.2.9 Clarified the purpose of injunctive actions
IRM 4.32.2.10.1 Updated citations regarding IRC 6111
IRM 4.32.2.10.2 Updated citations regarding IRC 6112
IRM 4.32.2.11.5.2 Expanded explanation of IRC 6707 penalties
IRM 4.32.2.14 Added section regarding partnership anti-abuse regulation
IRM Exhibit 4.32.2-1 Removed and renumbered remaining exhibits
IRM Exhibits 4.32.2-4 through IRM Exhibit 4.32.2-18 Added IRM Exhibits

Effect on Other Documents

IRM 4.32.2, dated 09-23-2011, is superseded.

Audience

This section provides guidance for Small Business/Self-Employed (SB/SE) Examination area office employees, Tax Exempt and Governmental Entities (TE/GE) employees, and Large Business and International (LB&I) examiners.

Effective Date

(06-08-2012)

Tamera L. Ripperda
Director, Abusive Transactions and Technical Issues SE:S:E:ATTI
Small Business/Self-Employed

Overview of Abusive Transactions (AT) Program

  1. This IRM section provides guidance to compliance employees for referring potential Abusive Transactions (AT) promoter leads and outlines procedures for AT promoter investigations, participant examinations, and other AT matters. It addresses identification of promoter leads, the promoter investigation process, parallel investigation procedures, investigation outcomes, closing procedures, identification and case-building processes for participant cases, and other AT matters.

  2. The IRS is committed to pursuing investigations of AT promoters to stop the widespread use of abusive promotions that erode the voluntary tax compliance system and result in substantial tax revenue loss. These investigations are designated as priority work. The IRS combats AT promotions by:

    • Seeking timely civil injunctions.

    • Asserting civil penalties against promoters and return preparers.

    • Providing published guidance on various promotions.

    • Conducting participant examinations.

    • Criminally prosecuting promoters, preparers, or participants.

  3. This IRM section is a compilation of the IRS's AT policy encompassing operations of the Small Business/Self Employed Lead Development Center (SB/SE LDC), the Office of Tax Shelter Analysis (OTSA), and the Large Business and International (LB&I) Technical Tax Shelter Promoter Committee (TTSPC).

  4. The procedures are primarily for the use of examiners in Small Business and Self-Employed (SB/SE), LB&I, and Tax Exempt and Government Entities (TE/GE). These procedures may also be helpful to employees in Appeals, Criminal Investigation (CI), and the Office of Professional Responsibility (OPR).

  5. The term "promoter" as used throughout this IRM chapter unless specifically noted, includes promoters, material advisors as defined under IRC 6111, and tax return preparers.

  6. The term "participant" as used in this IRM chapter includes all persons who participated in a promotion, purchased a product or service from a promoter, had an interest in a promotion, or received any material aid, assistance, or advice with respect to the promotion. Participant includes investors and advisees.

Abusive Transactions Defined

  1. Abusive transactions include the organization or sale of any plan or arrangement promoting false or fraudulent tax statements or gross valuation misstatements, aiding or assisting in the preparation or presentation of a return or other document to obtain tax benefits not allowed by law, and actions to impede the proper administration of the Internal Revenue Code (IRC). This general definition includes both tax shelters as defined in various sections of the IRC and other types of abusive tax promotions.

  2. IRC 6662(d)(2)(C) broadly defines a "tax shelter" as a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, if a significant purpose of such partnership, entity, or arrangement is the avoidance or evasion of federal income tax.

  3. AT promotions include, but are not limited to, programs that rely on:

    1. False statements about the allowance of tax benefits to participants that are contrary to clearly established law.

    2. Intentional manipulation or misapplication of IRC sections to improperly claim tax benefits.

    3. Sham arrangements having no economic significance or business purpose other than the avoidance or evasion of tax.

    4. Gross valuation misstatements that ascribe a value to an asset or service that is at least twice the correct value and result in a tax reduction.

    5. Noncompliance with disclosure requirements of IRC 6111, Disclosure of Reportable Transactions.

    6. Noncompliance by material advisors with the list maintenance requirements of IRC 6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees Etc.

    7. Attempts to impede the proper administration of tax laws.

    8. Gross overstatement of withholding or refundable credits to obtain false refunds.

  4. There are many tools available to the IRS to address the promotion of and the participation in an AT activity, including:

    1. Seek injunctive relief under IRC 7402, Jurisdiction of District Courts; IRC 7407, Action to Enjoin Tax Return Preparers; and/or IRC 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions.

    2. Assessment of civil penalties against promoters under IRC 6700, Promoting Abusive Tax Shelters, Etc.; IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability;IRC 6707, Failure to Furnish Information Regarding Reportable Transactions; IRC 6708, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions;IRC 6694, Understatement of Taxpayer’s Liability by Tax Return Preparer; and/or IRC 6695, Other Assessable Penalties with Respect to the Preparation of Tax Returns for Other Persons.

    3. Criminal prosecution of individuals who organize; promote; sell; or assist in the organization, promotion, or sale of an AT activity; and, potentially, participants in the activity.

    4. Issuing notification letters to participants in AT promotions.

    5. Examinations of individuals involved in promotions (i.e., promoters, preparers, participants, etc.).

    6. Assessment of civil penalties against participants including IRC 6707A, Penalty for Failure to Include Reportable Transaction Information With Return, and IRC 6662A, Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions.

    7. Office of Professional Responsibility sanctions for those participants, promoters, or preparers who are practitioners defined in § 10.3 of Circular 230, Regulations Governing Practice Before the Internal Revenue Service, or otherwise subject to Circular 230.

    8. Revocation of electronic filing privileges.

  5. Successful resolution of promoter investigations and participant examinations require the combined actions of Collection, Counsel, Criminal Investigation (CI), LB&I, SB/SE, TE/GE, W&I, and the Tax Division of the DOJ. See IRM 4.32.3, Coordination and Roles of Cross Functional Units, for additional information.

Statutory History and Provisions

  1. The Tax Reform Act of 1976 (PL 94–455) added IRC 7407, Action to Enjoin Income Tax Return Preparers.

  2. Statutory tools provided in the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 (PL 97-248) used to address promotions include:

    • IRC 6700, Promoting Abusive Tax Shelters Etc.

    • IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability.

    • IRC 7408, Action to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions.

  3. The Tax Reform Act of 1984 (PL 98-369), sections 141 and 142, added additional statutory provisions to the IRC imposing penalties for failure of an organizer or seller of an abusive tax shelter to register that tax shelter or to maintain the required list of investors. See IRC 6111, IRC 6112, IRC 6707, and IRC 6708.

  4. Abusive tax shelters that required registration by organizers and sellers in the 1980s and 1990s included 2:1 ratio tax shelters and confidential corporate tax shelters. See IRC 6111(c)(1) and (d) (as effective prior to October 23, 2004) for more information.

  5. The American Jobs Creation Act (AJCA) of 2004, sections 811 through 822 and 838, added additional statutory provisions to the Internal Revenue Code and amended some existing code sections as follows:

    Citation Description
    IRC 6111
    Disclosure of Reportable Transactions
    IRC 6112
    Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc.
    Amended IRC 6111 to require material advisors of reportable transactions to file informational returns identifying reportable transactions and the potential tax benefits expected to result from the transaction and such other information the Secretary may prescribe. IRC 6112 requires material advisors to maintain a client list of investors/advisees and to provide that list to the IRS upon request.
    IRC 6662A
    Imposition of Accuracy-Related Penalty on Understatements With Respect to Reportable Transactions
    Imposes a 20 percent penalty for understatements resulting from listed transactions and reportable transactions (other than listed transactions) if a significant purpose of the transaction is the avoidance or evasion of tax. The penalty increases to 30 percent for reportable transactions that are not adequately disclosed.
    IRC 6662(d)(1)(B)
    Imposition of Accuracy-Related Penalty on Underpayments - Substantial Understatement of Income Tax
    Revised to define substantial understatement of income tax for corporations other than an S corporation or a personal holding company as the lesser of 10 percent of the tax required to be shown on the return (or, if greater, $10,000) or $10 million.
    IRC 6700
    Promoting Abusive Tax Shelters, Etc.
    Amended to increase the penalty applicable to a person who knowingly makes, or causes another to make, a false or fraudulent tax benefit statement for any material matter pertaining to a tax shelter plan or arrangement to 50 percent of the gross income derived or to be derived from the abusive plan or arrangement.
    IRC 6707
    Failure to Furnish Information Regarding Reportable Transactions
    Amended to impose a penalty on material advisors for failing to timely file an information return or for filing false or incomplete information as required by IRC 6111 for reportable transactions. The penalty equals:
    1. For failures with respect to reportable transactions (other than listed transactions), $50,000; or

    2. For listed transactions, an amount equal to the greater of $200,000 or 50% (75% in the case of an intentional failure) of the gross income derived by such person with respect to aid, assistance, or advice which is provided with respect to the listed transaction before the date the return is filed under IRC 6111.

    IRC 6707A
    Penalty for Failure to Include Reportable Transaction Information With Return
    Imposes a penalty for failing to report certain transactions that have a potential for tax avoidance or evasion (reportable transactions as defined in IRC 6011 and the regulations thereunder) and transactions specifically identified as tax avoidance transactions (listed transactions) as required by Treas. Reg. 1.6011-4.
    IRC 6708
    Failure to Maintain Lists of Advisees With Respect to Reportable Transactions
    Amended to impose a daily penalty of $10,000 on material advisors of reportable transactions who fail to make a list of investors/advisees available as required by IRC 6112 within 20 business days from an IRS written request for the list.
    IRC 7408
    Action to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions
    Expanded to allow injunctions to be sought for actions subject to penalty under IRC 6707 or IRC 6708, or violating Treasury Department Circular 230, Regulations Governing Practice Before the Internal Revenue Service.
    IRC 6501(c)(10)
    Limitations on Assessments and Collection - Exceptions
    Amended to add an exception to the applicable statute of limitations for assessing underpayments of tax resulting from undisclosed listed transactions. The statute of a taxpayer who participated in a listed transaction remains open until the taxpayer or a material advisor discloses the taxpayer's participation in the transaction. After such disclosure occurs, the statute will remain open for 1 year from the date of that disclosure.
    IRC 163(m)
    Interest
    Revised to disallow any deduction for interest paid or accrued on any portion of an underpayment attributable to an undisclosed reportable transaction.
    IRC 7525(b)
    Confidentiality Privileges Relating to Taxpayer Communications – Section Not to Apply to Communications Regarding Tax Shelters
    Amended to extend the denial of privilege for written communications between a tax practitioner and a corporate client to include any individual engaged in a tax shelter activity.
    American Jobs Creation Act (AJCA) of 2004 section 821 Amended § 5321(a)(5) of Title 31, United States Code, to increase the penalty for failing to report interests in foreign financial accounts.
    AJCA of 2004 section 822 Amended § 330(b) of Title 31, United States Code, to authorize the Secretary to censure and fine an incompetent or disreputable tax advisor who practices before the Department of the Treasury.

Lead Identification and Investigation Authorization

  1. This material provides guidance to all IRS employees for referring potential AT promoter leads and describes the process for authorizing promoter investigations.

  2. SB/SE investigations are authorized by the SB/SE LDC.

  3. LB&I investigations are authorized by the TTSPC.

Identification of Promoter Leads

  1. All potential leads are sent to the SB/SE LDC or OTSA for development and evaluation. If sent to OTSA, OTSA will make a recommendation to the TTSPC.

  2. The following is a list of the types of promoter leads reviewed by SB/SE LDC and OTSA. The list is not all-inclusive.

    • Domestic abusive trust promotions

    • Offshore compliance promotions

    • Abusive business entity and deduction promotions

    • Refund and tax credit promotions

    • Anti-tax and constitutional arguments

    • Exempt organization promotions

    • Corporate tax shelter promotions

    • Arrangements designed to illegally reduce or eliminate employment taxes

    • Compliance issues relating to IRC 6111, Disclosure of Reportable Transactions

    • Compliance issues relating to IRC 6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees

    • Collection promotions

  3. No contact with a known or suspected promoter or third parties should be made prior to receiving authorization from the SB/SE LDC or LB&I TTSPC. Examiners may only conduct passive research on any lead. Examples of passive research are securing marketing or promotion materials from internal or public sources and researching IDRS to identify the suspected promoter’s taxpayer identification number (TIN). Any research should be included with the referral package.

  4. Active research of leads relating to a promoter is not conducted until appropriate approval is obtained from the SB/SE LDC or LB&I TTSPC. Active research includes:

    1. Forwarding promotional materials to Counsel for a formal opinion outside the scope of an ongoing income tax examination.

    2. Ordering the promoter's tax return.

    3. Initiating an income tax examination of the promoter.

    4. Making direct contact with the promoter or third parties.

    5. Ordering a return of a participant not currently under examination or directly related to a return currently under examination.

    6. Performing IDRS research on participants.

  5. Promoter lead packages should contain sufficient background information that is readily available to make the referral useful. Examples of information that may be useful include:

    1. Marketing or promotional materials including legal opinions, secured during an examination or from third parties.

    2. Information regarding the promoter’s network, operations, or marketing strategy.

    3. A list of any known participants.

    4. Affidavits, interview notes, correspondence or statements from witnesses or participants.

    5. A brief overview of examination results (if applicable).

    6. An estimate of the scope and potential harm to the government.

    7. Copies of tax returns used in the promotion.

    8. Names, addresses, and employer identification numbers (EINs) for related and/or sub-promoters.

    9. Copies of any correspondence between related and/or sub-promoters.

    10. Years involved.

    11. Source(s) of information.

    12. Promoter /material advisor history, if known.

  6. Promoter lead packages are forwarded to the SB/SE LDC or OTSA as appropriate.

  7. For referral forms and additional information on the SB/SE LDC or OTSA referral process:

    • For SB/SE - See IRM 4.32.2.3.2, SB/SE Lead Development Center (SB/SE LDC).

    • For LB&I - See IRM 4.32.2.3.3.1, Role of OTSA.

Time Charges for Promoter Referrals
  1. Time charged to SB/SE promoter investigations is non-case specific until the SB/SE LDC formally approves an investigation. Time spent by SB/SE examiners preparing referrals is charged as follows:

    Activity Code Activity
    593 Promoter activity under IRC 6700.
    594 Aiding and abetting promoter activity under IRC 6701.
  2. Once the SB/SE LDC authorizes an investigation, time is charged to the specific investigation.

  3. LB&I examiners and technical specialists must use Activity Code 529 for time spent developing information on lead referrals and for providing assistance to examiners in developing promoter leads before LB&I TTSPC approval. When a promoter investigation is approved, LB&I examiners use Activity Code 593.

SB/SE Lead Development Center (SB/SE LDC)

  1. SB/SE Delegation Order 4.60, Functions Related to Potential Promoters/Tax Shelters Cases, delegates authority to approve and refer all SB/SE AT promoter investigations to the SB/SE LDC Program Manager, in consultation with the Director, Abusive Transactions and Technical Issues, Counsel, and CI.

  2. The SB/SE LDC was established to centralize receipt and development of SB/SE AT promoter leads, conduct research, build promoter cases, and authorize the initiation of promoter investigations in coordination with Counsel, CI, and other operating divisions.

  3. Leads are submitted to the SB/SE LDC using Form 14242, Reporting Abusive Tax Promotions and/or Promoters.

  4. The SB/SE LDC will acknowledge receipt of the lead and may contact the referring IRS employee for additional information.

  5. The SB/SE LDC conducts additional research and evaluates the investigation potential. Some factors they consider are:

    • Type of promotion.

    • Past activity of the promoter.

    • Ongoing activity or likelihood of reoccurrence.

    • Size of the promotion.

    • Tax impact of the promotion.

    • Possible tax law violations.

    • Favorable public impact or compliance impact.

    • Existing balance due liabilities including an open Collection assignment.

  6. If a promoter subject to Circular 230 violates any of its provisions (such as failure to file tax returns or a criminal conviction for financial crimes involving breach of trust), the SB/SE LDC will make a referral to the OPR. A copy of the referral is included in the investigation case file.

  7. Once an investigation is authorized, the administrative file is sent to the field. A copy of the authorization memo is sent via e-mail to Collection Policy. The file includes:

    1. An investigation authorization memorandum describing the promoter's background and history, the promotion, potential First Amendment concerns, summary of products or services sold, any criminal investigation information, the scope of the promotion, and recommendation for investigation.

    2. Any promotional or other materials provided by the referring examiner(s) or other lead source.

    3. Internal or public records research conducted by the SB/SE LDC.

  8. An investigation is not limited to the scheme identified in the referral. Approval of the investigation authorizes an examiner to review all potentially abusive promotional activities.

  9. Approval of a promoter investigation includes the investigation of any entity controlled by the promoter.

  10. Promoter investigations may be conducted simultaneously with examination of the promoter and related participants. While not required, it is sometimes preferable that one examiner conduct the promoter investigation and a different examiner conduct the income tax audit(s) of the promoter and/or participants. However, the examiners should coordinate and share relevant information.

Primary/Secondary Promoters
  1. When a promotion involves multiple promoters, each person involved in the promotion is designated as either a "primary" or "secondary" promoter.

  2. The key person or principal organizing or arranging the AT promotion, if known, is designated as the primary promoter.

  3. If the Area where the primary promoter resides is not able to coordinate the investigation, the issue management team (IMT) selects the primary investigative office. If an IMT is not established, then an ATTI senior program analyst should be consulted.

Office of Tax Shelter Analysis (OTSA), LB&I Tax Shelter Steering Committee and LB&I Technical Tax Shelter Promoter Committee (TTSPC)

  1. OTSA was created as part of the Pre-Filing and Technical Guidance (PFTG) function in LB&I (Announcement 2000-12, IRB 2000-12, 835, Disclosure Requirements for Corporate Tax Shelters). OTSA provides information and services to all IRS operating divisions and functions as well as other interested parties, including Treasury and Congress.

  2. The LB&I Tax Shelter Steering Committee provides leadership and executive oversight in implementing the tax shelter program.

  3. The LB&I TTSPC is a sub-committee of the LB&I Tax Shelter Steering Committee, and approves all LB&I tax shelter promoter and material advisor contacts and investigations. Examiners may NOT contact a promoter or material advisor with respect to a tax shelter or reportable transaction promotion unless approval is first obtained from the LB&I TTSPC.

Role of OTSA
  1. OTSA serves the entire IRS as a centralized clearinghouse for all information related to abusive tax shelter activity and issues of significant compliance risk to tax administration that comes to the attention of the IRS from both internal and external sources. OTSA collects complete and accurate information, timely analyzes the information to identify trends and disseminates the results to those in the position to take the necessary action.

  2. OTSA is responsible for making recommendations to the LB&I TTSPC regarding tax shelter promoters/material advisors referrals and IRC 6112 letter requests from the technical specialists' review of Form 8918, Material Advisor Disclosure Statement.

  3. OTSA works with Counsel, headquarters, field personnel and others, including the operating divisions and CI to evaluate the tax treatment of new variations of tax-structured transactions. OTSA works indirectly with Treasury through Counsel.

  4. OTSA collects information from many sources to support and implement the IRS’s tax shelter compliance and behavior strategies, including, but not limited to:

    • Taxpayer and Material Advisor Disclosures of Reportable Transactions

    • Promoter/Material Advisor Investigations

    • Tax Shelter Hotline

    • LB&I Referrals

    • Emerging Issues

Disclosures of Reportable Transactions
  1. OTSA is responsible for:

    1. Monitoring all reportable transactions disclosed by material advisors as required by IRC 6111, as amended by AJCA of 2004, and Treas. Reg. 301.6111-3.

    2. Monitoring all reportable transactions disclosed by taxpayers as required by Treas. Reg. 1.6011-4.

    3. Reviewing and analyzing reportable transactions to detect patterns as well as identifying new promoters and/or promotions.

    4. Maintaining a centralized and secure document repository of Form 8886, Reportable Transaction Disclosure Statement, and Form 8918, Material Advisor Disclosure Statement, and associated databases to be used for enterprise-wide issue collaboration, searching, and knowledge management.

    5. Assigning unique material advisor reportable transaction numbers to each reportable transaction disclosed by a material advisor on Form 8918.

    6. Identification of potential IRC 6707A penalty cases for non-compliance with disclosure laws and dissemination to appropriate business operating divisions (BODs) for examination.

Taxpayer Disclosures
  1. OTSA receives and evaluates all Form 8886, Reportable Transaction Disclosure Statements, (disclosures), which are submitted by taxpayers who have participated in a reportable transaction(s) as defined in Treas. Reg. 1.6011-4. A taxpayer may have multiple disclosures in its tax return and may disclose the same transaction with different taxable year returns if they participated in the transaction in multiple years. However, only those disclosures that are included in the tax return for the first time are to be submitted to OTSA. The OTSA submitted disclosure by the taxpayer has to be an exact copy of the disclosure included in their tax return and is to be sent to the Office of Tax Shelter Analysis (OTSA) at the following address:

    Internal Revenue Service
    OTSA
    1973 North Rulon White Blvd. Mail Stop 4915
    Ogden, UT 84404

  2. Forms 8886 received by OTSA during a calendar year are processed and evaluated as follows:

    • OTSA processing is conducted on a batch basis. That is, received disclosures are accumulated during each calendar year until there is a sufficient number of disclosures to warrant committing processing resources.

    • Once processing resources have been committed, OTSA analysts review the disclosures and sort or assign them to various predetermined categories. During this initial sorting phase, care is taken to ensure that all submitted supporting documents continue to be associated with the disclosure.

    • During the initial sorting process, each disclosure is reviewed by an analyst for completeness. Any potentially incomplete disclosure is identified.

    • Once the initial sorting has been completed, all disclosures and supporting documents are scanned and saved in a secure repository. In addition, the data from certain fields on the disclosure is transcribed into a database by OTSA clerical staff.

    • At this point, OTSA has a scanned image of each disclosure and a database of information about each disclosure that can be used for further review activities.

    • The OTSA analyst reviews each disclosure in each of the initial sorted categories and assigns each disclosure with a specific OTSA shelter type identification (ID) number and enters this number into the OTSA database. In addition, the OTSA analyst will determine which disclosures require further action or review. For those disclosures identified for further review or action, certain additional information is ascertained and entered into the OTSA database. At this point, OTSA has identified those disclosures having further interest to OTSA which includes potentially incomplete disclosures. For the rest of the disclosures, the OTSA processing and evaluation activities have been completed.

    • For those disclosures having further interest, additional data is secured such as the exam status and exam group code (EGC) of the associated taxpayers. This additional data is then saved to the OTSA database.

  3. Disclosures having further interest are re-sorted by BOD and disseminated as follows:

    • SB/SE, W&I and TE/GE BOD: The OTSA database and disclosures are made available to the SB/SE Abusive Transaction Support Unit (ATSU) or the TE/GE contact for further review and to make exam determination. OTSA's processing and evaluation activities are complete with respect to these disclosures.

    • LB&I BOD: Disclosures for which the related taxpayer has an open examination in the field: the OTSA analyst sends the Team Manager an e-mail with copy of the disclosure, requesting review of the transaction. If OTSA has identified the disclosure as potentially incomplete, the e-mail will also request consideration of potential penalty under IRC 6707A because the disclosure received was incomplete.

    • For LB&I BOD: Disclosures which are listed transactions and the related taxpayer is not currently under examination: OTSA analyst sends the disclosure to the appropriate workload identification team for possible assignment to an exam team for review of the transaction. If OTSA has identified the disclosure as potentially incomplete, the assigned examination team will be asked to consider a potential penalty under IRC 6707A because the received disclosure was incomplete.

    • LB&I BOD: Disclosures that are non-listed transactions with no open exam: The OTSA analyst will send the disclosures to the appropriate workload identification team for possible assignment to an exam team. If OTSA has identified the disclosure as potentially incomplete, the assigned examination team should consider a potential penalty under IRC 6707A.

    • Processing of disclosures is complete.

  4. Under the IRC 6011 regulations, disclosure of a reportable transaction (on Form 8886, Reportable Transaction Disclosure Statement), is not always made at the same time a tax return is filed.

    • If a transaction is reportable at the time the taxpayer files a return reflecting participation (as described in Treas. Reg. 1.6011-4) in that transaction, the taxpayer is required to attach a Form 8886 with its filed tax return for each reportable transaction for every year of participation. A taxpayer may report multiple reportable transactions on one form if they are the same or substantially similar. In addition, a copy of the Form 8886 is to be sent to OTSA at the time a Form 8886 is first filed by the taxpayer pertaining to a particular reportable transaction. Failure to comply with these requirements could result in penalties.

    • If a transaction is not listed at the time that the taxpayer files its return reflecting participation in the transaction, Treas. Reg. 1.6011-4(e)(2)(i) requires taxpayers to file a disclosure with OTSA within 90 calendar days of the date that a transaction is listed or identified as a transaction of interest (TOI) by the Service, if the period for assessing tax on the previously filed return remains open and the taxpayer reported tax benefits from the transaction on the previously filed return.

  5. When placing a tax return under examination that has a Form 8886 attached, LB&I examiners must contact OTSA under the following conditions to verify if a Form 8886 was properly and timely filed:

    • The attached Form 8886 has a check in the "Initial year filer" box on line C

    • The attached Form 8886 has a check in the "Listed" box on line 2a

    • The attached Form 8886 identifies a year that is potentially open on line 1b.

    All other examiners, please refer to IRM 4.32.4.3.2.1, Opening an IRC 6707A Penalty Examination, for further guidance

  6. Contacting OTSA is not mandatory if the examiner has previously verified that OTSA has received a copy of the attached Form 8886.

    • To contact OTSA, examiners are to send an e-mail requesting Form 8886 verification (including only the taxpayer's name and taxpayer identification number). In order to determine the proper e-mail address, the examiner should go to the OTSA website.

    • OTSA will respond back to the examiner by e-mail and identify all Forms 8886 that are on file with OTSA.

  7. For a job aid to assist examiners in determining whether a Form 8886 is required, timely, and complete. see Exhibit 4.32.2-4, Audit Tools. This form is also available on MySB/SE at Audit Tool worksheet.

Material Advisor/Promoter Investigations
  1. OTSA serves as a centralized collection point for all leads involving abusive technical tax shelters and reportable transactions. OTSA is responsible for the evaluation of leads, completion of referral packages, and submissions to the LB&I TTSPC for consideration of a LB&I promoter investigation. For additional information, see IRM 20.1.6.13.1, LB&I, SB/SE and TE/GE Functional Guidelines.

  2. Advisee/investor lists are secured through material advisor investigations under the authority of IRC 6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc.

  3. These lists secured by LB&I examiners are routed to OTSA in Ogden for input into a database and case building. After input, OTSA forwards the investor or advisee names to the appropriate operating division for examination consideration.

Tax Shelter Hotline
  1. OTSA receives information on potentially improper tax shelter activity from both internal and external sources.

  2. OTSA is responsible for the evaluation of these leads.

  3. The IRS Internet website contains contact information for the hotline as follows:

    Type of Contact Contact Information
    Mailing address: Internal Revenue Service
    Office of Tax Shelter Analysis
    LB&I:PFTG:OTSA M/S 4916
    1973 North Rulon White Blvd.
    Ogden, UT. 84404–5402
    Telephone Number: 866-775-7474
    (toll free)
    Fax Number: 801-620-5122
    (not toll free)
    E-Mail Address: irs.tax.shelter.hotline@irs.gov

Emerging Issues
  1. OTSA evaluates information on new and emerging transactions which may have potential for strategic importance to the IRS and facilitates various compliance actions such as issuing notices, alerts, pronouncements, or seeking to designate the issue as a listed transaction or a transaction of interest.

  2. OTSA is responsible for coordinating and assisting in the identification of potentially abusive transactions.

  3. Information on making a referral of a potentially abusive transaction can be found on the OTSA website under the "Emerging Issues" program.

  4. See IRM 4.51.2.3, LMSB Emerging Issues.

    Note:

    The title of the IRM section reads LMSB, even though the operating division is now LB&I.

Communications and Guidance
  1. OTSA facilitates technical guidance communication to LB&I examiners on tax shelter issues.

LB&I Tax Shelter Steering Committee
  1. The LB&I Tax Shelter Steering Committee makes key decisions in implementing LB&I’s strategic initiative pertaining to abusive tax shelters. Some areas of focus include:

    • Oversight of the LB&I TTSPC, which approves LB&I tax shelter promoter/material advisor investigations.

    • Coordinating and developing consistent approaches addressing abusive tax shelters in LB&I.

    • Sharing information with other operating divisions.

    • Formulating strategies to deal with abusive tax shelter promotions and investors including allocation of resources to these activities in LB&I.

    • Supporting coordination of legislation and published guidance.

    • Establishing studies and task teams.

LB&I Technical Tax Shelter Promoter Committee (TTSPC)
  1. The LB&I TTSPC is a sub-committee of the LB&I Tax Shelter Steering Committee. Its purpose is to ensure consistency and uniformity in selecting promoter/material advisors for investigation within LB&I. OTSA submits referrals to the LB&I TTSPC for investigation consideration and for their consideration of IRC 6112 letter requests from the technical specialists.

  2. The LB&I TTSPC has sole authority to approve LB&I tax shelter promoter/material advisor investigations. No contact may be made with a promoter/material advisor by an LB&I examiner unless approved by the LB&I TTSPC.

  3. The LB&I TTSPC comprises the following:

    • Industry Director, Financial Services (Chairperson).

    • Industry Director, Field Operations, Financial Services (designated by the Industry Director).

    • LB&I Area Counsel, Financial Services.

    • LB&I Special Counsel, designated by LB&I Division Counsel.

    • Senior Manager, OTSA.

  4. Representatives from other operating divisions and OPR may be invited to participate in LB&I TTSPC discussions.

Referrals to the LB&I TTSPC
  1. OTSA analyzes information received on promoters/material advisors to make an initial determination as to whether a formal investigation is warranted.

  2. OTSA coordinates with other operating divisions to determine if the promoter is already under investigation. In determining if a promoter should be recommended for investigation, OTSA considers many factors such as:

    • Past activity of the promoters or material advisors

    • Type of shelter

    • Number of taxpayers

    • Size of the promotion

    • Scope (years involved)

    • Gross income derived from the promotion

    • Amount of tax benefits claimed

    • National impact

    • Specific issues

  3. If OTSA determines a formal investigation is warranted, the information is presented to the LB&I TTSPC.

  4. OTSA receives requests from technical specialists for issuance of an IRC 6112 letter subsequent to their review of Form 8918. OTSA coordinates with the other operating divisions to determine if there is a conflict with OTSA sending the IRC 6112 letter. If it is determined a letter should be issued, the letter request is referred to the TTSPC for their approval prior to sending the IRC 6112 letter.

  5. Contact the OTSA senior program analyst for tax shelter promotions/material advisor disclosures for questions regarding referrals to the LB&I TTSPC. All referrals to the LB&I TTSPC must be made through OTSA.

Criteria for Authorization
  1. This section provides guidance on the type of information considered by the LB&I TTSPC in determining whether to approve an investigation. The type of information includes:

    • Entities

    • Law firms

    • Individuals

Entities
  1. The following types of information are considered by the LB&I TTSPC in reaching a determination regarding promoter/material advisor activity. This list is not exclusive:

    • Returns filed by material advisors regarding any reportable transaction under IRC 6111 (post-AJCA of 2004).

    • Registration of, or failure to, register a tax shelter under IRC 6111 (pre -AJCA of 2004) with respect to interests sold in such shelters before October 23, 2004.

    • Disclosure statements filed by investors/advisees under IRC 6011.

    • Evidence obtained from investor/advisee income tax examinations or other promoter investigations, including interview statements, indicating that the entity was promoting tax shelters/reportable transactions and/or providing any material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount as defined in Treas. Reg. 301.6011-3(b)(3). For additional information and definition of terms, see Treas. Reg. 301.6111-3, Disclosure of Reportable Transactions.

    • Information received from the IRS Tax Shelter Hotline.

    • Written promotional materials or prospectuses discussing the tax benefits of a transaction.

    • Confidentiality or nondisclosure agreements between investors and promoters/material advisors.

    • Evidence that a known promoter/material advisor created a new entity to facilitate a tax shelter/reportable transaction promotion.

    • Evidence of fees received for a tax shelter promotion/material aid, assistance or advice.

    • News articles or evidence of seminars, conferences, etc.

    • Internet research.

    • IDRS or other internal research.

Law Firms
  1. When considering whether a law firm is the promoter or material advisor of a tax shelter, items listed in IRM 4.32.2.3.3.5.1 (1) above should be considered.

  2. In addition to the items in IRM 4.32.2.3.3.5.1 (1), evidence which may tend to show a law firm was "selling a product" and not providing independent legal advice may include, but is not limited to:

    • Copies of written opinions discussing the tax implications of participating in a particular transaction, including evidence of multiple "cookie cutter" legal opinions.

    • Copies of fee schedules, particularly those including fees tied to the amount of tax savings derived by investors.

    • Evidence showing that the clients and the law firm are not geographically close.

    • Information showing that the opinion/legal advice was part of a prepackaged tax shelter product or service.

    • Written opinions/legal advice that fail to discuss applicable law.

Individuals
  1. The LB&I TTSPC must approve IRC 6111 and IRC 6112 investigations of individuals. Whether an individual is a material advisor depends on the specific facts and circumstances of each promoter investigation. Examiners should carefully review the facts to determine if an individual is a material advisor.

  2. IRC 6111 and IRC 6112 were amended by the AJCA of 2004 and the corresponding regulations have been modified several times. It is imperative that examiners carefully consider which rules apply to their investigation and they should contact Area Counsel for guidance.

  3. There are two compelling situations where individuals have been referred to the LB&I TTSPC and approved for investigation:

    • Where evidence shows that the individual promoted/provided material advice in their individual capacity.

    • Where evidence tends to show that the promoter entity was a shell with the intent to avoid or evade the provisions of IRC 6111, IRC 6112, IRC 6707, or IRC 6708.

  4. Appropriate referrals of individuals with other persuasive facts are encouraged. All the factors listed under IRM 4.32.2.3.3.5.1, Entities, are also considered in determining whether an individual should be subject to a promoter/material advisor investigation.

LB&I TTSPC Procedures
  1. After reviewing the information provided by OTSA, the LB&I TTSPC may:

    1. Approve the lead for investigation.

    2. Reject the lead.

    3. Send the lead back to OTSA for further development.

    4. Refer the lead to the LB&I Tax Shelter Steering Committee for guidance if the LB&I TTSPC cannot agree on a course of action.

  2. All decisions by the LB&I TTSPC are documented in the TTSPC minutes and formalized on a Promoter Investigation Approval/Disapproval form.

  3. Approval of a promoter/material advisor investigation encompasses all promotions/reportable transactions conducted/advised by that promoter/material advisor.

  4. Promoter/material advisor investigations may be conducted simultaneously with an income tax examination of the promoter/material advisor and/or investor(s).

  5. Approved promoter/material advisor investigation cases are forwarded to the Executive Issue Owner for assignment. See IRM 4.32.1.4.1, Membership in the Issue Management Team, for more information on Executive Issue Owners.

Tax Exempt and Government Entities (TE/GE) Referrals

  1. If a TE/GE examiner identifies a potential AT or emerging issue involving a TE/GE entity during the course of an examination, the examiner should contact the appropriate function through the links on TE/GE Emerging Issues intranet page.

  2. If the applicable Committee determines a referral warrants further development, the information is forwarded to the SB/SE LDC or OTSA for consideration and authorization.

Coordination With Criminal Investigation (CI)

  1. The SB/SE LDC and OTSA submit deconfliction memoranda to the CI Lead Development Center (CI LDC) advising of their intent to authorize a civil promoter investigation (SB/SE) or present a referral to the TTSPC (LB&I).

  2. CI queries their database, Criminal Investigation Management Information System (CIMIS), to identify any ongoing CI investigations of the promoter or associates.

  3. Based on the query the investigation falls into one of three categories:

    • No CI Activity

    • CI Activity - No Conflict

    • CI Activity - Conflict

  4. If CI notifies the LDC or OTSA that there is CI activity, the civil investigation is authorized and sent to the local SB/SE or LB&I field compliance group whether there is conflict or not. The examiner is directed to hold a six-way conference with CI before starting any investigative activity (see IRM 4.32.2.6.3, Six-Way Conference).

No CI Activity
  1. If the CIMIS database search fails to disclose any open investigation of the primary subject or any related party, CI will advise the SB/SE LDC or OTSA to proceed with the authorization.

  2. If CI decides to conduct a criminal investigation after the civil promoter investigation has been authorized, CI is responsible for initiating a six-way conference. See IRM 4.32.2.6.3, Six-Way Conference.

  3. The progress of the civil investigation should not be postponed or delayed pending CI’s assessment of the criminal potential.

  4. The decision to stop an authorized civil investigation rests with the SB/SE or LB&I field compliance managers. If agreement is not reached between SB/SE or LB&I and CI, the issue will be elevated. See IRM 4.32.2.6.3.3.3, Resolving Conflicts.

Open CI Investigation
  1. If there is an ongoing criminal investigation, the CI LDC issues a memorandum to the local CI special agent in charge (SAC) requesting a determination as to whether there would be a conflict between the proposed civil action and the criminal investigation. The determination should be made within 10 days of receipt of the CI LDC memorandum.

No Conflict With Parallel Investigation
  1. A no conflict determination means concurrent civil and criminal promoter investigations (referred to as a parallel investigation) may be pursued. See IRM 4.32.2.6, Parallel Investigations.

  2. A six-way conference is required before initiating the investigation. See IRM 4.32.2.6.3, Six-Way Conference.

Conflict With Parallel Investigation
  1. Conflict means a civil investigation would greatly harm an ongoing criminal investigation. The mere existence of a criminal investigation, including a grand jury investigation, does not present a conflict and should NOT automatically delay or forestall a civil investigation.

  2. If CI believes a conflict exists that warrants a halt to a civil investigation, this must be discussed during the six-way Conference. See IRM 4.32.2.6.3, Six-Way Conference.

SB/SE Coordination With Return Preparer Program (RPP)

  1. The SB/SE LDC also evaluates return preparer leads for investigation. These cases generally fall into one of two categories:

    • Return preparers authorized for civil investigation.

    • Return preparers who have been the subject of a preparer project and who have not corrected their misconduct.

  2. Return preparers can engage in conduct in violation of IRC 6700, IRC 6701, IRC 6694, and IRC 6695, so coordination between the return preparer program coordinators (RPC) and the SB/SE LDC is important.

  3. Before the RPC submits a program action case (PAC) request (see IRM 20.1.6.5, Program Action Cases Overview), the RPC contacts the SB/SE LDC to determine if a promoter investigation has been considered. See IRM 20.1.6, Preparer/Promoter/Material Advisor Penalties, for more information on PACs. The following actions may be taken:

    Category Action
    Investigation authorized or pending authorization RPC will not request PAC
    Investigation not authorized-return preparer not engaged in promotional conduct RPC may initiate a PAC request
    Investigation not authorized-return preparer engaged in promotional conduct SB/SE LDC will assess lead on expedited basis. If authorized RPC will not proceed with PAC.
  4. If a PAC is approved, the RPC monitors the examinations of the preparer's clients and the assessments of preparer penalties. Depending on the outcome of the PAC or other information regarding the preparer’s activities, the RPC may resubmit a new referral to the SB/SE LDC for consideration of an investigation.

  5. See IRM 20.1.6, Preparer/Promoter/Material Advisor Penalties, for more information on the RPP program.

Joint International Tax Shelter Information Centre (JITSIC)

  1. In 2004, the IRS and the national taxing agencies of the United Kingdom, Canada and Australia created the Joint International Tax Shelter Information Centre (JITSIC) to identify, develop and share information and expertise about abusive transactions, particularly those that cross borders. In 2007, the Japanese National Tax Agency joined JITSIC as a member. In 2010, the tax agencies of the Republic of Korea and the People’s Republic of China joined JITSIC as members and France joined in 2011. A tax agency may send a representative to JITSIC as an observer. An observer country participates as a full member, but does not participate in the governance of JITSIC. Participation in JITSIC enables each country to better target compliance and enforcement efforts to combat abusive transactions. Since its creation, JITSIC has evolved to address issues beyond abusive transactions. This IRM will address only JITSIC's role with abusive transactions.

  2. The JITSIC role in addressing abusive transactions is to:

    1. Provide support to the parties through the identification and understanding of abusive transactions and those who promote them.

    2. Share expertise, best practices and experience in tax administration to combat abusive transactions.

    3. Exchange information on abusive transactions, in general, and on specific promotions, their promoters, and investors consistent with the provisions of bilateral tax conventions.

    4. Enable the parties to better address abusive transactions promoted by firms and individuals who operate without regard to national borders.

  3. The objectives of JITSIC are to deter promotion of, and investment in, abusive transactions. Through information exchange and knowledge sharing, the parties:

    • Increase public awareness of the potential civil and criminal risks of promoting and investing in abusive transactions.

    • Share best practices among the parties' tax administrations for identifying and addressing abusive transactions.

    • Enhance each party's compliance and enforcement efforts through coordinated and "real time" exchanges of tax information consistent with the provisions of bilateral tax conventions.

    • Develop new internet search and other techniques for early identification of promoters and investors involved in abusive transactions.

    • Identify emerging trends and patterns to anticipate new abusive transactions.

    • Improve parties' knowledge of techniques used to promote abusive tax avoidance transactions cross-border.

  4. JITSIC representatives have been designated Competent Authorities for purposes of their JITSIC work and have the authority to exchange information per bilateral tax treaties and disclosure rules.

  5. JITSIC has offices in Washington, D.C., and London, England. Representatives from the member and observer countries work together to supplement the ongoing work of member tax administrations. They identify abusive transactions, arrangements and schemes and enhance activities against cross-border transactions involving compliance risk.

  6. Examiners that identify cross-border abusive transactions that involve a JITSIC member and/or an observer country should make referrals directly to JITSIC following instructions on the JITSIC website or through the SB/SE LDC. Examiners may consult with the appropriate technical specialist or field specialist as needed for a list of the current observer countries and to determine if an identified issue is potentially abusive. All referrals to JITSIC should be clearly referenced with "JITSIC Referral" .

  7. Referrals outside the IRS can be made to JITSIC through OTSA.

    Internal Revenue Service
    Office of Tax Shelter Analysis
    1973 North Rulon White Blvd.
    LB&I:PFTG:OTSA;M/S 4916
    Ogden, Utah 84404-5402

  8. Examiners should refer to their respective operating division's Guidance Memorandum for individuals to contact for further guidance.

Frivolous Return Program (FRP)

  1. This section describes the coordination of the campus FRP with AT investigations. A complete description of the FRP is contained in IRM 4.10.12, Frivolous Return Program.

  2. The FRP identifies individuals or promoters preparing or promoting frivolous returns, claims or documents and educates them on their tax responsibilities. Campus examination is responsible for detecting, controlling, processing and examining frivolous activities.

  3. The FRP takes a proactive approach to frivolous non-compliance by providing outreach education through stakeholders on pertinent program data such as geographic trends of frivolous filings and common frivolous arguments.

  4. All frivolous documents received in the campuses are processed at the Ogden Compliance Services Campus.

  5. Campus examination conducts orientations to campus functions involved in processing or examining returns or correspondence to emphasize recognition of frivolous documents and provide appropriate referral instructions.

  6. The program participates in coordinating new systemic identification of frivolous filings wherever possible and makes referrals to affected stakeholders such as OPR, CI, SB/SE LDC, OTSA and Communications and Government Liaison.

Frivolous Tax Submission Penalties

  1. IRC 6702(a), Civil Penalty for Frivolous Tax Returns, imposes a $5,000 penalty on any taxpayer filing a document purporting to be a return which:

    1. Does not contain sufficient information to determine the substantial correctness of the self-assessment, or contains information on its face which indicates the self-assessment is substantially incorrect, and

    2. Is due to a position that the Secretary has identified as frivolous, or reflects a desire to delay or impede the administration of federal income tax laws.

  2. IRC 6702(b), Civil Penalty for Specified Frivolous Submissions, imposes a $5,000 penalty on any person who submits a specified frivolous submission. The term "specified frivolous submission" means a specified submission if any portion of such submission:

    1. Is based on a position which the Secretary has identified as frivolous, or

    2. Reflects a desire to delay or impede the administration of federal tax laws.

  3. The term "specified submission" means:

    • A request for hearing upon filing of notice of lien (IRC 6320).

    • A request for hearing before levy (IRC 6330).

    • An application relating to agreements for payment of tax liability in installments (IRC 6159).

    • An application relating to compromises (IRC 7122).

    • An application relating to taxpayer assistance orders (IRC 7811).

  4. The Secretary maintains a list of identified frivolous positions and updates it as necessary.

  5. Under IRC 6702(b)(3), if a taxpayer withdraws the frivolous submission within 30 days of notification by the IRS, the penalty will not apply. The amount of the penalty can be reduced if in the opinion of the Secretary it would promote compliance with and aid administration of federal tax laws (IRC 6702(d)).

  6. This penalty can be imposed in addition to other applicable penalties (IRC 6702(e)).

Detecting Frivolous Submissions

  1. Identification of frivolous submissions can be made during original return processing, amended return or claim processing, examinations, collection activities, and other contacts with a taxpayer or the taxpayer's representative. These filings are frequently identified in Customer Account Services (CAS) and compliance in the campuses, field offices, and other IRS offices.

  2. Frivolous submissions not related to an open examination or collection case should be routed to the Ogden Compliance Campus Frivolous Return Program. See IRM 4.10.12.1.3.4, Transshipping Frivolous Filings to FRP.

  3. If there is an open examination or collection case, frivolous submissions should be copied and forwarded to the campus FRP.

  4. The Ogden Compliance Campus Frivolous Return Program mailing address is:

    Internal Revenue Service
    1973 N. Rulon White Blvd., M/S 4450
    Ogden, UT 84404

Responses to Frivolous Submissions

  1. Employees are responsible for replying to frivolous submissions associated with an open case using Letter 3175, Response to Frivolous Documents/Returns Received from Taxpayers.

  2. If the document submitted is a frivolous return or amended return, employees must contact the FRP. The FRP will send Letter 3176, Response to Frivolous Documents/Returns Received from Taxpayers, to the taxpayer and impose the frivolous submissions penalty, as appropriate.

  3. Any reply associated with an open case is documented in the case file and on IDRS via Command Code ACTON.

  4. If the document contains valid requests (e.g., FOIA, transcripts, or taxpayer advocate issues), the request is forwarded to the appropriate function.

New Frivolous Positions

  1. A Servicewide Electronic Research Program (SERP) alert can be prepared to notify the campuses and field compliance of new frivolous positions. See IRM 1.11.8, Internal Management Documents System - Servicewide Electronic Research Program (SERP).

  2. The government’s position with respect to new frivolous positions should be coordinated with the FRP Senior Technical Coordinator, Campus Reporting Compliance (CRC) Exam Policy FRP Analyst and Counsel.

FRP Master Database

  1. The FRP master database is used to track and monitor frivolous submissions. The database includes current inventory and historical data on accounts not in compliance (return filing or payment of tax) for two consecutive years. It provides a means to identify new AT promotions to make referrals for injunctive actions, civil and criminal investigations, and follow-up monitoring on violations of existing court orders on promoters.

  2. FRP provides reports to SB/SE Communications and Liaison and other affected parties on:

    • Emerging promotions.

    • Promoters involved in AT promotions.

    • Trends in geographic locations of frivolous submissions or specific business affiliations.

    • The need for outreach education on specific promotions.

    • Any data pertinent to the overall compliance objectives of the IRS.

  3. FRP reports are also used to provide data to examiners conducting related promoter investigations. Examiners should submit requests for FRP database information to the Ogden FRP Senior Technical Advisor.

Campus Promoter Investigations

  1. The FRP screens each frivolous submission to determine if it is related to a promotion, specific promoter or return preparer. If four or more related frivolous submissions are identified, a referral is made to the SB/SE LDC for consideration of a promoter investigation.

  2. The SB/SE LDC evaluates and authorizes civil investigations of AT promotions.

  3. The SB/SE LDC determines whether an authorized investigation will be conducted by the FRP or by an SB/SE Area.

  4. If assigned to an SB/SE Area, the examiner should contact the FRP for assistance and to obtain pertinent data related to the promotion.

FRP Preparer Projects
  1. If the SB/SE LDC does not authorize a civil investigation of a referred return preparer, the FRP will consider initiating a preparer project under IRC 6694 or IRC 6695. This process is described in the Frivolous Return and Non-filer Programs Overview section of IRM 4.10.12.9.5, Approved Cases for Preparer Penalty Assessment Only.

  2. All preparer penalty cases prepared by FRP are coordinated with Area Counsel. Depending on the facts, the case may result in a referral for civil injunction, penalty assessment, or no action.

Case Control/Case Assignment Procedures

  1. All promoter investigation cases (except for TE/GE investigations) must be input on the Examination Return Control System (ERCS) Promoter investigations are not controlled on AIMS. TE/GE will be publishing IRM 4.70.3, TE/GE Promoter Investigations, for TE/GE case control procedures. In the meantime, refer to the TE/GE intranet webpage for instructions. Also see the ERCS Handbook for further instructions.

  2. Investigation cases are input on ERCS through the "Control Penalty Investigation" screen option as indicated in the following chart:

    Code Section ERCS MFT Code Time Charge Activity Code
    IRC 6700 P6 593
    IRC 6701 P7 594
    IRC 6707 P0 549
    IRC 6708 P8 595

SB/SE Case Assignment Procedures

  1. SB/SE Area Planning and Special Programs (PSPs) establish SB/SE promoter investigations on ERCS as penalty investigations, with a project code and tracking code if applicable. A tracking code is generally assigned after a participant list is forwarded to the listkeeper for case building. See IRM 4.32.2.5.5, SB/SE Tracking Codes.

  2. For SB/SE, only the promoter's most current fully completed tax year is established on ERCS.

  3. SB/SE examiners upon assignment of the investigation should verify that the investigation was established on ERCS by PSP.

LB&I Case Assignment Procedures

  1. The Executive Issue Owner forwards the OTSA referral package to the Team Manager for field assignment. See IRM 4.32.1.4.1, Membership in the Issue Management Team, for a description of the roles of these members.

  2. Team Managers set up the administrative ERCS record for the promoter investigation. The tax period used is the year the investigation was approved by the LB&I TTSPC. See IRM 4.32.2.5, Case Control/Case Assignment Procedures, for further information on setting up the investigation case on ERCS.

Invalid or Unidentified Promoter TINs

  1. If a valid TIN was not identified for the promoter, the PSP ATTI Coordinator assigns a temporary TIN.

  2. When the promoter's correct TIN is identified or a permanent TIN is secured, the ERCS record is updated with the correct information. See IRM 4.32.2.5.3.2 (4).

SB/SE PSP ATTI Coordinator Responsibilities
  1. PSP ATTI Coordinators are responsible for obtaining temporary TINs for promoter investigation cases without valid TINs before sending the investigation to a field group.

  2. Command Code AMTIN7 is used to assign a new temporary number. See IRM Exhibit 2.8.8-3, Command Code AMTIN7, for the input display for Command Code AMTIN7.

  3. If an income tax examination is to be conducted as well as the promoter investigation:

    1. Establish a Non-Master File (NMF) record on AIMS using Form 5354, Examination Request Non-Master File. See IRM 4.4.9.4.2, AIMS Control When TP Does Not Have a TIN, for additional information.

    2. Use Command Code AMNON to establish the dummy number on AIMS. See IRM Exhibit 2.8.8-1, Command Code AMNON, for the input display for Command Code AMNON.

Examiner Responsibilities
  1. Examiners will attempt to identify a promoter's valid TIN during their investigation.

  2. If a promoter does not have a valid TIN, examiners will request the promoter to acquire a TIN as follows:

    For a Social Security Number (SSN):

    TIN Type TIN Source Form
    Social Security Number (SSN) Social Security Administration (http://www.socialsecurity.gov) Form SS-5, Application for a Social Security Number
    Individual Taxpayer Identification Number (ITIN) See IRM 3.21.263.4.4, How to Obtain Application and Where to File Form W-7, Application for IRS Individual Taxpayer Identification Number
    Employer Identification Number (EIN) Internal Revenue Service (www.irs.gov) Form SS-4, Application for Employer Identification Number


  3. If a promoter does not have a valid TIN and refuses to obtain one, examiners should contact the PSP ATTI Coordinator to secure a valid TIN from the campus.

  4. Once a valid TIN has been determined or obtained, the promoter examiner should update ERCS from the temporary TIN with the valid TIN. Use the Correct or Display option from the ERCS Main Menu and select "Change a Non-Master File Return to a MasterFile Return."

  5. If a promoter is not located, the promoter investigation is closed as discontinued before contact. See IRM 4.32.2.11.8, Penalty Case Processing Procedures, for investigation case closing procedures. For LB&I promoter investigations, the LB&I:F DFO Manhattan's approval must be obtained before discontinuing a promoter investigation.

  6. If an income tax examination is conducted on the promoter and a valid TIN has been determined or obtained, both ERCS and AIMS must be updated as follows:

    1. ERCS is updated as described in paragraph (4) above.

    2. The Non-Master File return is deleted from ERCS and replaced with the MasterFile return by completing a Form 5345-B, Examination Request Non-ERCS Users. This is done at the group level if the user has Command Code AMSOC permissions. Two command codes are generated to update AIMS: a MasterFile requisition (AM424) and a Non-Master File deletion (AMSOC).

    3. If a substitute for return (SFR) is required, wait until a valid TIN is received before sending the SFR for processing. When the return is converted on ERCS and if an SFR is to be generated at the same time, input Push Code 036. If an SFR is not to be generated at the same time as the AIMS opening, update the push code on ERCS to 036 when the SFR is to be generated.

SB/SE LDC Responsibilities
  1. The SB/SE LDC updates the database with the temporary/valid TIN as applicable.

  2. If a valid TIN is received, the LDC should be notified so that the Investigation Authorization memorandum and LDC database can be updated with the correct TIN.

Transferring Promoter Investigations

  1. There may be instances where the promoter investigation is transferred from one compliance area to another. For example:

    • The promoter has relocated or the promotional activity is concentrated in another compliance area. It may be more efficient to transfer the investigation to the other area office.

    • The receiving area office may be unable to conduct a civil promoter investigation due to staffing limitations or other considerations.

    • The promoter is related to another investigation and it would be more efficient to have one area or examiner work all the related investigations.

Field Compliance Responsibilities
  1. Examiners prepare Form 4665, Report Transmittal, explaining the reasons for the transfer. A copy of the Form 4665 should be sent to the SB/SE LDC by secure e-mail at the *LDC mail box or faxed to 949-389-5083.

  2. Update the promoter investigation on ERCS to Status Code 41 using Disposal Code 30.

  3. Send the administrative investigation case file to the SB/SE Area PSP ATTI Coordinator or LB&I PSP using Form 3210, Document Transmittal.

  4. Transfers of LB&I promoter investigations must be coordinated through the LB&I Promoter Penalty Program Manager.

PSP ATTI Coordinator Responsibilities
  1. The transferring Area PSP ATTI Coordinator:

    1. Notifies the SB/SE LDC or LB&I Financial Services that the promoter investigation is being transferred to another area office. Notification may be made electronically

    2. Transfers the administrative case file per the area office’s standard case transfer procedures.

    3. Case is updated to Status Code 90 on ERCS and short closed.

  2. The receiving Area PSP ATTI Coordinator:

    1. Ensures that the promoter investigation is established on ERCS.

    2. Assigns the promoter investigation to the field.

SB/SE Tracking Codes

  1. Once a participant (advisee) list is secured or developed, the list is forwarded to the listkeeper for case-building and assignment of a tracking code. The examiner is advised of the assigned tracking code. See IRM 4.32.2.13, Participant/Investor/Advisee Lists, for more information on participant cases.

  2. Locally defined project or tracking codes cannot be used unless approved in advance by a Divisions' Headquarters since the locally defined codes are not reflected in national reports or tables.

  3. A promoter tracking code generally overrides any other tracking code. If a different tracking code is assigned to a related promoter investigation or participant examination case, contact PSP to update. Group managers should contact the AT listkeeper for advice if there is a conflict in tracking codes.

  4. A tracking code is used on all promoter investigations and related examinations regardless of the area. The tracking code is added to all related cases including any in-process cases.

  5. Use of the same tracking code on all the promoters and participants in a promotion helps the key case examiner compute an estimate of harm to the government. It also allows the case-building unit to coordinate participant examinations.

Parallel Investigations

  1. The Internal Revenue Code contains both civil and criminal provisions to address AT promotions. Examiners may conduct civil investigations before, during or after criminal investigations of a promoter.

  2. Parallel investigations are simultaneous, yet separate, civil and criminal investigations of a common individual or entity.

  3. Parallel investigations are not joint investigations. Each operating division conducts a separate investigation. Significant coordination is required throughout the investigation and litigation processes. While regularly scheduled coordination meetings are required, Criminal Investigation (CI) must not direct the examiner’s actions in the civil investigation.

Policy Statement 4-26

  1. IRM 1.2.13.1.11, Policy Statement 4-26 (Formerly P–4–84), provides guidance on taking civil enforcement action when the subject is also involved in a criminal investigation. This statement, effective October 5, 2005, encourages civil enforcement action in all investigations where the promotion is ongoing and harm to the government is significant. This compliance strategy is intended to stop the promotion quickly, prevent additional loss of tax revenue and foster voluntary compliance by the participants.

  2. If criminal and civil operating divisions cannot agree on how to proceed, Policy Statement 4-26 (P-4-26) describes procedures for resolving the matter. Refer to IRM 4.32.2.6.3.3.3, Resolving Conflicts.

Commencement of Parallel Investigation

  1. CI is notified of all proposed investigations prior to authorization by the SB/SE LDC or OTSA. CI will determine whether the commencement of a civil investigation will or will not pose a conflict with a criminal investigation. See IRM 4.32.2.3.5, Coordination with Criminal Investigation (CI), for additional discussion.

  2. If CI has an open subject or related investigation or is interested in initiating a criminal investigation, civil and criminal examiners must coordinate the development of evidence to support both the separate and distinct criminal and civil investigations while being mindful of legal requirements and constraints. Communication is essential for a successful parallel investigation.

Six-Way Conference

  1. A six-way conference is held to determine the appropriate course of action to achieve the IRS’s objective of stopping the AT promotion as quickly as possible. Conference participants should discuss the legal implications and coordination aspects of a parallel investigation.

  2. A six-way conference is required for all investigations where CI has an open investigation or is interested in pursuing an investigation. The conference should be held within 10 days after assignment of the investigation to an examiner.

  3. A pre-conference meeting with the examiner, Collection, and Area Counsel to discuss the investigation and objectives of the six-way conference is advised.

Conference Participants
  1. The following individuals should participate in the six-way conference:

    • Examiner

    • Group/Team manager

    • Area Counsel

    • Special agent

    • Supervisory special agent

    • Criminal Tax (CT) Counsel

  2. If there is an Assistant United States Attorney (AUSA) or DOJ attorney assigned to the criminal investigation, that attorney should participate. If that attorney cannot participate, it is imperative that he or she is fully apprised of the nature of the discussion and decisions made with respect to the coordination of the civil and criminal investigations.

  3. Territory managers, a representative from Collection, and an AT senior program analyst (SPA) may also participate as appropriate.

Discussion Topics During Six-Way Conference
  1. The goal of a parallel investigation is to ensure the IRS effectively uses all available enforcement tools, both civil and criminal, to achieve maximum compliance and stop the AT promotion.

  2. Discuss and evaluate potential conflicts and establish a plan of action to handle them.

  3. During the conference, each operating division should share all non-grand jury information about the promotion. The discussion should include:

    1. Identification of the subject(s) or entities of the investigations.

    2. The types of evidence available and the source of such evidence.

    3. Information known with respect to participants.

    4. The tax theories or positions of each respective investigation.

    5. Any limitation on CI sharing information with the civil side because of Rule 6(e) regarding grand jury secrecy.

    6. The importance of the civil side disclosing all information and documents to CI.

  4. See Exhibit 4.32.2-5, Six-Way Conference Discussion Job Aid, which is also available on MySB/SE, Parallel Investigations. This document may be used during the six-way conference. This job aid is intended to be used as a guide to help facilitate the discussion. It should be modified as appropriate, and may be used to document the outcome of the meeting.

  5. The following factors are considered in determining whether or when the IRS should proceed with a parallel investigation:

    1. Scope and size of the promotion in terms of potential loss of tax revenue, geographic location, number of promoters, participants or returns involved.

    2. Rate of growth and extent of marketing, particularly for internet promotions.

    3. Potential for civil injunction.

    4. Deterrence value of civil versus criminal actions.

    5. Potential impact on criminal investigation.

    6. Efficient and effective use of resources.

    7. Amount of time to complete the civil or criminal investigations.

    8. Ongoing or planned undercover operations or search warrants.

    9. Identification, potential examination, and deterrence of promotion participants.

  6. At the conclusion of the six-way conference, determinations should be made with respect to:

    1. Concurrence on commencement of a parallel investigation.

    2. Any proposed restrictions as to the extent or timing of the civil investigation.

    3. Contacts with investigation subjects and witnesses.

    4. Compliance actions with respect to identified participants.

    5. Sharing of all non-grand jury materials.

    6. Ongoing civil or criminal coordination.

Outcomes of Six-Way Conference
  1. The six-way conference may result in several different outcomes:

    • Conduct a parallel investigation.

    • Temporarily delay any overt steps of the civil investigation (e.g., do not contact the promoter or third parties).

    • Commence only a civil investigation.

    • Proceed with only a criminal investigation.

Delay of Civil Action
  1. Delay of overt civil actions should only occur in investigations where CI shows that civil enforcement would seriously harm or impair the criminal investigation.

  2. Suspension of overt civil action should be limited to a short time frame to allow CI to complete a specific task (e.g., undercover activity or search warrant). When the agreed-upon period for suspending overt civil action expires, another six-way conference should be held to discuss whether the suspension should continue and, if so, for how long.

  3. Field compliance and CI should agree on extensions of time beyond the originally agreed time frames. If there is no agreement among field compliance and CI, see IRM 4.32.2.6.3.3.3, Resolving Conflicts.

  4. If an agreement is made to temporarily delay the civil investigation, the investigation may be suspended at the group level until civil actions can proceed. The examiner should carry out any actions that are not prohibited by the suspension. Allowable actions may include conducting internal and public information research, review of non-grand jury records in CI’s possession, securing or developing a participant list, gathering information from participant audits and preparing injunction referral reports. If there is no further action that the examiner can carry out until the suspension is lifted, then the case should be suspended in the group by updating the case to Status Code 16 on ERCS. This is an indicator to anyone analyzing the group’s inventory that there are no further actions possible until CI removes the suspension. This is the only allowable use of Status Code 16.

  5. Compliance actions with respect to participants who are not subjects or potential subjects of the criminal investigation, should not be delayed. Examiners must coordinate with CI in securing participant information to ensure no inappropriate contact with CI witnesses occurs while timely civil examinations are conducted with respect to participants. The government’s interests need to be protected whether the participant is a witness or not.

No Civil Action Determination
  1. In SB/SE promoter investigations, if a decision is made to proceed only with a criminal investigation, the promoter administrative file is returned to the SB/SE LDC through the local PSP ATTI Coordinator. See IRM 4.32.2.8.3, Discontinuation.

  2. In LB&I, any decision not to open an investigation that was approved by the LB&I TTSPC must be communicated to the Industry Director, Financial Services, with a copy to OTSA. The Industry Director, Financial Services, makes the final determination regarding the investigation.

Resolving Conflicts
  1. A key objective of a promoter investigation is to stop the promotion expeditiously, preventing additional loss of tax revenue to the government. The existence of a criminal investigation should not automatically delay a civil investigation.

  2. If at any point during the civil investigation, a decision is made to limit, delay, or not proceed with the civil investigation, or CI discontinues their investigation, examiners must advise Area Counsel, the SB/SE LDC or Industry Director, Financial Services.

  3. Examiners should seek assistance in resolving parallel investigation issues from Area Counsel, the SB/SE LDC, or Industry Director, Financial Services both at the inception of the investigation and throughout the investigation process.

  4. It is not appropriate to delay a civil investigation unless CI can demonstrate that the civil investigation will harm or impair the criminal investigation. Examples include a planned undercover operation or imminent search warrant. See IRM 1.2.13.1.11, Policy Statement P-4-26.

  5. If CI requests a suspension or extended delay, the examiner or group manager should contact the LDC SPA responsible for parallel investigations prior to agreeing to a suspension or delay in the civil investigation. The SPA will help determine if the request for suspension of civil actions is appropriate.

  6. If an agreement cannot be reached between the civil and criminal divisions of IRS and DOJ/US Attorney’s Office (USAO) (if referral has been made), Policy Statement P-4-26 directs that the matter is to be elevated for resolution. Elevation is through the respective chains of command of CI and the civil examination.

  7. The examiner and the special agent will prepare separate memoranda for the appropriate territory manager (TM) and special agent in charge (SAC). The memoranda should summarize the facts of the investigation, the investigation status, the projected plan of action and the reason(s) the civil investigation should proceed or not proceed without delay. The special agent memo should also address the potential harm to the criminal investigation if the civil investigation proceeds.

  8. The steps of the elevation process are as follows:

    1. TM and SAC meet to discuss resolution of any civil or criminal conflicts.

    2. If the TM and SAC are unable to reach an agreement, the TM immediately prepares a memorandum (with LDC SPA assistance) describing the nature of the conflict and reasons CI believes civil actions will harm the criminal investigation. The memo is provided to CI to officially document the civil position.

    3. CI should provide a response within 5 days. As mandated in P-4-26 (13), the SAC must prepare a memo at the same time, officially documenting CI’s position. See IRM 1.2.13.1.11.

    4. If an agreement still is not reached, the SB/SE Examination Area Director or LB&I Director of Field Operations (DFO) will attempt to resolve the issue with the CI Director of Field Operations (DFO).

    5. If agreement is still not reached, the next elevation level involves the SB/SE Director, Abusive Transactions and Technical Issues and the CI Director, Global Financial Crimes.

    6. The Deputy Commissioner, Services and Enforcement, has final authority for determining the appropriate resolution.

  9. There is a job aid available. See Exhibit 4.32.2-6, Elevation of Parallel Investigation - Record of Actions. The Parallel Elevation Record of Action job aid can also be found on MySB/SE, Parallel Investigations.

Quarterly Coordination Meetings (Six-Way Conferences)

  1. Civil and criminal examiners must regularly communicate regarding their investigative efforts, but CI should not direct civil actions. Investigation status meetings are required to be held every quarter until the civil proceedings are complete.

  2. The purpose of the quarterly investigation status meeting is to communicate investigation developments and facilitate information sharing between the civil and criminal divisions.

  3. Participants in the status meeting should include the examiner, special agent, their respective managers, and the respective Area and CT Counsel. If a civil or criminal matter has been referred to DOJ, the assigned DOJ attorney should participate in these investigation status meetings. It is critical that the DOJ attorney assigned to the criminal investigation be fully aware of all civil actions, developments and evidence throughout the investigation process.

  4. Use of special investigative techniques, such as undercover operations or the active pursuit of a search warrant should be communicated to the civil operating division. The timing of actions in the civil examination, investigation or proceeding may affect special agent safety during a special investigative technique or the execution of a search warrant. Therefore, close coordination and communication is necessary when CI utilizes these techniques. Any decisions on how and when to proceed should be weighed in the favor of special agent safety concerns.

  5. Any concerns or objections raised during the investigation process should be resolved by consultation among the civil and criminal investigators and their supervisors, and Area and CT Counsel. When the promoter has been referred civilly or criminally, DOJ must be included in the decision-making process. See IRM 4.32.2.6.3.3.3, Resolving Conflicts.

Coordination of Tax Positions

  1. Civil and criminal examiners and their respective Area Counsel should carefully consider whether any tax theories or positions taken in their respective investigations (civil injunction and criminal prosecution) and related participant examinations are inconsistent. However, CI may not direct civil actions in promoter investigations or participant examinations.

Interviews

  1. Examiners must advise the special agent assigned to the criminal investigation prior to contacting the promoter or witnesses.

  2. Generally, CI informs promoters of their Fifth Amendment rights before the examiner initiates contact or conducts an interview. Examiners should explain to the promoter at each meeting that they are conducting a civil investigation but the information provided will be shared with CI.

  3. If a promoter under investigation inquires about criminal implications or whether the promoter is the subject of a criminal investigation before CI has contacted the promoter, examiners must be careful to provide accurate information and never mislead or misrepresent the facts to the promoter.

  4. When interviewing a subject or witnesses, examiners and special agents should clearly explain the purpose of their respective investigations, their roles in the investigations, and the potential impact of cooperation by the subject.

  5. Examiners must not mislead the promoter regarding the existence of a criminal investigation nor conduct a criminal investigation under the guise of the civil investigation. See United States v. Tweel, 550 F.2d 297 (5th Cir. 1977). Refer to IRM 25.1, Fraud Handbook, for further information.

  6. There is no specific prohibition on conducting joint interviews of promoters. However, examiners and special agents must clearly identify themselves and their roles at these meetings and prepare a joint memorandum of the interview. Examiners should keep a copy of their interview notes and provide the original notes to the special agent.

  7. On occasion, CI may request that no contact be made with a promoter. IRC 6700 and IRC 6701 do not mandate an initial appointment letter be sent or interview of the promoter conducted, so examiners can proceed with the development of the civil investigation without contacting the promoter. Area Counsel should be involved in any decision to conduct an investigation without contacting a promoter.

  8. IRC 7602(c)(3)(C) provides for an exception to the third party notification requirements. Accordingly, if CI requests no civil contact with a promoter, the third party notification letter (Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations) is not required. See IRM 4.32.2.7.3.2, Third Party Contacts.

Information Sharing

  1. Sharing information among examiners, special agents, and government attorneys assigned to the investigation is a key ingredient in developing civil and criminal investigations simultaneously and efficiently.

  2. Examiners should work with Area Counsel to gather from CI the evidence from the Criminal Investigation file to demonstrate material violations of the elements of the applicable code sections.

  3. Special agents should develop as much evidence as practical administratively before using the grand jury process. This can be done through summonses, search warrants, witness interviews and undercover operations and allows CI to share information with the civil operating division.

  4. A grand jury investigation in a parallel investigation does not prohibit a civil investigation; however, Federal Rule of Criminal Procedure 6(e) does limit the use of grand jury materials to the enforcement of criminal law.

  5. Information sharing between civil and criminal functions is appropriate unless prohibited under grand jury secrecy rules of Rule 6(e) of the Federal Rules of Criminal Procedures and disclosure provisions of IRC 6103, Confidentiality and Disclosure of Returns and Return Information. Judicial districts and appellate courts have diverse rulings on what constitutes grand jury information. The grand jury process may never be used to perfect a civil investigation. Refer to IRM 9.3.1.4.1, Grand Jury Secrecy (Federal Rules of Criminal Procedure Rule 6), and Chief Counsel Directives Manual (CCDM) 38.2.2, Review of Criminal Tax Cases -Grand Jury Procedures, for further information about the grand jury secrecy rules of Rule 6(e).

  6. Examiners are permitted access to all non-grand jury information obtained during the criminal investigation. Generally, not all records obtained in the criminal investigation are grand jury materials. Records that constitute "matters occurring before the grand jury" depends upon the law of the particular judicial circuit. Examiners should consult with Area Counsel and the LDC SPA responsible for parallel investigations with questions related to access to records in grand jury cases.

  7. IRC 6103 permits the disclosure of tax information between civil and criminal functions to the extent permitted by IRC 6103(h) as long as there is a "need to know" to accomplish official duties relating to tax administration, and there are no grand jury prohibitions.

  8. In grand jury investigations, concurrence of the DOJ attorney assigned to the criminal investigation must be secured prior to releasing or allowing civil examiners access to any records in CI’s possession to avoid inadvertent release of grand jury information. Examiners should contact Area Counsel and the LDC SPA responsible for parallel investigations if the DOJ attorney will not allow access or release records that are not grand jury materials.

  9. IRC 6103(h)(2) allows disclosure to DOJ attorneys as long as a referral to DOJ has been made by either the civil or criminal divisions. However, grand jury information cannot be shared with a civil DOJ attorney unless a Rule 6(e) order has been secured from the court.

  10. Examiners must provide CI access to all available information in the civil examination and attorney files. Sharing information should be an ongoing process throughout the parallel investigation to avoid unnecessary delays. Criminal attorneys have a mandatory obligation to disclose certain information to criminal defendants. This includes documents, interview notes and any other information obtained in the civil investigation. See Brady v. Maryland, 373 U.S. 83 (1963), Giglio v. United States, 405 U.S. 150 (1972) and Jencks Act, Demands for Production of Statements and Reports of Witnesses (18 USC § 3500).

Undercover Operations and Search Warrants

  1. Any overt civil actions are temporarily stayed if CI is conducting an undercover operation or developing probable cause to execute a search warrant in the near future. Benefits of an undercover action or search warrant should be weighed against the need to enjoin a promoter quickly.

  2. Information obtained through a search warrant is generally not grand jury information. Search warrant information obtained during the grand jury process can be made available to civil examiners if no grand jury information was included in the affidavit for the search warrant. Although not yet addressed by the courts, if grand jury information is included in the affidavit, the materials seized during the search may be disclosed even if the affidavit is not subject to disclosure. If the affidavit supporting the warrant has been sealed by the court, sharing of the information seized in the search with civil examiners or attorneys may result in the unsealing of the affidavit. Examiners should seek the guidance of Area Counsel for direction in these circumstances.

  3. Use of search warrant and undercover evidence must be approved by the assigned DOJ attorney. Requests should be coordinated with CI, Area Counsel, and DOJ. Examiners should consult with Area Counsel and the LDC SPA responsible for parallel investigations with questions or issues related to release of this information.

Administrative Summons

  1. IRC 7602(d) does not allow a summons to be issued or enforced with respect to any person if a Justice Department referral is in effect with respect to such person.

  2. A referral is defined as an IRS recommendation of a grand jury investigation or criminal prosecution of the taxpayer or a criminal investigation request initiated by DOJ pursuant to IRC 6103(h)(3)(B).

  3. IRC 7602(d)(3) specifies that each taxable period and type of tax be treated separately for purposes of determining what constitutes a referral. Administrative civil summonses are generally permitted with respect to taxable periods for other types of tax not included in a criminal investigation referral.

  4. An IRC 6700 or IRC 6701 penalty, while deemed to be a tax pursuant to IRC 6671, is not included in the criminal referral for a grand jury investigation with respect to the promoter’s income tax liabilities.

  5. Treas. Reg. 301.7602-1(c)(4)(ii), Example (5) describes the issuance of an administrative summons, related to a promoter investigation, where DOJ referred the case for a grand jury investigation with respect to the promoter’s income tax liability. In this example, a summons is allowed in conjunction with the promoter investigation because the IRC 6700 penalty is not the same as the promoter’s income tax liability included in the criminal referral for a grand jury investigation.

  6. If CI has made a criminal referral to DOJ and the referral involves a conspiracy theory, widespread false return preparation or interference with administration of the tax laws, then seek Area Counsel’s advice prior to the examiner issuing a summons with respect to the civil promoter investigation.

  7. If an administrative summons in a civil promoter investigation is proposed and CI has made a referral to DOJ for grand jury investigation or criminal prosecution, examiners must discuss this matter with Area Counsel and CT Counsel along with any DOJ attorney assigned to the investigation before issuing a summons. See IRM 4.32.2.7.5, Summonses.

Assessment of Penalties

  1. Assessment of promoter and preparer penalties must be delayed until completion of the criminal investigation. Penalties will reject if there is a 914 freeze on the promoter’s account. See IRM 4.32.2.8.2.2, Penalty Assessment – CI Parallel Investigation, for more information.

  2. An immediate penalty assessment should be considered when a promoter is planning to flee the United States, dissipate assets or property or place assets beyond the reach of the US Government. Examiners should consult with Area Counsel, the DOJ attorney, Collection and CI. See IRM 4.4.25, Quick Assessments, and IRM 3.17.244.2, Quick, Prompt, Jeopardy and Termination Master File Assessments, for additional information on prompt assessments.

  3. Refer to IRM 4.32.2.11.8, Penalty Case Processing Procedures, for more information on case closure procedures.

Suspension of Penalty Assessment

  1. After the civil investigation is complete, including the litigation process, and if the penalty assessment is suspended at the request of CI, the investigation is updated to Status Code 16 and suspended in the group. The investigation should be completed to the point where penalties can be easily assessed once CI has completed its criminal investigation.

Participant Lists

  1. Examiners assigned to promoter investigations should request a participant list from CI even when there has been a decision to proceed with only a criminal investigation. All participant lists should be forwarded to the designated headquarters AT SPA or OTSA as applicable for case-building of participant examinations. See IRM 4.32.2.13, Participant/Investor/Advisee Lists.

  2. If CI does not have a participant list readily available, examiners should prepare a list from available non-grand jury information such as search warrant documents or bank records. In grand jury investigations, the use of CI evidence must be approved to prevent unintentional release of grand jury information. See IRM 4.32.2.6.7, Information Sharing.

  3. CI may wish to review the participant list and exclude those participants who may be considered potential criminal subjects in their investigation.

Coordinating Participant Examinations

  1. Examinations of participant returns should be initiated as soon as possible. CI should be kept apprised of all civil compliance actions with respect to participants.

  2. Special agents must be mindful of the civil statute of limitations and the potential loss of tax revenues to the government. Special agents should make every effort to provide the civil examiner with all information or potential sources of information to identify participants in a timely manner.

  3. CI may wish to postpone contact or examination of a limited number of participants who are being considered as potential criminal subjects as part of their investigation. CI should not prohibit civil compliance actions on participants just because the participant is a witness in the criminal case.

  4. Any tax theories or positions advanced in the participant examinations should be consistent. See IRM 4.32.2.6.5, Coordination of Tax Positions.

Promoter Investigation Guidelines

  1. These guidelines provide basic steps for examiners to use. However, each promoter investigation is unique and varies in complexity. Examiners should use all available tools including internal and external sources to address specific investigations.

  2. The goals of an income tax examination and a promoter investigation are significantly different. The goal of an income tax examination is to determine the substantially correct income tax liability. The goal of a promoter investigation is to identify and quickly terminate the abusive promotion or activity and to address the tax implications to participants by:

    • Determining if a promoter has engaged in conduct that violates the applicable civil penalty statutes.

    • Determining if the promotion is reoccurring or likely to reoccur and if the promoter should be referred for an injunction.

    • Obtaining participant/investor/advisee lists.

    • Ensuring compliance with the requirements of IRC 6111 and IRC 6112.

Pre-Contact Analysis

  1. Before meeting with promoters, examiners should discuss and plan the investigation with the assigned Area Counsel attorney. Although it is not required, Area Counsel should review Form 4564, Initial Document Request, so that it includes "summons ready" language.

  2. If a revenue officer is assigned to the investigation, the examiner should meet with the revenue officer. See IRM 4.32.3.4, Collection, for the procedures to have a revenue officer assigned to the investigation.

  3. If specialists are needed, examiners should request assistance as early in the investigation as possible. Requests are made using the Specialist Referral System (SRS).

  4. Information in the SB/SE LDC or OTSA referral package should be reviewed, verified, updated, and used as a basis for developing the investigation. The package may include leads that were not fully investigated by the SB/SE LDC or OTSA.

  5. Examiners should research IDRS, CBRS, the internet and other sources for current information on the promoter or promotion such as whether First Amendment issues may be present or possible leads regarding participants/investors/advisees, etc.

  6. If the investigation involves a paid return preparer, secure RPVUE for the most recent processing year and forward to the AT listkeeper.

  7. If the investigation is a parallel investigation, the examiner must initiate a six-way conference. See IRM 4.32.2.6.3, Six-Way Conference.

SB/SE Pre-Contact Procedures
  1. SB/SE examiners are responsible for ensuring investigations are controlled on ERCS using the correct project code and ERCS tracking code (if applicable).

  2. A promoter investigation action plan is a tool that can be used by SB/SE examiners and group managers. It outlines the activities, actions and suggested time frames for SB/SE investigations. A sample action plan is available. See Exhibit 4.32.2-7, Sample Action Plan and is also available on MySB/SE, under "Promoter Investigations."

  3. SB/SE examiners may conclude during the pre-contact analysis that an investigation should be discontinued before contacting the promoter or that the investigation needs to be transferred to another compliance area. See IRM 4.32.2.8, Investigation Outcomes, for details on these actions.

LB&I Pre-Contact Procedures
  1. LB&I Team Managers set up administrative controls, including input on ERCS.

  2. LB&I examiners should review the OTSA referral package which may include investor disclosure statements, OTSA database spreadsheets, attorney legal opinions, promotional materials, IDRS research, internet research, Q and A's of investors and any other material.

  3. For LB&I examiners, the investigation/audit plan for promoter penalty cases must be used by examiners involved in promoter investigations.

  4. LB&I Team Coordinators/Team Managers are responsible for completing the audit plan with estimated completion dates at each stage, including an estimated closing date (ECD). The status summary may be used for monitoring the progress of the investigation.

  5. LB&I Team Coordinators create activity records and logs to monitor progress for information document requests (IDRs), summonses, third party contacts, interviews, etc.

The SB/SE LDC and OTSA
  1. The SB/SE LDC can assist SB/SE examiners with investigation development by obtaining promoter materials, conducting field surveys, and performing computer research. Generally, field surveys are limited to those investigations where the information is critical to developing the investigation. The SPA assigned to the promotion coordinates these survey requests.

  2. OTSA is available to assist LB&I examiners with investigation development by providing information from OTSA disclosure and registration databases and assisting in facilitating field surveys. Generally, field surveys are limited to investigations where the information is critical to developing the investigation. See IRM 4.32.2.3.3.1.1, Disclosures of Reportable Transactions.

AT Senior Program Analysts (SPAs) and Technical Advisors (TAs)
  1. SPAs (SB/SE) or TAs (LB&I) responsible for specific promotions can provide additional information not in the SB/SE LDC or OTSA referral package, such as names of other IRS employees investigating the same promotion or similar promotions. SPAs or TAs can assist examiners with national coordination issues related to the promotion.

Commencing the Investigation

  1. This section provides procedures for examiners to commence promoter investigations.

Commencement of SB/SE Investigations
  1. Examiners schedule the initial appointment using Letter 1844, Initial Interview Letter, for investigations related to conduct potentially subject to penalties under IRC 6700, IRC 6701, IRC 6694, or IRC 6695. This initial appointment letter specifies the specific time and place of the initial interview.

  2. Examiners should schedule an initial appointment for 10 days from the date Letter 1844 is mailed to the promoter. The appointment should not be rescheduled to a later date unless there is a valid reason. Examiners should be alert for attempts by promoters to delay the investigation.

  3. In some investigations, it may be advisable to combine the opening and closing appointments into one meeting. This approach is generally used when an examiner has reason to believe the promoter will fail to cooperate or appear for the scheduled appointments. In these cases, the opening and closing appointments can occur in the same meeting by using Letter 3828, Opportunity to Present Position - Tax Shelter Promoter.

  4. A Notice 609, Privacy Act Notice, should be enclosed with the initial appointment letter.

  5. Form 4564, Information Document Request (IDR), must be sent with the initial appointment letter. The IDR must be specific and request relevant information related to the promotion.

  6. It is recommended that the IDR include "summons ready" language in the event the promoter fails to cooperate and an administrative summons is issued. Consult Area Counsel when preparing the IDR, particularly for complex transactions. Examiners should be prepared to serve the summons at the initial interview if they anticipate lack of cooperation by the promoter. See IRM 4.32.2.7.5, Summonses.

Commencement of LB&I Material Advisor Investigations
  1. After the TTSPC approves the opening of a material advisor investigation under IRC 6707, the Team Manager/Team Coordinator issues the appropriate audit letter together with the standard IDR to the material advisor. The Team Manager/Team Coordinator should contact the LB&I:F Senior Program Specialist for the promoter program for the appropriate audit letter and IDR. The audit letter and IDR, issued by the Team Manager after Area Counsel review may be modified to fit the specifics of the investigation.

  2. Notice 609, Privacy Act Notice, must be included with the material advisor contact letter.

  3. The Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations, modified as appropriate, must also be included with the material advisor contact letter.

  4. Modifications may be made to the standard audit letter and IDR as needed, with the participation of Area Counsel.

  5. Central Audit File - All LB&I promoter investigation cases should have a "central audit file" that includes all documentation pertaining to the investigation including workpapers, analyses, correspondence, copies of summonses, taxpayer’s responses, etc. All examiners working on the investigation should have access to the central audit file. If the investigation is being worked by examiners in multiple locations and it is not feasible for all examiners to have access to the central audit file, then each examiner should be provided with a complete copy of all of the documents as the investigation progresses. The file should be arranged so that the information needed can be located easily. All examiners are required to have a complete activity record in the file. The central audit file must be separate and apart from the Counsel's file.

  6. LB&I examiners should send a copy of the potentially abusive transaction material obtained during the examination to OTSA. The identity of all material advisors who helped with the tax shelter promotion should also be sent to OTSA.

  7. LB&I team managers are required to prepare and submit monthly progress reports on each promoter investigation to the Financial Services Senior Program Specialist for the promoter program. A copy of the monthly report format can be found in Exhibit 4.32.2-3, LB&I Monthly Progress Report. If anything significant happens between reporting dates (e.g., serving a summons, enforcement) contact the Financial Services Senior Program Specialist immediately.

  8. A promoter may not file a qualified amended return after the date any person is first contacted by the IRS concerning an examination of that person under IRC 6700 for an activity with respect to which the taxpayer claimed any tax benefit on the return directly or indirectly through the entity, plan, or arrangement. Treas. Reg. 1.6664-2(c).

Responses to the Audit Letter
  1. If the promoter's response to the audit letter is adequate:

    1. Determine if additional staff or other resources are needed to assist in analyzing the documents. If needed, request help from the TM. If additional resources are not available in the territory, the TM should contact the Financial Services (FS) TM having responsibility for tax shelter promotions.

    2. Index and scan the documents submitted by the promoter;

    3. Prepare an investor list on the standard OTSA spreadsheet and forward it to the Senior OTSA Analyst for promotions, with a copy to the Financial Services Senior Program Specialist for tax shelters. OTSA forwards the investor information to the Tax Shelter Support Unit (TSSU) in Ogden. The TSSU enters the information in the OTSA database and generates referral letters to the field to open examinations.

    4. Determine the number of different promotions the taxpayer is involved in and make referrals for assistance from financial products specialists, TAs, international examiners, etc. as appropriate.

  2. If the promoter's response to the audit letter and IDR is insufficient, consider issuing a summons to compel production of the information. All summons must be approved by Area Counsel and enforced as necessary.

Issuance of IRC 6112 Letter
  1. The IRC 6112 letter may only be issued if the Service has a reasonable basis for believing that the recipient is required to comply with IRC 6112. The Team Manager/Team Coordinator, together with Area Counsel, must evaluate whether such a letter is appropriate and when enough information exists to support the issuance of the IRC 6112 letter.

  2. The Team Manager/Team Coordinator issues an IRC 6112 letter by certified or registered mail or hand delivery. Letter 4378, Multiple Sec. 6112 Request, may be used to make requests under IRC 6112.

  3. Notice 609, Privacy Act Notice, must be included with the IRC 6112 letter.

  4. Modifications may be made to the standard IRC 6112 letter as needed, with participation of Area Counsel.

Responses to IRC 6112 Letters
  1. The promoter's response to the IRC 6112 letter is due within 20 business days. IRC 6112 does not provide for extensions. If the investor/advisee list is not received or is received after the 20 day response period, the promoter or material advisor is subject to an IRC 6708 penalty unless the reasonable cause exception applies.

  2. If a promoter responds timely, examiners must copy any investor list obtained to the standard OTSA spreadsheet. It is important that the investor list information conform to the OTSA spreadsheet; otherwise it will impede the OTSA database process.

  3. If the examiner, together with Area Counsel, determines that the material advisor's timely response was complete, then the examiner should issue Letter 4376, Discontinuance Letter for Sec. 6112 Inquiry, after receiving approval from the LB&I:F DFO Manhattan.

  4. If a promoter does not respond to the IRC 6112 letter request or if the examiner, in consultation with Counsel considers the response incomplete, then the Team Manager/Team Coordinator should send the material advisor a letter stating that the material advisor's submission was not fully responsive and that an IRC 6708 investigation is being opened. The examiner should contact the LB&I:F Senior Program Specialist for the Promoter Program for the appropriate letter.

Reportable Transactions
  1. A "reportable transaction" is defined in IRC 6707A(c)(1), and is a type of transaction that the Secretary determines has a potential for tax avoidance or evasion per regulations under IRC 6011. See Treas. Reg. 1.6011-4. Material advisors are required to disclose reportable transactions (including listed transactions) to the IRS on Form 8918, Material Advisor Disclosure Statement. See IRC 6111. Material advisors may be subject to penalties under IRC 6707 for failing to provide the required information. See Treas. Reg. 301.6111-3, Disclosure of Reportable Transactions.

  2. Reportable transactions include the following categories of transactions:

    Category Description
    Listed Transaction A transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a listed transaction. See Notice 2009-59, IRB 2009-31, 170, for a list of these transactions.
    Confidential Transaction A transaction offered to a taxpayer under conditions of confidentiality where the taxpayer's disclosure of the potential tax treatment and strategy is limited in any manner, and for which the material advisor is paid a minimum fee. The minimum fee equals:
    1. $250,000 if the taxpayer is a corporation (looking through partnerships and trusts), or

    2. $50,000 for all other taxpayers.

    The agreement or understanding limiting such disclosure can be express or implied.
    Transaction With Contractual Protection The taxpayer or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences are not sustained, or fees are contingent on the taxpayer's realization of tax benefits.
    Loss Transactions Any transaction resulting in the taxpayer claiming a loss under IRC 165, Losses, of at least the following amounts:
    1. For C corporations and partnerships that only have C corporations as partners - a $10 million loss in a single tax year or a $20 million loss in any combination of taxable years.
    2. For individuals and trusts - a $2 million loss in a single tax year or a $4 million loss in any combination of taxable years; or a $50,000 loss in a taxable year if the loss arises with respect to an IRC 988 transaction.
    3. For all other taxpayers, a $2 million loss in a single tax year or a $4 million loss in any combination of taxable years.
    Transactions of Interest (TOI) A transaction that is the same or substantially similar to one of the types of transaction that the IRS has identified by notice, regulation or other form of published guidance as a transaction of interest. See Notice 2009-55, IRB 2009-31, 170 for a list of TOIs.
    Transactions With a Significant Book-Tax Difference For a transaction, any items of income, gain, expense, or loss for tax purposes which differ by more than $10 million on a gross basis from the amount used for book purposes. This provision only applies to taxpayers that are reporting companies under the Securities Exchange Act of 1934 and related business entities, or to business entities that have $250 million or more in gross assets for book purposes. For taxpayers that would have to make disclosures on or after January 6, 2006, these taxpayers are not required to file a disclosure statement. See Notice 2006-6, IRB 2006-51 1, "Notification of Removal of the Transaction With a Significant Book-Tax Difference Category of Reportable Transaction Under Treas. Reg. 1.6011-4."
    Transactions With a Brief Asset Holding Period Any transaction resulting in the taxpayer claiming a tax credit (including a foreign tax credit) exceeding $250,000 if the underlying asset giving rise to the credit is held by the taxpayer for 45 days or less. This transaction category was removed in the Final IRC 6011 Regulations issued August 3, 2007.

  3. For returns and statements due after October 22, 2004, and which were not filed before that date, any taxpayer who participates in a reportable transaction and fails to disclose information on Form 8886, as required, is subject to an IRC 6707A penalty.

  4. Specific exceptions to the requirement to report loss transactions are described in Rev. Proc. 2004-66, 2004-50 IRB 966. Generally, the exceptions include losses from the sale or exchange of assets with a qualifying basis, losses under IRC 165(c)(3), involuntary conversions, certain mark-to-market losses, losses determined by reference to cash payments, and various other losses as described in Rev. Proc. 2004-66, Section 4.03.

  5. Specific exceptions to the requirement to report transactions with contractual protection are found in Rev. Proc. 2007-20, 2007-7 IRB 517. These exceptions apply to certain contractual protection arrangements for which the fee is related to certain credits. See Rev. Proc. 2007-20, Section 4.02.

  6. In general, any taxpayer, including an individual, trust, estate, partnership, S-corporation, or other corporation, that participates in a reportable transaction and is required to file a federal income tax return or information return, must file a Form 8886.

  7. Regulations requiring disclosures of reportable transactions by participants in those transactions are found under IRC 6011 at Treas. Reg. 1.6011-4.

Listed Transactions
  1. The IRS has alerted taxpayers to transactions that it has determined are tax avoidance transactions and identified these transactions as "listed transactions."

  2. Listed transactions are defined as transactions that are the same as, or substantially similar to, one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction. Refer to Treas. Reg. 1.6011-4(b)(2) and IRC 6707A(c)(2), as added by the AJCA of 2004.

  3. In Notice 2009-59, IRB 2009-31, 170, Listed Transactions, and subsequent notices the IRS provides a list of certain transactions it has determined to be tax avoidance transactions and classified those transactions as listed transactions. Contact OTSA for a complete summary of all listed transactions.

  4. Organizers, sellers, and material advisors involved with listed transactions must maintain and furnish certain investor/advisee information under Treas. Reg. 301.6112-1, Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc., for interests sold in these shelters after February 28, 2000.

  5. After the AJCA amended IRC 6111 effective for transactions with respect to which material aid, assistance, or advice is given with respect to a transaction after October 22, 2004, material advisors must disclose listed transactions by filing a Form 8918.

  6. Taxpayers must disclose their participation in listed transactions per Treas. Reg. 1.6011-4, Requirement of Statement Disclosing Participation in Certain Transactions By Taxpayers.

  7. When a listed transaction is identified during an examination, the issue is raised and developed. Examiners should contact the SPA orTA , identified coordinator or IMT handling the issue. Examiners should provide the name of the taxpayer, taxable period(s) involved, type of listed transaction, and the name of the promoter, if known. LB&I examiners should include the names of the team manager and team coordinator and their telephone numbers. SB/SE examiners should include the name of their group manager (GM) and their telephone numbers. The initial contact may be via e-mail (utilizing secure messaging), fax or telephone.

  8. As a transaction is listed, the SPA or TA, with the assistance of the Field Counsel attorney assigned to the issue, prepares a paper describing the facts of the issue, questions raised and the best way to address the issue to ensure full development and consistency among taxpayers. Training, reference and resource materials are also provided. The SPA or TA, with the assistance of the Field Counsel attorney assigned to the issue, develops and proposes a coordinated issue paper (CIP) or similar document, as appropriate.

  9. Examiners should consult with the SPA or TA and Area Counsel on the development of the issue. Examiners must secure the concurrence of the SPA or TA if their examination deviates from any mandated specific examination techniques proposed for issue development or their proposal for adjustment deviates from any stated legal positions. Examiners must also consult with, and secure the concurrence of, the SPA and Area Counsel before proposing any resolution other than full concession of the issue by the taxpayer. No proposals can be made without the concurrence of the Executive Issue Owner. See IRM 4.32.1.4.1, Membership in the Issue Management Team, for more information on Executive Issue Owners.

  10. Penalties under IRC 6662, Accuracy-Related Penalty, and IRC 6662A, Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions, must be considered for all listed transactions. Due to the definition of "reportable transaction understatement," the IRC 6662A penalty, unlike the IRC 6662 penalty, may apply even if there is no underpayment of tax on the taxpayer’s return. Furthermore, if the taxpayer did not disclose their participation in the transaction as required by Treas. Reg. 1.6011-4, penalties under IRC 6707A should be considered.

Responses to Promoter Frivolous Challenges
  1. Examiners should anticipate arguments and questions from the promoter defending the arrangement and questioning the right of the IRS to examine the books and records.

  2. Examiners also should familiarize themselves with The Truth about Frivolous Tax Arguments and the various toolkits located on the IRS internet website at www.irs.gov/.

Powers of Attorney
  1. Promoters may have an attorney, certified public accountant (CPA), enrolled agent, or other authorized person represent them during the investigation. If so, a Form 2848, Power of Attorney and Declaration of Representative, should be secured. The form should indicate the type of tax to be "Civil Penalties" as the type of tax. The tax form number should be marked as "Not Applicable (N/A)." The year(s) or period(s) block should be completed showing the current year and any prior year in which the promotion was ongoing.

  2. Refer to IRM 21.3.7, Processing Third Party Authorizations onto the Centralized Authorization File (CAF), for additional information regarding powers of attorney including whether the form is complete.

    Note:

    Married filing joint taxpayers - A separate Form 2848 should be secured for each spouse.

Claims of Identity Theft
  1. If a promoter or participant claims to be a victim of identity theft, the following documents must be provided to establish the claim. These documents have been established as service-wide standards to reduce taxpayer burden. See IRM 21.9.2, Accounts Management Identify Theft, and IRM 10.5.3Identity Protection Program, for additional information.

    • Authentication of Identity – A copy of a valid United State federal or state government issued form of identification (e.g., driver’s license, state identification card, social security card, passport, etc.).

    • Evidence of identity theft – A copy of a police report or a completed Form 14039, Identity Theft Affidavit.

Promoter Interviews

  1. The primary goals of the initial interview are to:

    1. Conduct a detailed interview with the promoter.

    2. Secure promotional materials.

    3. Secure a complete participant, investor, or advisee list.

  2. Examiners should prepare a list of interview questions with guidance from Area Counsel before the interview. Interview questions should cover the following topics:

    • Personal history.

    • Business and professional history.

    • Structure of the organization and role of various parties within the organization.

    • Size of the promotion.

    • Description of tax attributes of the promotion.

    • Sub-promoters, co-promoters, or other related parties.

  3. Every effort should be made to secure as much information as possible at the initial interview as the promoter may cease to cooperate at any point during the investigation.

  4. Examiners should consider preparing a summons in advance of the interview to serve on the promoter in the event the promoter fails to comply with the IDR.

  5. Examiners also should provide Pub 1, Your Rights as a Taxpayer, or a Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations, at the initial interview. Pub 1 or Letter 3164-P (DO) may also be sent with the initial appointment letter.

  6. It is recommended that interviews be conducted in the presence of at least one IRS witness.

  7. If possible, the assigned Area Counsel attorney should attend the interview.

  8. In parallel investigations, promoters will not be interviewed without coordination with CI and consultation with Area Counsel. See IRM 4.32.2.6.6, Interviews, for procedures regarding special agents attending interviews. See IRM 4.32.2.6, Parallel Investigations.

  9. It is recommended that interviews be held in government facilities. Group managers may agree to alternative arrangements to facilitate interviews provided the safety of the examiner is not compromised.

  10. For LB&I, court reporters are required for all formal interviews. Examiners should make arrangements for purchase of the interview transcript. Examiners should contact a LB&I Financial Services Senior Program Specialist for assistance.

  11. For some sample promoter interview questions, see Exhibit 4.32.2-8, Sample Interview Questions for Promoters/Preparers. This document is also available on MySB/SE, Promoter Investigations.

  12. See IRM 4.10.3.2, Interviews: Authority and Purpose, for the authority for and purpose of conducting interviews.

  13. See IRM 4.10.3.2.7, Interview Techniques, for additional general interviewing techniques.

Recording Interviews
  1. IRC 7521, Procedures Involving Taxpayer Interviews, allows audio recordings of in-person taxpayer interviews by either the taxpayer or the IRS if the party desiring to record provides advance notice. See IRM 4.10.3.2.6, Requests to Tape Record Interviews. Advance notice of at least 10 calendar days is required if either the IRS or the taxpayer intends to make an audio recording under the provision in IRM 4.10.3.2.3, Preparation and Planning for Interviewing.

  2. If the promoter audio records the interview or uses a court reporter, the examiner must record the meeting.

  3. Promoters may fail to provide the IRS with advance notice of their intention to record a meeting. Since time is of the essence in these investigations and recordings of interviews can play a pivotal role in the investigation, examiners should be prepared to audio record all interviews.

  4. Cameras, cell phones with cameras, and videotaping are never allowed. See IRM 25.5.5.4.4, Right to Make an Audio Recording of the Proceeding, for additional information.

  5. Examiners should consider audio recording all interviews with promoters and participants to document the meetings. See IRM 4.16.1.3.2.2, Electronic or Verbatim Recording of Interviews, and IRM 4.10.3.2.6, Requests to Tape Record Interviews, and IRM 4.71.1.13, Verbatim Recordings.

  6. If the IRS is not recording the interview, examiners should ask whether the promoter or participant is recording the interview, and document the question and the response in the interview notes. Many states have wiretap laws prohibiting the secret recording of conversations without a court order. If the meeting/interview was illegally recorded, the promoter’s denial could be used in later legal proceedings.

  7. Promoters may use a court reporter in their own interview if the court reporter is licensed by the state to record official court proceedings and will make a copy of the transcript available to the IRS.

  8. See IRM 25.5.5.4.4, Right to Make an Audio Recording of the Proceeding, and IRM Exhibit 4.10.3-1, Pattern Letter P2156: Recording Interviews.

Third-Party Contacts
  1. IRC 7602(c) requires the IRS to provide notice to the promoter before contacting third parties. Letter 3164-P (DO), Third Party Notification for IRC 6700/6701 Investigations, is used to provide this statutory notification for promoter investigations.

  2. IRC 7602(c)(3)(C) provides for an exception to the third-party notification requirement with respect to any pending criminal investigation. Accordingly, in parallel investigations where CI has requested “no-contact,” the third-party notification letter (Letter 3164-P (DO)) is not required.

  3. Examiners should attempt to obtain the information in writing from the promoter before contacting any third parties. However, third-party contacts will be required in most promoter investigations to obtain or verify information provided by the promoter.

  4. Tax return information may be disclosed to a third party to the extent necessary for the third party to answer questions. Sufficient information should be included in the file to document the necessity for IRC 6103(k)(6) disclosure purposes. Further information on disclosures to third parties may be found in IRM 11.3.21.3, Requirements of Investigative Disclosure, and in IRC 6103(k)(6).

  5. Form 12175, Third Party Contact Report Form, should be forwarded to the Area Third Party Contact Coordinator for each third party contact. Use IMF MFT 55 or BMF MFT 13, as appropriate, and the tax period on ERCS for the penalty case when completing Part 10 of Form 12175.

  6. Promoter's requests for third party contact lists must be forwarded to the Area Third Party Contact Coordinator. Before forwarding any such request, the employee receiving the request must secure the promoter’s current mailing address.

  7. Taxpayers and their counsel have no legal right to be present for IRS interviews of any third party witness. However, if the interview is with a former employee of a corporation who exercised managerial responsibility, contact Area Counsel to determine what questions can be asked of the former employee without taxpayer’s counsel present. See also IRM 25.5.5.5.5, Excluding a Taxpayer or a Taxpayer's Representative From the Interview of a Summoned Third Party, and IRM 25.5.5.5.7, Third-Party Witness’s Choice of Representative, for additional information.

  8. See IRM 4.10.1.6.12, Third Party Contacts - Background, for more information.

Sub-promoters/Co-Promoters Contacts
  1. Sub-promoters/co-promoters are involved in promoting the same transaction as the promoter. They may also be organizers, managers or sellers of this transaction. They generally receive fees for their role in the transaction.

  2. A promotion may involve several sub-promoters/co-promoters, such as an accounting firm, financial services/investment boutique firm, investment banker, or law firm. Generally, the entity that gives an opinion on the transaction being promoted is a law firm.

  3. Some abusive tax promotions are multi-level marketing promotions. Individuals in multi-level marketing promotions pay fees or commissions to whoever recruited them into the promotion, and receive fees or commissions from whomever they recruit into the promotion. Examiners must be alert to the possibility that sub-promoters and co-promoters could have other sub-promoters and co-promoters working under them.

  4. Sub-promoters/co-promoters may be subject to penalties under IRC 6700, IRC 6701, IRC 6707, or IRC 6708.

  5. Examiners should contact the SB/SE LDC or LB&I Financial Services Senior Program Specialist to obtain information on related or affiliated promoters. The sub-promoter or co-promoter may have previously, or may be currently, the subject of an investigation. If so, contact should be made with the examiner who conducted or is currently conducting that investigation.

  6. In LB&I, if the co-promoter is not under investigation, contact OTSA to find out if any disclosure statements pertaining to the co-promoter have been filed.

  7. If the sub-promoter’s or co-promoter’s activities warrant investigation or should be included with the key promoter investigation, the sub-promoter or co-promoter should be referred to SB/SE LDC or OTSA. See IRM 4.32.2.3, Lead Identification and Investigation Authorization. Investigation of a sub-promoter or co-promoter requires SB/SE LDC or LB&I TTSPC approval.

  8. In parallel investigation cases, sub-promoters and co-promoters should not be contacted without coordination with CI. See IRM 4.32.2.6, Parallel Investigations.

  9. Contacts with sub-promoters and co-promoters are considered third-party contacts subject to the notice and record-keeping requirements of IRC 7602(c). See also IRM 4.11.57, Third Party Contacts, for additional information

  10. Examiners should consider recording all interviews with sub-promoters and co-promoters. See IRM 4.32.2.7.3.1, Recording Interviews.

  11. Interviews with sub-promoters and co-promoters should follow the guidelines contained in IRM 4.32.2.7.3, Promoter Interviews, except that third-party interviews are not covered by IRC 7521 and the taxpayer has no legal right to be present for IRS interviews of any third-party witness. See IRM 25.5.5.5.7, Third Party Witness’s Choice of Representative, for additional information.

  12. For some sample sub-promoter and co-promoter interview questions, see Exhibit 4.32.2-9, Sample Interview Questions for Sub-Promoters and/or Co-Promoters. This document is also available on MySB/SE, Promoter Investigations.

Promoter or Related Promoter Income Tax Examinations
  1. Income tax returns should be reviewed for potential tax issues; however, an examination is not mandatory.

  2. If an examination is warranted, it should be done concurrently with the promoter investigation. It is generally advisable to have one examiner conduct the promoter income tax examination and another examiner conduct the promoter investigation, although there is no prohibition against one examiner doing both.

  3. Promoters often utilize their own promotion, and in the absence of known participants, the promoter's income tax examination could reveal the underlying operation of the promotion.

  4. The additional time and resources necessary to complete the examination must be balanced against the need to shut down the promotion as quickly as possible.

  5. Examiners should ensure the promoter has made all required disclosures with their individual return. See IRC 6011 and Treas. Reg. 1.6011-4. If there is noncompliance, appropriate penalties are assessed.

Participant Contacts
  1. Identification and contacts with participants is a critical component in the development of a promoter investigation. Participants can be a good source of information on the promoter and the promotion, providing insight on operations of the promotion, principals or entities involved and the flow of the money through the promotion. Participant information can be helpful in determining the tax harm of the promotion.

  2. In parallel investigation cases, participants are not contacted without coordination with CI. See IRM 4.32.2.6.6, Interviews.

  3. The number of participant contacts and the selection of specific participants for interview are determined on a case-by-case basis.

  4. Examiners should consider securing an affidavit from the participant. See IRM 4.32.2.7.4, Affidavits and Oral Testimony.

  5. Examiners should consider recording interviews with participants. See IRM 4.32.2.7.3.1, Recording Interviews.

  6. For some sample participant interview questions, see, Exhibit 4.32.2-10, Sample Interview Questions for Participants. This document is also available on MySB/SE, Promoter Investigations.

  7. Examiners should consider reviewing participants' compliance history and current collection status. If there is a need for a revenue officer to assist refer to IRM 4.32.3, Coordination and Roles of Cross Functional Units, for current procedures.

Participant Tax Examinations
  1. Participant examinations are frequently conducted simultaneously with a promoter investigation, but these examinations are not always mandatory. Examiners should also proceed with third-party contacts or other sources of information and not delay or suspend the investigation pending the outcome of any participant exams. The AT program makes participant exam decisions on a case-by-case basis.

  2. Examiners should secure any available information about prior examinations of participants to use as evidence for the promoter investigation. Contact an AT SPA for assistance.

  3. Examiners should consider reviewing participants' compliance history and current collection status. If there is a need for a revenue officer to assist, refer to IRM 4.32.3, Coordination and Roles of Cross Functional Units, for current procedures.

  4. In parallel investigations, participant income tax examinations are not initiated without coordinating with CI. See IRM 4.32.2.6.3, Six-Way Conference, and IRM 4.32.2.6, Parallel Investigations.

  5. In SB/SE, if participant examinations are necessary to develop a promoter investigation, the Area PSP office can build a maximum of 20 examination files. This number can be adjusted, if necessary, by agreement between the AT listkeeper, the case building team and the Area PSP Coordinator. Case building cannot be conducted at the group level.

  6. Participants who fail to disclose information required under IRC 6011 regarding a reportable transaction on a return or statement due after October 22, 2004, may be subject to IRC 6707A penalties.

  7. Examiners are required to consider the application of IRC 6662A penalties and other relevant penalties as part of the package audit requirements.

  8. The AJCA of 2004 amended the IRC 7525(b) exception to confidentiality privileges relating to taxpayer communications. This privilege does not apply to any written communication which is in connection with the promotion of the direct or indirect participation of the person in any tax shelter, as defined in IRC 6662(d)(2)(C)(ii).

  9. Examiners should be aware that the participants' returns most likely have statute of limitation (SOL) periods different from that of the promoter's return. This may be because the due dates of the promoter's information return and participants' returns differ. Additionally, the AJCA of 2004 made exceptions to the ordinary SOL periods in IRC 6501(c), Limitations on Assessment and Collection, if the taxpayer fails to include on any return or statement for any taxable year any information regarding a listed transaction. AIMS Alpha Code "WW" is used to identify this exception to the normal statute of limitations. See IRC 6501(c)(10) and Rev. Proc. 2005-26 for further guidance.

Participant Job Aid
  1. The examiner working the promoter investigation will prepare a participant job aid or "white paper" for use by other examiners working the related participant cases. The job aid is forwarded to the listkeeper along with the participant list for case building

  2. Information provided in the participant job aid includes:

    • Identifying information on the promoter, including project and tracking codes.

    • Key tax issues and a description of the scheme.

    • Tax law analysis.

    • Suggested audit techniques.

    • Contact information on the promoter examiner and SPA.

    • Information from the participant audit files to be provided to the promoter examiner.

    Optional information that can be helpful includes suggested interview questions and a penalty application addendum.

  3. The participant job aid is intended to provide a brief overview of the promotion and the relevant tax issues, and to facilitate coordination between examiners. Normally, 4 or 5 pages is sufficient. In some instances, a separate issue paper may be prepared by the SPA to address technical or complex issues.

Affidavits and Oral Testimony

  1. Affidavits can be used to document oral statements of the promoter or any other person interviewed during the promoter investigation. Form 2311, Affidavit, and Form 2311-B, Affidavit Continuation Sheet, can be used to document the interview.

  2. Affidavits are used:

    • When other documentary evidence is not available to support the statements of a person.

    • To record the testimony of a person.

    • To discourage a person from later changing his testimony.

    • In certain circumstances as evidence if the person cannot be located for future proceedings.

    • To accurately record and document a person’s statements.

  3. Examiners can administer an oath or affirmation to the person being interviewed. The authority for administering oaths is IRC 7602, Examination of Books and Witnesses, and IRC 7622, Authority to Administer Oaths and Certify, and authority 14 of Delegation Order 25-1 (IRM 1.2.52.2), Summonses, Oaths, Certifications, and Related Functions. Contact Area Counsel prior to administering any oath or affirmation.

  4. See IRM 20.1.6.20, Affidavits Overview, for information to be included in affidavits related to preparer penalty cases.

  5. There is no set form for an affidavit as long as all of the required information is present. There are four basic types of affidavits:

    • Narrative Affidavit – A verbatim written record of the person’s statements or testimony.

    • Summary Affidavit – A summary of the person’s statements or testimony.

    • Question and Answer Affidavit – A written record containing the exact question asked, and either the verbatim answer or a summary of the answer given by the witness.

    • Attested Interview Report – A summary of the interview that is not signed by the person but is signed under oath by the examiner and all other IRS employees attending the interview.

  6. Except for an attested interview, the person giving the affidavit should sign and date the document. If the affidavit is more than one page, the person should initial and date each page. Any typographical errors or other changes to the person’s statement must be initialed and dated by the person. If more than one person is interviewed, prepare a separate affidavit for each person.

  7. If a person refuses to sign the affidavit, but states that it is true and correct, the following statement should be added to the bottom of each page of the document:

    "This statement was read by [insert name] on [date], who stated it was true and correct but refused to sign it."

Summonses

  1. A summons can be used to require a witness to appear on a given date to give testimony, or to produce existing books, papers and records, or other data. A summons cannot require the preparation or creation of documents (including tax returns) that do not already exist. If a privilege defense is raised to the production of summoned documents, it is a best practice to describe the elements of the privilege log requested from the witness in the instructions to the summons. See IRM 25.5.5.4.3, Privileged Communication and Summons.

  2. For summonses related to promoter investigations the following language must be included in the summons: "In the matter of liability of [promoter or preparer's name] under 26 USC Secs. 6694, 6695, 6700, 6701, 6707 and 6708 [use all sections that may be applicable]."

  3. The periods on the summons form should say "From January 1, [year] through date of compliance with this summons" . The year to be inserted would be the earliest year that the promoter is suspected of having engaged in the abusive transaction.

  4. The Area Counsel attorney assigned to the promoter investigation should review all summonses before they are issued to make sure they are legally enforceable. For LB&I investigations, LB&I Area Counsel forwards the summons to DOJ for approval after Counsel review through procedures prescribed by LB&I Division Counsel and the CCDM. Area Counsel can conduct interviews pursuant to a summons. Summonses are of particular concern in cases where First Amendment concerns are present. Such summonses must be narrowly tailored to avoid infringing on First Amendment rights.

  5. In parallel investigations, examiners must coordinate all summonses with CI before issuance. Examiners should be aware that IRC 7602(d) limits the authority of the IRS to issue or enforce summonses when there is a "Justice Department referral" in effect. See IRM 4.32.2.6.9, Administrative Summons. For advice on the meaning of that restriction, examiners should contact Area Counsel.

  6. Examiners should continue to develop the promoter investigation during the summons enforcement process and attempt to secure the information from another source.

  7. Additional requirements for LB&I examiners:

    1. A summons log must be kept. A sample copy of the summons log is in IRM Exhibit 4.32.2-2, Sample Summons Log.

    2. Each listed transaction should be shown on a separate summons. All other transactions should be combined on one additional summons.

    3. Team Managers should sign the summons. It is left to the discretion of the TM whether or not to inform the promoter of the pending summons. If a summons is a third party summons, notice must be given under IRC 7609(a).

  8. See IRM 25.5, Summons, for additional information on summonses and IRM 1.2.52.2, Delegation Order 25-1, Summonses, Oaths, Certifications, and Related Functions.

Summonses for Foreign Records
  1. Documents related to foreign accounts or entities can often be obtained by use of a summons. Summonses may be issued to persons or entities who have a presence in the United States (including United States possessions) and who have control over books and records located abroad. For countries with which the United States has treaties or tax information exchange agreements (TIEAs), examiners generally may request information that is either in the other country's possession or obtainable under the laws of the particular country. The treaty or TIEA does not obligate the foreign country to provide information that would disclose any trade or business secret. All requests for foreign information are made through the Deputy Commissioner (International) LB&I, (or his delegate) who is the U.S. Competent Authority for tax treaties and TIEAs. (See Delegation Order 4-12 (Rev. 3) for the current delegated offices within the Deputy Commissioner (International) (LB&I). Additionally, see Chief Counsel Directives Manual (CCDM) 34.6.3.6.6 for procedures in the handling and the enforcement of Tax Treaty and TIEA exchange of information requests received by the U.S. Competent Authority from the foreign country.)

    Note:

    Revisions of Delegation Order 4-12 (Rev. 3) are still in process.

  2. If the promoter is acting as agent for an entity or if there is a factual basis for concluding that the promoter controls or possesses foreign-based records (e.g., the promoter is the grantor of a foreign trust or is using a credit card issued by a foreign bank), a court can compel the promoter to produce the summoned books, papers, records, or other data. See United States v. Wheaton, 791 F. Supp. 103 (D. N.J. 1992 (the court applied the text articulated in United States v. Powell, 379 U.S. 48 (1964)). Other examples of "control" of records abroad include interlocking boards of directors, corporate officers holding positions with each corporation, or direct or indirect ownership.

  3. Any such proposed summons shall be submitted for pre-issuance review to the appropriate Area Counsel office. Area Counsel will then consult with Branches 6 and 7 of the Office of the Associate Chief Counsel (Procedure and Administration). The Office of Associate Chief Counsel (Procedure and Administration) will consult with the Office of Associate Chief Counsel (International), Branch 7, as necessary, particularly in situations where there is a likelihood that the foreign country where the records are located may attempt to "block" compliance or enforcement of the summons (see also, paragraph 6 below). In such cases, the DOJ may also be consulted.

  4. If the issuance of a summons for foreign information to a person or entity who has a presence in the United States and who has control over books and records located abroad is unsuccessful, only then may the Service consider if it is appropriate to obtain foreign information directly in the foreign country by utilizing treaties, conventions and agreements, including tax treaties and TIEAs.

  5. In situations where the United States has a tax treaty, TIEA or other bilateral or multilateral agreement for the exchange of information with the country where the information is located, the IRS will attempt to obtain the foreign information by utilizing such treaty, TIEA or agreement prior to issuance of a summons for the foreign information. See Chief Counsel Directives Manual (CCDM) 34.6.3.6.6Tax Treaty and TIEA Summons and Chief Counsel Directives Manual (CCDM) 34.6.3.6.7, Issuance of Summons for Books and Records Abroad.

  6. Requests for information to foreign governments under tax treaties and TIEAs must be made through the Office of the Deputy Commissioner (International) LB&I. The Deputy Commissioner (International) LB&I is the U.S. Competent Authority for treaties and TIEAs and only s/he or those with a delegated authority have the authority to exchange information with a foreign government. Any questions regarding the exchange of information process should be directed to the Manager of Exchange of Information Programs in that office, and any legal questions should be directed to Branch 7 of the Office of Associate Chief Counsel (International). The summoned party may allege that compliance with the summons will violate the law of the country where the books and records are located. In that case, the court will balance the competing interests of the two countries. Field counsel shall coordinate summons enforcement matters with Branch 6 or 7 of Procedure and Administration, and Procedure and Administration will coordinate with Branch 7 of the Office of Associate Chief Counsel (International) with regard to summons enforcement matters involving issues related to tax treaties and TIEAs. See Chief Counsel Directives Manual (CCDM) 35.4.5, Pre-Trial Activities - Evidence and Information from Abroad.

  7. Area Counsel should be consulted for assistance in preparing summonses to offshore entities. If a foreign trust chooses a foreign branch of a U.S. bank to be its trustee, a summons may be issued to the U.S. bank to produce its branch records. A proposed summons of this type will be subject to review by Area Counsel.

  8. A collective entity, such as a corporation or partnership, possesses no Fifth Amendment privilege; therefore, it cannot use that privilege as a defense against production of summoned books, papers, or other data. See IRM 25.5.5.4.1, Fifth Amendment Privilege Against Self Incrimination, IRM 25.5.5.4.1.1, Rights Concerning Partnership and Other Unincorporated Association Books and Records, and IRM 25.5.5.4.1.2, Rights Concerning Corporate Books and Records.

    1. This applies regardless of the corporation's size, and regardless of whether the summons is addressed to the corporation or to an individual in his representative capacity as a custodian of the collective entity's records. See Braswell v. United States, 487 US 99 (1988).

    2. An agent of a collective entity (including an offshore entity), such as the custodian of corporate records, may not resist a summons for such records on the ground that the act of production will incriminate him in violation of the Fifth Amendment privilege against self-incrimination. See Braswell, 487 U.S. at 117-18. Because the agent is acting as the collective entity's representative and not in his individual capacity, the act of production is deemed to be that of the entity, and the government may make no evidentiary use of the "individual act" of production against the individual. See Braswell, 487 U.S. at 118.

Formal Document Requests
  1. A formal document request (FDR) is another method of gathering information from abroad. An FDR is any request issued during an investigation or examination and made after the normal request procedures have failed to produce the requested documents. IRC 982(c)(1). IRC 982, Admissibility of Documentation Maintained in Foreign Countries, provides consequences if a taxpayer fails to substantially comply with any FDR for documents.

  2. IRC 982(c)(1) provides a powerful incentive for a promoter to produce foreign-based documentation. Under specific conditions, see IRC 982(a), the appropriate court shall prohibit the introduction of any foreign-based documentation covered by the FDR in a civil proceeding in which the tax treatment of the examined item is an issue. IRC 982 does, however, provide a reasonable cause exception, IRC 982(b), and allows for a proceeding to quash, IRC 982(c)(2).

  3. Examiners should consult with managers and Area Counsel for the preparation of a FDR and consider issuing a summons concurrently with it. See IRM 4.61.2.1, Information Reporting and Record Keeping, and Chief Counsel Directives Manual (CCDM) 35.4.5.2.1, Formal Document Requests.

Authorization Directives
  1. An authorization directive is a document, signed by a US person, that, without admitting the existence of documents, authorizes and directs a foreign specified person (bank, trustee, or other entity or individual) who has control over documents of the US person, to turn them over to the IRS. An authorization directive can only be used to obtain documents located outside the United States. The authorization directive says that to the extent the US person has foreign records under the specified person's control the foreign specified person is to release those records to the IRS. An authorization directive may be made voluntarily or compelled by court order in a summons enforcement proceeding (the request to sign the authorization directive is made by summons served on the US person). A summons issued under IRC 7602 may not be used to compel the taxpayer to execute a consent directive; however, the desired result may be achieved by summoning the taxpayer to produce the records. Even though the records are not in his possession, the taxpayer does have custody and control over them, and the taxpayer can be ordered to comply with the summons by either producing the books and records himself or by signing a consent directive authorizing the bank to produce the records on his behalf.

  2. The IRS may be able to compel a court order that compels a promoter to sign an authorization directive for releasing foreign bank or trustee records otherwise protected by bank secrecy laws. Consult Area Counsel for assistance with preparing this document.

  3. See Chief Counsel Directives Manual (CCDM) 34.6.3.7, Issuance of Summons for Books and Records Abroad, for guidance.

Evidence

  1. One objective of the investigation is to develop evidence to support the government’s case. Evidence is generally defined as something that proves a fact and includes properly sworn testimony, documents, photographs, audiotapes and videotapes.

  2. Knowledge that a promoter’s activities are for tax evasion and avoidance purposes is an element of many promoter penalties. Examiners should develop and retain evidence of the promoter's claimed tax expertise.

  3. Generally, in a court of law, the contents of a document can be proven only by that document, rather than by summaries or testimony about the document. In addition, the original piece of evidence should be produced unless there is a satisfactory explanation why the original cannot be produced. A copy can be provided to the court if properly authenticated. Consequently, great care in handling or preserving information is necessary if it is to be used in court. See IRM 9.6.4.9, Admissibility of Evidence at Trial, for further information. Examiners should consult with Area Counsel if questions arise about handling or preserving potential evidence.

  4. All documents obtained during the investigation should be maintained in the condition in which they were received. For each document received the examiner should record on Form 9984, Examining Officer's Activity Record, or its equivalent, the date it was received, from whom it was received, and how it was received (mail, during interview, via fax, etc.).

  5. Do not make notations or other extraneous marks on any documents received. Examiners are seldom allowed to retain original documents obtained from the promoter, so it is very important to make copies. Mark the back of each copy with the statement "compared to original," then sign and date the document to authenticate it.

  6. If examiners are allowed to temporarily retain documents for additional examination and/or making copies they should provide a receipt to the promoter for the records. Form 2725-A, Document Receipt/History and Custody of Documents, is available for this purpose.

  7. See IRM 4.10.7.3, Evaluating Evidence, for additional information on evaluating evidence.

Seals and Certifications
  1. IRS records (tax returns or other official documents) must be certified if they are to be used as evidence in court. See IRM 11.3.6, Seals and Certifications, for obtaining certified copies of official IRS records. When a record for which certification is requested is located in another office, it is generally preferable to transfer the certification request to the office that has the record, rather than to transfer the record to be certified elsewhere.

  2. Form 2866, Certificate of Official Record, is the cover sheet used for official certifications of documents or records. Attach copies of the certified documents or records to this form.

  3. Form 4340, Certificate of Assessments, Payments, Other Specified Matters, is attached to Form 2866 when certifying transcript information.

  4. Form 3050, Certificate of Lack of Record, can be used in lieu of Form 2866 when certifying a lack of records (for example, no record of a filed return).

Closing Conferences

  1. Closing conferences are used to summarize the IRS’s understanding of the facts and evidence and ascertain any defense or rebuttal positions claimed by a promoter. No definitive statement should be made at the meeting regarding any final determination of the IRS. Instead, the examiner should discuss the possible outcomes.

  2. If an injunction referral is anticipated, a discussion of penalties is generally deferred until DOJ has had an opportunity to evaluate the injunction referral. If DOJ accepts the referral, examiners and Area Counsel should discuss the timing of assessment of any applicable penalties. In most instances, DOJ recommends suspending penalty assessments until a preliminary injunction is ordered by the court. In that case, a follow-up meeting with the promoter may be necessary in order to discuss penalty assessments.

  3. Generally, no extension of time shall be granted for the meeting, except in extenuating circumstances. Promoters are not entitled to any additional meetings with the IRS, although the IRS may at its discretion schedule additional meetings if productive to the investigation.

  4. If a promoter declines an offer to attend a meeting, fails to attend the meeting, or fails to provide the requested documents or information, the IRS shall proceed based on the available information.

  5. Although a closing conference is usually required in a promoter investigation, in SB/SE it may be waived with the concurrence of Area Counsel. If the promoter fails to cooperate during the investigation, the closing conference may not be warranted. LB&I requires closing conferences to be offered in all investigations.

  6. If there are indications of fraud, a closing conference would not normally be held. Examiners should consult the fraud technical advisor (FTA) and make a fraud referral when appropriate.

  7. If the Letter 3828, Opportunity to Present Position - Tax Shelter Promoter, was sent to the promoter, a closing conference is not required. However, if the promoter cooperated during the investigation, a closing conference is recommended.

  8. Examiners send Letter 3829, Closing Conference Letter for Tax Shelter Promoter Investigations, to the promoter to offer the closing conference. This letter should be modified to incorporate the specific IRC sections applicable to the investigation. Area Counsel must review all revisions to the letter. If possible, it is recommended that Area Counsel attend the closing conference.

  9. Any proposed penalties must be approved in writing by the examiner's immediate supervisor before discussing with the promoter. See IRM 4.32.2.11.1, Approval of Penalties.

LB&I Promoter Investigations
  1. A closing conference is generally scheduled after the examiner and Area Counsel determines that the evidence establishes that penalties should be asserted or that a suit to enjoin the promoter should be initiated. In making the decision, consider whether:

    1. All requested documents have been provided by the promoter.

    2. All documents received have been reviewed by the promoter team.

    3. All investor lists have been provided.

    4. Applicable penalties have been determined and computed.

  2. For LB&I examiners, Form 5701, Notice of Proposed Adjustment, should be prepared for the penalty asserted for each transaction. Any proposed penalties must be approved by the promoter team's DFO and subsequently the DFO, Financial Services, Manhattan, before discussing with the promoter. See IRM 4.32.2.11.1, Approval of Penalties.

  3. Promoters are given the opportunity to present facts or legal arguments as to why a penalty is not appropriate, including "reasonable cause" arguments. The promoter’s position should be obtained in writing, along with any informal protest that the promoter wishes to provide.

  4. For LB&I IRC 6707/IRC 6708 investigations, if the investigation is agreed, the promoter team prepares Form 906, Closing Agreement on Final Determination Covering Specific Matters. Area Counsel and the LB&I DFO with jurisdiction over the investigation and LB&I:F DFO, Manhattan, must be involved in the preparation of this agreement. The agreement finalizes the examination issues permanently. The agreement should also address future compliance of the promoter. The LB&I:F DFO, Manhattan must execute the agreement on behalf of the IRS.

  5. For potentially unagreed IRC 6707 and IRC 6708 investigations, examiners may consider the LB&I/Appeals Fast Track Settlement program (Fast Track) if it is applicable to the investigation and the promoter consents. The exam team must receive the approval of the LB&I:F DFO, Manhattan prior to participating in Fast Track. See IRM 4.32.2.7.7.3, LB&I Special Procedures - Use of Fast Track.

LB&I Special Procedures
  1. Examiners and attorneys must agree on the appropriate action. Any disagreements must be referred to the respective managers for resolution.

  2. Examiners, with review by Area Counsel, prepare a recommendation memorandum to the examiner's DFO. The DFO's approval is mandatory for the assertion or non-assertion of promoter penalties. After the DFO's approval is obtained, the recommendation memorandum is sent to the LB&I Financial Services DFO, Manhattan, for final approval. The memorandum should include:

    • Case Summary and Facts (including the personal history, educational and professional background of the promoter and a discussion of the promotion(s)).

    • Findings (including spreadsheets supporting the penalty calculations, a discussion of the facts that support the promoter's violation of code provisions and prospects for future compliance, if asserting penalties).

    • Recommendations and conclusions (including the examiner's and Counsel's recommendations).

    • Position of the promoter.

    • Appendix of attached exhibits.

    • Other supplemental data.

    • Approval of the Team Manager, TM, and Industry Director Field Operations (DFO). Digital signatures may be used to document approvals.

  3. If case is agreed, copies of the Form 906 must be provided for the LB&I:F DFO Manhattan's signature.

LB&I Special Procedures - Use of Fast Track
  1. The exam team may request the use of Fast Track for unagreed IRC 6707 and IRC 6708 examinations. The exam team prepares a memo recommending the resolution of the case using Fast Track and obtains signatures from the Team Manager, TM and Industry DFO. The memo shall include:

    1. A brief description of the shelter(s), a range of possible penalty resolutions, and support for each resolution position; and

    2. Recommendation to close the case unagreed if the Fast Track process is unsuccessful.

  2. The exam team will forward the signed memo and the following documents to the Promoter Program Senior Program Specialist who will submit the package to LB&I:F DFO Manhattan for review and approval:

    1. Form 5701

    2. Form 886-A

    3. Form 4665

    4. Promoter's position and exam team's response

    5. Spreadsheets supporting the penalty computations

  3. Concurrently with (2) above, the Promoter Program Manager will request Promoter Program Counsel to submit a concurrence memo in support of the exam team's recommendation to the LB&I:F DFO, Manhattan, via e-mail.

  4. The LB&I:F DFO, Manhattan will make the final determination of the recommendations of the exam team. After approval, the LB&I:F DFO, Manhattan will sign the memorandum and return the documents to the exam team.

  5. The LB&I:F DFO, Manhattan shall participate in the mediation or delegate authority to the LB&I:F Promoter Program Manager.

Investigation Outcomes

  1. Preparer and promoter investigations can result in one or more of the following outcomes:

    • Injunction

    • Assessment of penalties

    • Discontinuation of the investigation

    • Criminal referral

    • Survey

Injunctions

  1. During preparer and promoter investigations, examiners gather information to determine if injunctive relief is appropriate. An injunction is warranted if the preparer and/or promoter engages in conduct specified in IRC 7407(b) related to income tax return preparation and/or specified conduct under IRC 7408(c).

  2. The purpose of an injunction is to stop individuals from further engaging in certain conduct with respect to the preparation of returns or engaging in conduct related to tax shelters and reportable transactions and to prevent the recurrence of the conduct. There is no requirement that the conduct be ongoing but a court may be reluctant to grant the extraordinary remedy of an injunction unless the government can demonstrate that there is a likelihood of reoccurrence. Factors to consider in assessing the appropriateness of an injunction include:

    • Gravity of the harm to the government.

    • Extent of the promoter's participation.

    • Degree of knowledge.

    • Isolated or recurrent nature.

    • Promoter's recognition or non-recognition of culpability.

    • Likelihood that the preparer and/or promoter’s occupation would place him in a position where future violations could be anticipated.

  3. Injunction actions are separate and apart from any other civil or criminal actions (such as summons proceedings and criminal trials) brought by the government against promoters.

  4. An injunction should be pursued even if the preparer or promoter is criminally prosecuted and sentenced to incarceration, probation, etc. A criminal sentence is punishment for past criminal behavior while an injunction prohibits future behavior.

  5. See IRM 4.32.2.9, Injunctive Actions, for additional information on injunctions.

Injunctions - Penalty Assessment
  1. If injunctive action is warranted, penalties generally are applicable. Examiners prepare penalty reports and close an investigation as described in IRM 4.32.2.11.8, Penalty Case Processing Procedures.

  2. The DOJ generally recommends penalties not be assessed until after the court has granted a preliminary injunction.

  3. In some instances, the timing of the penalty assessment may be done earlier or postponed (e.g., jeopardy assessments or parallel investigations). See IRM 4.32.2.6, Parallel Investigations, for additional information on coordinating a penalty assessment in parallel investigations.

Injunctions - No Penalty Assessment
  1. In some limited instances, an examiner in consultation with the group manager and Counsel may determine that the assessment of penalties is not in the government's best interest.

  2. Collectibility is not a basis for non-assessment of penalties. Promoters frequently conceal assets and misrepresent their true financial status, making it difficult to immediately determine true collection potential. IRM 5.20.8.5, IRC 6700 and IRC 6701 Penalty Assessment, requires revenue officers to advise examiners that the penalty must be assessed regardless of collectibility.

  3. There may be rare situations when a penalty will not be asserted such as when the promoter is deceased or in the case of an entity, no longer in existence, and there are no assets in the promoter’s estate or there is no successor in interest. In these situations, Counsel should be consulted before determining that penalties should not be assessed.

  4. The group manager must approve all recommendations for non-assertion of penalties. In an LB&I examination, examiners should coordinate the preparation of the report with the LB&I:F Promoter Program Manager.

  5. Investigations with no penalty assessments are closed by the field compliance group using penalty processing procedures described in IRM 4.32.2.11.8, Penalty Case Processing Procedures.

Penalty Assessment

  1. If a preparer or promoter engages in conduct or activity subject to penalties under IRC 6694, IRC 6695, IRC 6700, IRC 6701, IRC 6707, or IRC 6708, penalties will generally be assessed.

  2. Examiners may recommend asserting penalties regardless of whether injunctive relief is pursued by the government as long as the evidence demonstrates that the preparer and/or promoter engaged in conduct that violates specific penalty code sections.

  3. Prior to the AJCA, IRC 6707 and IRC 6708 allowed for a reasonable cause exception if the tax shelter organizer or any other person could establish that the failure to comply was due to reasonable cause. See Treas. Reg. 301.6707-1T and Treas. Reg. 301.6708-1T. After the AJCA, the reasonable cause exception only applies to IRC 6708. Persons subject to IRC 6707 are not entitled to reasonable cause consideration, but may request rescission of the IRC 6707 penalty under the procedures set forth in Rev. Proc. 2007-21.

  4. IRC 6751 requires written managerial approval for the assessment of most penalties, including IRC 6700, IRC 6701, IRC 6707, and IRC 6708 by the immediate supervisor of the individual making the determination to assess the penalty or such higher level official as the Secretary may designate. See IRM 4.32.2.11.1, Approval of Penalties, and IRM 20.1.1.2.3, Managerial Approval for Penalty Assessments.

  5. Coordinate with the Area ATAT Collection Coordinator based on the location of the preparer/promoter whenever the collectibility of a potential penalty is a concern. For a list of ATAT Collection Coordinators, see the collection contact located on MySB/SE.

Penalty Assessment - No Injunction
  1. If an examiner, in consultation with the group manager and Area Counsel, does not pursue injunctive relief, penalties may still be assessed.

  2. Injunctive action generally will not be sought if there is insufficient evidence to demonstrate that the specified conduct is likely to reoccur. Lack of current or ongoing activity alone should not be the basis for failing to seek an injunction. See IRM 4.32.2.8.1, Injunctions, for a discussion of factors to consider in determining the potential for future recurrence of the conduct.

  3. DOJ may decline to pursue injunctive action against a promoter or the court may deny the government’s motion for injunctive relief if there is insufficient evidence to demonstrate a reasonable likelihood of reoccurrence. In such cases, penalties may still be applicable provided there is evidence to show that the promoter engaged in conduct in violation of one or more of the penalty statutes.

  4. Examiners must use sound judgment when pursuing only penalties. Preparers and promoters may provide self-serving testimony maintaining that they have voluntarily ceased the conduct when, in fact, they continue to advocate abusive schemes, abusive tax shelters, or reportable transactions. Many promoters modify existing promotions to avoid detection by the IRS or become engaged in a new but equally abusive promotion.

  5. Examiners prepare penalty reports and close the investigation as described in IRM 4.32.2.11.8, Penalty Case Processing Procedures.

Penalty Assessment – CI Parallel Investigation
  1. In parallel investigations, CI may request suspending penalty assessments until the conclusion of the criminal investigation. See IRM 4.32.2.6, Parallel Investigations, for additional information on coordination of penalty assessments in parallel investigations.

Discontinuations

  1. A discontinuation of an investigation may occur before or after promoter contact.

  2. SB/SE examiners should consult with their group manager, assigned Area Counsel, AT or IMT SPA and the SB/SE LDC prior to discontinuing an investigation.

  3. LB&I examiners must contact assigned counsel, the LB&I DFO with jurisdiction over the promoter investigation and LB&I Financial Services, DFO, Manhattan prior to discontinuing an investigation. If the promoter has been contacted, examiner must issue a withdrawal letter when closing the investigation. LB&I examiners do not issue the withdrawal letter until approved by the DFO, Financial Services, Manhattan.

  4. Circumstances that may warrant a discontinuation of an investigation include:

    1. The individual or entity identified as the AT promoter is in fact not involved in the activity.

    2. The activity has been proven not to be abusive in nature, and accordingly, would not be subject to penalty under one of the applicable penalty statutes.

  5. Discontinuing a civil investigation is not a “no change” closure and does not preclude the investigation from being reopened if more information becomes available at a later date, if the statute of limitations permits. The reopening of a civil investigation is not subject to the reopening requirements of an income tax examination.

  6. See IRM 4.32.2.11.8, Penalty Case Processing Procedures, for investigation discontinuation processing procedures.

Criminal Referral

  1. The SB/SE LDC or LB&I OTSA coordinates all civil promoter investigation cases with CI prior to approval of the investigation. See IRM 4.32.2.3.5, Coordination with Criminal Investigation (CI).

  2. Examiners should be alert to indicators of fraud throughout their investigation. A fraud technical advisor (FTA) should be contacted if the investigation reveals indicators of fraud. See IRM 25.1.2, Recognizing and Developing Fraud, for more information on fraud development.

Survey

  1. For SB/SE, the decision to survey a promoter investigation should be discussed with Area Counsel and an LDC SPA. The group manager must approve the reason for the survey. LB&I promoter examinations may not be surveyed.

  2. No survey is allowed if there has been any contact with the promoter or more than 10 hours were charged to the case.

Injunctive Actions

  1. The primary goal of a civil promoter investigation is to obtain information on whether the promoter complied with its obligations under the code, to obtain information on the promoter's participants and to quickly terminate an abusive promotion or activity. Seeking injunctive relief under IRC 7402, IRC 7407, or IRC 7408 can accomplish these goals.

  2. Examiners gather information during the investigation to determine if the promoter engaged in conduct or activities subject to one or more penalties under IRC 6700, IRC 6701, IRC 6707, or IRC 6708 and whether the activity is ongoing or likely to reoccur, thereby causing irreparable tax harm to the government.

  3. The IRS should consider injunction actions in investigations where the promotion is ongoing or is likely to recur and there is irreparable tax harm to the government, even when a criminal investigation has begun. For coordination between civil and criminal cases, see IRM 4.32.2.6, Parallel Investigations.

  4. Failure to make a referral as early as possible may result in continued harm to the government from the promotion. An injunction referral should be made to DOJ once:

    • Evidence has been developed to prove the promoter's engaging in activities subject to penalties or violation of Circular 230 provisions,

    • Evidence of irreparable harm from current and potential or future activities, i.e., involvement with another scheme or promotion, and

    • Evidence that the promoter's conduct is substantially interfering with the proper administration and enforcement of the Internal Revenue laws.

  5. In some instances, such as when the evidence demonstrates that the activity has ceased and is not likely to reoccur, the examiner in consultation with the group manager and Area Counsel may opt to pursue only penalties. However, penalties alone sometimes do not deter future promotions. Injunction referrals including referrals to obtain consent injunctions should always be considered. See IRM 4.32.2.9.4, Consent Injunctions.

Examiner Injunction Referrals

  1. Examiner Injunction Referrals (EIR) are prepared using a specific format. The referral should include detailed information about the promoter and any related promoters, the mechanics of the promotion, and the basis for an injunction recommendation.

  2. The EIR is organized into the five sections:

    1. Investigation summary

    2. Facts and findings

    3. Exhibits

    4. Investigative agent data

    5. Witness list

  3. If several individuals or entities were investigated, the EIR should discuss the involvement of each person or entity. See IRM 4.32.2.9.2, Related Promoters.

  4. An example of an Examiner Injunction Referral (EIR) is available on MySB/SE, Promoter Investigations.

Investigation Summary
  1. The investigation summary briefly describes the examiner’s findings and recommendations. The information may be presented in narrative or outline format and is generally limited to 1 or 2 pages.

  2. The investigation summary must include:

    1. Name and address of person(s) or entities under investigation.

    2. Basis for the injunction (e.g., false or fraudulent statements, gross valuation misstatement, aiding or abetting the understatement of tax liability, abusive return preparation or a combination of the above).

    3. Years involved.

    4. Recommendations.

Facts and Findings
  1. The facts and findings section is a comprehensive discussion of the promotion or scheme and the evidence obtained in the investigation.

  2. The following information is included in this section:

    1. Personal background of the promoter(s)

    2. Business background

    3. Criminal Investigation (CI) involvement

    4. Mechanics of the promotion

    5. Applicable penalties, i.e., IRC 6700, IRC 6701, IRC 6707, IRC 6708, IRC 6694, or IRC 6695 violations

    6. Conduct violating Circular 230

    7. Penalty calculations (or estimation of penalties)

    8. The code sections under which the injunction action should be commenced, i.e., IRC 7402, IRC 7407, or IRC 7408

    9. Venue

    10. Pre-filing notification

    11. Closing conference

    12. Recommendations

Examiner Injunction Referral Exhibits
  1. Exhibits are used to support material facts included in the referral and should be referenced in the narrative section of the referral.

  2. While not mandated, using a numbering system such as Bates stamping is an efficient way to organize and refer to specific documents and pages in lengthy documents. Evidence is frequently organized by:

    • Witness

    • Type of information

    • Specific items or documents

    • Page number of documents

  3. It is very important throughout the investigation to document the source of the evidence identifying when, how, and from whom it was received. See IRM 4.32.2.7.6, Evidence.

  4. If the amount of information is voluminous, examiners should consider including only the most significant items as exhibits and prepare a summary of other evidence available for inspection. Examiners should also consider scanning the information and placing it on a compact disc (CD) or digital video disc (DVD).

Tax Harm
  1. Documentation of potential or future tax harm to the government is a critical component of any injunction action. Examiners should include a preliminary computation of tax harm in the EIR.

  2. The computation can be an estimate and does not require completion of participant audits.

  3. If participant examinations have been, or are being, conducted, an exhibit identifying the participants, the examination status, and the proposed or estimated tax deficiency should be included in the EIR. This exhibit should be prepared early in the investigative process and updated as new information is secured or as requested by DOJ during the litigation process.

  4. If a tracking code has been assigned to the investigation, examiners should contact an AT SPA or TA to obtain a list of participant examinations.

Investigating Agent Data
  1. The investigating agent data list contains the contact information of all IRS personnel who were involved with the investigation, including the examiner(s), their respective manager(s), any specialists, Counsel attorney and the Counsel attorney's supervisor.

  2. In parallel investigations, the contact information should also include the name(s) and contact information of the special agent, the supervisory special agent, Criminal Tax (CT) Area Counsel and the Assistant US Attorney (AUSA), if one is involved.

Witnesses
  1. Witnesses are a critical component of a successful injunction. An alphabetical list of potential witnesses, their contact information and a description of the nature of their testimony should be included in the injunction report.

Related Promoters

  1. It is a best practice to consolidate related promoters in one referral to the extent possible. DOJ may elect to:

    • File one injunction suit against all parties.

    • File separate suits against specific individuals or entities.

    • Decline to file a suit against some or all of the related individuals or entities.

    • Request that IRS refer additional parties to be included in the injunction suit.

  2. The decision to consolidate related promoters in one referral is based on many factors, including when cases are identified or investigated, the related promoter’s involvement in the activity, and the strength of the evidence.

  3. The necessity and appropriateness of any further investigative actions on the related promoter should be discussed with the group manager and the AT or IMT SPA. For LB&I investigations, the LB&I:F, Promoter Program Manager should be consulted. The decision may be made to assert penalties based on the best available information, discontinue the investigation or proceed with the investigation, depending on the facts and circumstances of the case.

Counsel Injunction Suit Letter

  1. After receipt of the EIR, Area Counsel will prepare an injunction suit letter authorizing DOJ to file an injunction suit on behalf of the IRS or to secure a consent injunction.

  2. Area Counsel shall consult the CCDM on coordination requirements.

  3. All injunction packages are sent to DOJ Tax Division, Civil Trial Division, Central Region regardless of the location of the promoter

  4. Copies of the referral are sent by Area Counsel to:

    • SB/SE Division Counsel assigned to AT schemes.

    • LB&I Division Counsel for the Promoter Program.

    • Counsel for the related Issue Management Team, if any.

    • SB/SE Lead Development Center (LDC).

    • LB&I Office of Tax Shelter Analysis (OTSA).

  5. Injunction referrals must be handled on an expedited basis. These cases are classified as standard referrals.

Pre-Referral Consultation
  1. Examiners should work closely with Area Counsel throughout the investigative process. In some investigations, it may be beneficial to engage DOJ early in the investigation. Area Counsel can prepare a consultation injunction referral memorandum for this purpose. The memorandum should describe the factual background of the case and the reasons(s) for seeking the consultation.

Summons Enforcement Related to Injunctions
  1. Examiners should report to Area Counsel any refusal by the promoter or other summoned party to comply with a summons following the procedures outlined in IRM 25.5.10, Enforcement of Summons.

  2. All recommendations for enforcement of IRS summonses issued in connection with promoter investigations are sent to DOJ Tax Division, Civil Trial Section, Central Region.

Consent Injunctions

  1. The IRS will consider offers by promoters to enter into consent injunction agreements whereby the promoter agrees to a voluntary permanent injunction.

  2. An injunction referral must be made to DOJ to initiate the consent injunction process. Examiners should work with Area Counsel on preparing an expedited referral to DOJ.

  3. A Form 906, Closing Agreement on Final Determination Covering Specific Matters, or any other agreement cannot be used as a substitute for a consent injunction.

  4. If a consent injunction offer is made by the promoter prior to an injunction referral to DOJ, the information requested in all IDRs (see IRM 4.32.2.7, Promoter Investigation Guidelines) should still be obtained in the event the promoter does not execute the consent injunction.

  5. If DOJ enters into negotiations for a consent injunction subsequent to a referral, Area Counsel will participate in all negotiations.

First Amendment Considerations

  1. Promoters may claim that the First Amendment to the US Constitution (freedom of speech) prevents the government from obtaining injunctions against them.

  2. Federal courts can enjoin promoters without violating their First Amendment free speech rights if it is commercial speech, aids or abets a crime, or incites imminent lawlessness.

  3. The determination of what is deemed to be protected speech is a complex area of law. Examiners should seek assistance from Area Counsel on how best to address the promoter’s First Amendment assertions.

  4. The EIR and the corresponding Area Counsel injunction suit letter to DOJ should clearly explain the reasons why the First Amendment does not protect the promoter’s activities.

  5. For additional information on First Amendment issues, see the LDC intranet webpage on MySB/SE, First Amendment Guidance, under "News Flashes."

Post Injunction Referral Activities

  1. The injunction referral to DOJ does not conclude the involvement of the examiner in the investigation. Examiners and Area Counsel will assist DOJ attorneys throughout the litigation process.

  2. Litigation support may include:

    • Securing certified copies of participant returns.

    • Interviewing new or potential witnesses.

    • Computing or refining computations of estimated tax loss.

    • Gathering evidence of ongoing promoter activity.

    • Testifying in court proceedings.

  3. Examiners will execute a sworn declaration prepared with the assistance of the DOJ attorney. The declaration is filed with the initial complaint filed by DOJ.

  4. Examiners should contact Area Counsel or an AT SPA for assistance with requests from DOJ that will require extensive research or the gathering of substantial documents. (e.g., certified copies of large numbers of participant returns).

Litigation Holds
  1. When litigation is initiated or is reasonably anticipated, a “litigation hold” on relevant or potentially relevant documents and electronically stored information (ESI) must be established and the steps taken in this regard must be fully documented.

  2. The Service’s obligation under a litigation hold is to search, identify, preserve, and isolate ESI related to specific, predictable and identifiable litigation. This obligation supersedes all records management policies that would otherwise result in the alteration or destruction of ESI.

  3. Area Counsel will contact the appropriate Service personnel that may possess potentially relevant ESI when a litigation hold is warranted and provide additional instructions at that time.

  4. In 2006, the Federal Rules of Civil Procedure were amended to establish procedures applicable explicitly to ESI and provide a framework for dealing with the legal and ethical obligations to preserve evidence. ESI includes, but is not limited to:

    • All e-mails and attachments.

    • Word processing, spreadsheets, graphics presentation documents, images, and text files.

    • Any other information stored on hard drives or removable media, meta-data, databases, instant messages, transaction logs, audio and video files, voice mail, web pages, computer logs, text messages, and backup and archived material.

  5. The timing of the initial litigation hold will depend on whether the Service is a plaintiff or a defendant in a particular matter. When the Service is a plaintiff, the litigation hold should be implemented no later than when Area Counsel authorizes the filing of a suit by the DOJ. When the Service is a defendant, Area Counsel must begin implementing the litigation hold procedures upon receipt of a filed complaint.

  6. Failure to preserve documents and ESI can result in unfavorable discovery orders, sanctions against the government, disadvantage to the government’s position in litigation or exclusion of evidence in favor of the government’s position. It can also result in monetary or contempt sanctions directly against individuals who failed to take appropriate steps to locate and segregate information subject to a litigation hold.

Disclosure of Reportable Transactions Provisions

  1. This section provides an overview of IRC 6111 and IRC 6112.

IRC 6111 - Overview

  1. Any person who is a material advisor for a reportable transaction as defined under Treas. Reg. 1.6011-4(b) must disclose the reportable transaction in the manner prescribed by the Secretary. Failure to timely disclose or submitting false or incomplete disclosure statements are subject to penalties under IRC 6707. Material advisors must use Form 8918, Material Advisor Disclosure Statement, (or successor form) and the form must be completed in the manner provided for in the regulations and the instructions to the form.

  2. IRC 6111(b)(1) (as amended by the AJCA) defines a material advisor as any person who provides any material aid, assistance, or advice relating to organizing, managing, promoting, selling, implementing, insuring or carrying out any reportable transaction, and who directly or indirectly derives gross income for the advice or assistance in excess of the threshold amount. See IRC 6111(b)(1)(B), for threshold amounts. The threshold amounts are:

    1. For reportable transactions other than list transactions, $250,000 if all participants in the shelter are corporations (looking through any partnerships or trusts) or $50,000 for all other taxpayers;

    2. For listed transactions, these thresholds are reduced to $25,000 and $10,000, respectively.

  3. See Treas. Reg. 301.6111-3(d) and (e) for the form and content of material advisor disclosure statement and time for providing disclosure.

IRC 6112 - Overview

  1. Each material advisor (as defined in IRC 6111, as amended by the AJCA) of a reportable transaction is required to maintain a list identifying each person for whom the advisor acted as a material advisor with respect to that transaction. Lists are retained for seven years following the earlier of the date the material advisor last made a tax statement relating to the transaction or the date the transaction was last entered into, if known. See Treas. Reg. 301.6112-1(d) for rules regarding entries that have been dissolved or liquidated prior to the expiration of the seven year period.

  2. Material advisors must furnish this list when requested in writing by the IRS. The revised penalty under IRC 6708 (as amended by the AJCA) applies to requests made after October 22, 2004, for such lists. A material advisor who fails to make the list available within 20 business days of the request is subject to penalties under IRC 6708, as amended.

Promoter Penalties

  1. This section focuses on promoter penalties and the corresponding post-assessment rights relative to the following penalties:

    • IRC 6700, Promoting Abusive Tax Shelters, Etc.

    • IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability.

    • IRC 6707, Failure to Furnish Information Regarding Reportable Transactions.

    • IRC 6708, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions.

  2. Additional guidance on promoter penalties can be found in:

    • IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties.

    • IRM 20.1.6.13, Penalty for Promoting Abusive Tax Shelters - IRC 6700.

    • IRM 20.1.6.14, Penalties for Aiding and Abetting - IRC 6701.

    • IRM 20.1.6.16, Failure to Furnish Information Regarding Reportable Transactions - IRC 6707.

    • IRM 20.1.6.18, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions - IRC 6708.

Approval of Penalties

  1. IRC 6751 requires written managerial approval for the assessment of most penalties, including those under IRC 6700, IRC 6701, IRC 6707 and IRC 6708, by the immediate supervisor of the examiner making the determination to assess the penalty or such higher level official as the Secretary may designate. Documentation of the supervisor's approval must be included in writing in the file.

  2. Managerial approval should only be granted after the examiner has fully developed the facts, completed the workpapers, and clearly established a basis for penalizing the promoter or material advisor.

  3. In SB/SE investigations, the penalty case should be reviewed by Area Counsel prior to closing for assessment. Area Counsel does not, however, need to approve the penalty assessment.

  4. In LB&I, after Area Counsel reviews the investigation case, it is forwarded to the following officials for their review and approval:

    1. Territory Manager

    2. Director, Field Operations (DFO)

    3. Director, Field Operations, Financial Services, Manhattan (LB&I:F:DFO:M)

  5. See IRM 20.1.1.2.3, Managerial Approval for Penalty Assessments, for additional information.

Collection Statute of Limitations

  1. The 10-year collection statute of limitations begins on the date the penalty is assessed.

IRC 6700 - Promoting Abusive Tax Shelters

  1. IRC 6700, Promoting Abusive Tax Shelters, Etc., permits assertion of penalties against any person who:

    • Organizes or assists in the organization of a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, or

    • Participates (directly or indirectly) in the sale or any interest in an entity or plan or arrangement and

    • Makes or furnishes or causes another person to make or furnish a false or fraudulent statement about any material matter or a gross valuation overstatement.

  2. Penalties can usually be assessed after a preliminary injunction is obtained if there is not an on-going parallel investigation. See IRM 4.32.2.8.2.2, Penalty Assessment - CI Parallel Investigation.

  3. Penalties under IRC 6700 are assessed and collected in the same manner as taxes. See IRC 6671, Rules for Application of Assessable Penalties.

  4. It is not necessary to have a return filed in order to assess IRC 6700 penalties. The activity is the "sale or organization" of a plan or arrangement. Examiners need not prove the promoter's clients actually used the promotion, only that if the participant had utilized the promotion, there would have been tax harm to the government. The statute requires potential, not actual, tax harm to the government.

  5. An IRC 6700 penalty can be imposed in addition to any other penalty, except it cannot be assessed on the same document on which an IRC 6701 penalty is applied.

  6. See IRM 20.1.6.13, Penalty for Promoting Abusive Tax Shelters- IRC 6700, for more information.

Assessment Statute of Limitations
  1. There is no assessment statute of limitations for IRC 6700. An IRC 6700 penalty can be assessed at any time for each specific act of organizing and/or selling interests in a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement.

Computation of IRC 6700 Penalties
  1. For activities occurring after October 22, 2004, involving material false or fraudulent tax statements, the IRC 6700 penalty is equal to 50 percent of the gross income derived (or to be derived) by the promoter from the following activities:

    1. Organizing or assisting in the organization of a partnership or other entity, any investment plan or arrangement or any other plan or arrangement.

    2. Participating (directly or indirectly) in the sale of an interest in any entity, plan or arrangement in a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement.

  2. For all activities that involve gross valuation overstatements as defined in IRC 6700(b)(1), the penalty is $1,000, or if the person establishes that it is lesser, 100 percent of the gross income derived (or to be derived) by such person for each activity.

  3. When the penalty is based upon gross income from an activity (i.e., statement described in IRC 6700(a)(2)), examiners must compute the gross income based on the best available information. For example, a promoter’s scheme used limited liability companies (LLCs) and trusts to divert income. The examiner can prove the promoter created 40 LLCs, 25 of which were used by known participants in the scheme. The examiner also can prove 4 of the 25 participants paid $1,000 to the promoter. Gross income to be derived from the scheme was $40,000 (40 LLCs X $1,000 minimum per package), so the penalty is $20,000 (50% of the gross income).

IRC 6701 - Penalties for Aiding and Abetting Understatement of Tax Liability

  1. IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability, permits assertion of penalties against persons who help others understate their tax liabilities. A person who aids, assists in, procures, or advises others regarding the preparation or presentation of any portion of a return, affidavit, claim or other document who knows (or has reason to believe) that the document will be used in connection with any material matter arising under the IRC, and who knows will result in an understatement of another person's tax liability, may be liable for penalties under IRC 6701.

  2. If an injunction was pursued, penalties can be assessed after a preliminary injunction is obtained, except in the case where there is an on-going parallel investigation. Coordination with DOJ is recommended prior to assessment. See IRM 4.32.2.8.2.2, Penalty Assessment - CI Parallel Investigation.

  3. Penalties under IRC 6701 are assessed and collected in the same manner as taxes. See IRC 6671, Rules for Application of Assessable Penalties.

  4. IRC 6701 penalties generally can be imposed in addition to any other penalty. The penalty cannot be assessed on the same document for which a penalty under either IRC 6700 or subsections (a) or (b) of IRC 6694 is applied.

  5. See IRM 20.1.6.14, Penalties for Aiding and Abetting - IRC 6701, for more information.

Assessment Statute of Limitations
  1. There is no assessment statute of limitations for IRC 6701. The penalties can be assessed at any time.

Computation of IRC 6701 Penalties
  1. IRC 6701 imposes a penalty in the amount of:

    1. General - $1,000 with respect to each document.

    2. Corporations - $10,000 for each document if the return, affidavit, claim, or other document relates to the tax liability of a corporation; S-corporations are not subject to this higher penalty amount.

  2. IRC 6701 penalties cannot be asserted or assessed if a penalty under IRC 6700 or IRC 6694(a) or IRC 6694(b) is asserted for the same document.

IRC 6707 - Failure to Furnish Information Regarding Reportable Transactions

  1. For material advisors required to disclose reportable transactions under IRC 6111 (as amended by AJCA) for material aid, assistance or advice given after October 22, 2004:

    1. IRC 6707, Failure to Furnish Information Regarding Reportable Transactions, as amended by the AJCA, permits the assertion of penalties against any person who fails to file an information return with respect to a reportable transaction timely, or files a false or incomplete return, as required by IRC 6111(a). IRC 6707, as amended by the AJCA, is effective for returns the due date for which is after October 22, 2004.

  2. For tax shelter registrations due before October 23, 2004:

    1. Pre-AJCA IRC 6707, Failure to Furnish Information Regarding Tax Shelters, permits the assertion of penalties against any person who failed to register a tax shelter timely, or filed a false or incomplete registration, as required by pre-AJCA IRC 6111(a).

  3. IRC 6707 penalties can be applied in addition to any other penalty allowed by law.

  4. See IRM 20.1.6.16, Failure to Furnish Information Regarding Reporting Transactions - IRC 6707, for more information on IRC 6707 penalties.

Assessment Statute of Limitations
  1. For material advisors required to disclose reportable transactions for advice given after October 22, 2004 (post-AJCA of 2004), IRC 6707 penalties for failing to file an information return timely or for filing false or incomplete information on a return required by IRC 6111(a) must be assessed within three years of the filing of return or the return with the false or incomplete information.

  2. For tax shelters required to be registered before October 23, 2004 (pre-AJCA of 2004):

    1. For organizers, IRC 6707(a)(1) penalties for failing to register a tax shelter or for filing a false or incomplete registration are not subject to an assessment statute of limitation.

    2. For participants, IRC 6707(b)(2) penalties for failing to include a tax shelter registration number on a return must be assessed within three years of filing the return with the missing identification number.

Computation of IRC 6707 Penalties
  1. For material advisors required to disclose reportable transactions for which material aid, assistance, or advice was given after October 22, 2004 (post-AJCA of 2004):

    1. IRC 6707(b)(1) imposes a penalty of $50,000 for failing to file an information return regarding a reportable transaction (other than a listed transaction) timely or for filing a false or incomplete return.

    2. IRC 6707(b)(2) imposes a penalty for failing to timely file an information return regarding a listed transaction before the date prescribed, or for filing a false or incomplete return. The penalty is the greater of 50 percent (75 percent in the case of an intentional failure) of the gross income derived from any aid, assistance, or advice provided before the date the return is filed regarding the listed transaction or $200,000.

    3. The term "reportable transaction" is defined in IRC 6707A(c)(1), and is any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under IRC 6011, such transaction is of a type that the Secretary determines has a potential for tax avoidance or evasion.

    4. The term "listed transaction" is defined in IRC 6707A(c)(2), and is a reportable transaction which is the same as or substantially similar to a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of IRC 6011.

  2. For tax shelters offered for sale before October 23, 2004 (pre-AJCA of 2004):

    1. IRC 6707(a) imposes a penalty for failing to register a tax shelter, failing to register a shelter timely (i.e., upon its first offering for sale of interests in the tax shelter) or for filing incomplete or false information.

    2. If promoter penalties are appropriate based on documents and testimony, and the tax shelter is not a confidential shelter as defined in IRC 6111(d), compute the tax s[helter ratio per IRC 6111(c).

      If the ratio exceeds 2 to 1 and

      If the investment offered for sale is Then
      required to be registered under a federal or state law regulating securities all the promoters of the tax shelter (i.e., co-promoters) are subject to IRC 6707 penalties
      sold pursuant to an exemption from registration requiring the filing of a notice with a federal or state law regulating the offering or sale of securities all the promoters of the tax shelter (i.e., co-promoters) are subject to IRC 6707 penalties
      a substantial investment and the tax shelter was not registered. all the promoters of the tax shelter (i.e., co-promoters) are subject to IRC 6707 penalties

    3. For tax shelters defined in IRC 6111(c), the penalty is the greater of $500 or 1 percent of the aggregate amount invested.

    4. For tax shelters defined in IRC 6111(d), pertaining to corporate tax shelters offered under conditions of confidentiality, the penalty is the greater of 50 percent (75 percent if the act is intentional) of the fees paid to all promoters, with respect to payments made before the date the shelter is registered, or $10,000. See pre-AJCA IRC 6707(a)(3)(b) and pre-AJCA IRC 6111(d) for tax shelter special rules.

    5. Pre-AJCA IRC 6111(b)(1) required any person who sold or transferred an interest in a tax shelter to furnish to each investor the identification number given to the shelter by the IRS. IRC 6707(b)(1) imposed a $100 penalty for each failure to furnish a tax shelter registration number to participants. This penalty applies only if the return was filed prior to October 23, 2004.

    6. Pre-AJCA IRC 6111(b)(2) required any person claiming deductions, credits, or tax benefits from a tax shelter to include the identification number on their return. IRC 6707(b)(2) imposed a $250 penalty for each failure to include the tax shelter registration number on a return. This penalty applies only if the return was filed prior to October 23, 2004.

    7. Pre-AJCA IRC 6707 penalties are not imposed if the failure is due to reasonable cause.

  3. A promoter may be liable for penalties both under former IRC 6707 and under IRC 6707 as amended under the AJCA. For example, if the shelter was offered for sale prior to October 23, 2004 but was not timely registered, the former penalty would apply. If the same promoter then made tax statements to a potential investor after October 22, 2004, and was a material adviser, that promoter could be liable for the new IRC 6707 penalty with respect to the same transaction if the transaction was both an abusive tax shelter and a reportable transaction.

  4. See IRM 20.1.6.16, Failure to Furnish Information Regarding Reportable Transactions - IRC 6707, for further information on IRC 6707 penalties.

IRC 6708 - Failure to Maintain List of Advisees With Respect to Reportable Transactions

  1. For IRS requests made after October 22, 2004, post-AJCA IRC 6708, Failure to Maintain Lists of Advisees With Respect to Reportable Transactions, permits asserting penalties for failing to comply with the list-maintenance requirements against:

    1. A principal organizer, organizer, manager, or seller of a tax shelter who was required to maintain a list of investors under IRC 6112 (prior to amendment by the AJCA of 2004) for interests sold in investments before October 23, 2004; and

    2. A material advisor with respect to a reportable transaction who was required to maintain a list of advisees under IRC 6112, as amended by AJCA of 2004 for transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004.

  2. IRC 6708 penalties can be applied in addition to any other penalty allowed by law.

  3. See IRM 20.1.6.18, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions - IRC 6708, for more information.

Assessment Statute of Limitations
  1. For material advisors required to disclose reportable transactions for advice given after October 22, 2004 (post-AJCA of 2004), IRC 6708 penalties for failing to make available the list of advisees regarding reportable transactions are not subject to a statutory period of limitation for assessment.

  2. For tax shelters required to be registered before October 23, 2004 (pre- AJCA of 2004), IRC 6708 penalties for failing to maintain a list of participants in potentially abusive tax shelters are not subject to a statutory period of limitations for assessment.

Computation of IRC 6708 Penalties
  1. For advisee lists required to be maintained by material advisors after October 22, 2004 regarding reportable transactions and investor lists required to be maintained by principal organizers, organizers, managers, or sellers before October 23, 2004, for which a request for that list was made after October 22, 2004:

    1. Failure to make lists of advisees/participants available to the IRS after the date of a written IRS request as required by IRC 6112 is subject to penalty.

    2. For requests made after October 22, 2004, the penalty is $10,000 for each day the list is not furnished after the 20th business day of an IRS written request.

    3. This penalty can be imposed in addition to any other penalty provided for by law.

    4. The penalty is not imposed if the failure is due to reasonable cause.

    5. For requests made before October 22, 2004, the penalty is $50 for each person with respect to whom there is a failure, up to $10,0000.

Post-Assessment Rights

  1. This section explains the post-assessment process for promoter penalties and the promoter’s rights.

  2. After assessment of the penalties, promoters receive a penalty assessment notice and demand for payment. If the promoter pays the penalties, then the promoter may file a claim for refund.

  3. Promoter rights differ depending on whether the penalties are assessed under IRC 6700, IRC 6701, IRC 6707, or IRC 6708.

Promoter Rights for IRC 6700 and IRC 6701
  1. There are no pre-assessment appeal rights for IRC 6700 and IRC 6701 penalties.

  2. IRC 6703(b) specifically states that deficiency procedures used for income and other types of tax as provided for by Subchapter B of Chapter 63 of the IRC do not apply with respect to the assessment or collection of IRC 6700 and IRC 6701 penalties.

  3. IRC 6700 and IRC 6701 penalties may be challenged by following the special claim for refund procedures.

Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701
  1. A CP 15, Notice and Demand letter is sent to the promoter upon assessment of the penalties advising the promoter of the special claim procedures pursuant to IRC 6703(c).

  2. IRC 6703(c)(1) allows the promoter to pay at least 15% of the amount of the penalty within 30 days and file a claim for refund of the amount paid using Form 6118, Claim for Refund of Tax Return Preparer and Promoter Penalties.

  3. If the claim for refund is disallowed and a written request for Appeals consideration is received timely, Appeals may consider the IRC 6703 claim for refund in the same manner as any other claim for refund, except where the penalty is protested on moral, religious, political, constitutional, conscientious, or similar grounds.

  4. IRC 6703(c)(2) allows a promoter to begin a proceeding in United States District Court by filing suit within 30 days after the day that a claim for refund is disallowed or within 30 days after the expiration of 6 months after the day that a claim for refund was filed, whichever is earlier.

  5. Collection action is suspended pending the final resolution of any court proceeding.

    1. Under IRC 6703(c) collection by levy activity and the running of the statute of limitation on collection by levy are suspended during the period which the Secretary is prohibited from collecting by levy or a proceeding is in court.

    2. The examiner assigned the claim will request a transcript (TXMODA or IMFOLT) to validate that TC 470/CC 95 is present to stay collection activity on the Master File Tax (MFT) module 55 for individuals or MFT 13 module for entities. If TC 470 is not present, the examiner will complete Form 3177 for each year and fax it to Collection Centralized Case Processing at (fax number) (215) 516-1555. The examiner should follow-up in two weeks to ensure the codes have posted and document these actions on the activity record.

    3. When closing special claims, consideration must be given to the proper time to reverse the collection stay. For an agreed closure, the examiner will complete Form 3177 requesting input of TC 472, CC 95 for each year and fax it to Collection, Centralized Case Processing at (215) 516-1555.

    4. For unagreed special claims, the examiner uses Form 3198, Special Handling Notice for Examination Case Processing, to flag the special claim case for the reversal of the TC 470, CC 95. The "Other Instructions" item is checked in the Special Features section and the following explanation should be added: Form 3177, Notice of Action for Entry on Master File, with TC 472 CC 95 is to be completed by the function concluding the special claim and faxed to (215) 516-1555 for processing.

  6. See IRM 4.32.2.11.8.3.2.5, Claims for Refunds Procedures - SB/SE, for instructions and additional information on addressing claims for refund.

Promoter Rights for IRC 6707 and IRC 6708 Assessments
  1. Post-assessment appeal procedures apply to IRC 6707 and IRC 6708 penalties. See IRM 20.1.1.4.1.2, Post-Assessment Appeals and IRM 8.11.1.5, Appeals Post-Assessment Penalty Program. There are no pre-assessment appeal rights for IRC 6707 and IRC 6708.

  2. Promoters may request from Appeals an abatement of the IRC 6708 penalty for reasonable cause within 30 days of receiving the notice and demand for payment. The request must be in writing. Penalties arising under IRC 6707 for failure to comply with IRC 6111 after October 22, 2004, may not be abated on grounds of reasonable cause. They may be abated on grounds that there was not a failure to comply with IRC 6111(a). The penalty can also be rescinded for non-listed reportable transactions. See Rev. Proc. 2007-21, 2007-9 IRB 613.

  3. Promoters are not required to pay any portion of the IRC 6707 or IRC 6708 penalty before requesting abatement.

  4. If the penalty is not abated by Appeals, it must be paid in full. Promoters may then file a claim for refund on Form 6118Claim for Refund of Tax Return Preparer and Promoter Penalties. The claim is assigned to the field for consideration. Promoters may not file a refund suit:

    1. Before 6 months from the date of filing the claim for refund, unless the IRS acts on the claim, nor

    2. After two years from the date of mailing a notice of claim disallowance.

    See IRC 6532, Periods of Limitation on Suits. Late filed claims will be disallowed in full.

Penalty Case Processing Procedures

  1. This section discusses writing a penalty report, case file assembly, and closing procedures for promoter investigations.

Penalty Report
  1. The penalty report is a narrative summary of the facts and conclusions of the investigation, including which persons or entities are liable for penalties, and the amount of penalties to be assessed against each person or entity.

  2. In an SB/SE examination, if an examiner injunction report (EIR) was prepared for referral to DOJ, it can be used as the penalty report. Update the EIR to reflect any new information secured during the injunction proceedings.

  3. If an EIR was not prepared, Form 886-A, Explanation of Items, may be used for the penalty report following the report-writing guidelines in IRM 4.10.8.11.2, Explanation of Items.

  4. In an SB/SE examination, examiners can prepare a single, comprehensive report (addressing all promoters, sub-promoters, and facilitators, all applicable penalties, and all years) and place a photocopy of this report in each related penalty case file. For penalty cases without injunctions, examiners should disregard the sections of the injunction referral report that refer to venue or injunction.

  5. In an LB&I examination, examiners should coordinate the preparation of the penalty report with the LB&I:F Promoter Program Manager.

Penalty Computations
  1. The penalty report must include a detailed penalty computation. The penalty computation must contain enough information and supporting documentation to explain the basis for determining whether penalties are warranted. Keep in mind that this material will be used to defend the penalty assessment in Appeals and possibly in court.

  2. For each person who will be assessed a penalty, there must be a separate penalty computation for each year, and each computation must agree with the assessment shown on Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

    1. Form 8278 is an adjustment document used for the manual assessment or abatement of miscellaneous civil penalties. The penalty reference number (PRN) from the form is keyed in with the dollar amount to the proper master file tax account (MFT 13 for BMF, MFT 55 for IMF). The resultant TC 240 with the PRN indicates a miscellaneous civil penalty assessment. The PRN dictates the language in the CP 15 (IMF) or CP 215 (BMF), Notice of Demand, that provides an explanation of the penalty being assessed, the amount due, and the taxpayers recourse in contesting the assessment or paying the balance due.

    2. Always use the most current version of Form 8278 available from the electronic publishing website.

Notification of Penalty
  1. There are no pre-assessment appeal rights for IRC 6700 and IRC 6701 penalties, but prior to closing the penalty investigation and assessing the penalties the examiner will send an explanation of the penalty assessment to the promoter(s) who will be assessed a penalty. See IRM 4.32.2.11.7.1, Promoter Rights for IRC 6700 and IRC 6701.

  2. The examiner must provide a penalty report and computations to the promoter before assessment of penalties. The timing of the notification will vary depending on the outcome of the investigation. In injunction cases, the penalty report is not provided at the closing conference. See IRM 4.32.2.7.7, Closing Conferences. If an injunction was not pursued, the penalty notification and closing conference may be held at the same time.

  3. While normal deficiency procedures do not apply to promoter investigations, the examiner must still consider any defense or rebuttal positions the promoter may offer. The examiner may provide the penalty report and computation to the promoter in advance of the closing conference in order to facilitate that process. If no closing conference will be held, the examiner should allow the promoter a reasonable time frame (generally no more than 30 days) to respond.

  4. For SB/SE examinations, a sample notification letter, which can be used to provide the penalty computation to the promoter, is included as Exhibit 4.32.2-11, Sample Pattern Letter - Penalty Report and is also available on MySB/SE, Promoter Investigations. Area Counsel should be consulted for any modifications to the sample letter.

  5. The timing of this action should take into consideration the needs of all interested parties, such as DOJ and CI. See IRM 4.32.2.8.1, Injunctions and IRM 4.32.2.8.2.2, Penalty Assessment - CI Parallel Investigation, for additional information.

  6. Examiners may use the penalty report as the explanation for the penalty notification with the following modifications:

    • Delete all references to parallel investigations or other CI involvement. If the promoter was convicted of a crime, this information can remain in the report.

    • Delete confidential informant information, including the existence of an informant.

    • Except with respect to the person who will receive the penalty explanation, remove all tax return information as defined in IRC 6103 of other individuals, including participants.

    • Remove references to other promoters, sub-promoters, or facilitators unless this information is necessary to explain the penalty assessment.

    • If the penalty report covers more than one person, review the entire report for other disclosure issues. See IRC 6103, Confidentiality and Disclosure of Returns and Return Information.

    • Delete any other sensitive information that should not be disclosed.

  7. The penalty explanation must include a computation of the penalty assessment against the specific promoter. It does not need to be as detailed as the penalty computation included in the penalty case file, nor does it need to identify each participant or client by name. Generic explanations that identify the activity subject to a penalty, such as "sale of trust package," "sale of tax defense package," "membership in the organization," "depreciation schedule." , or "response to Statutory Notice of Deficiency," along with the number of items sold or documents prepared, are adequate to explain the penalty.

  8. The penalty report and computations sent to a promoter should not contain the taxpayer identification numbers (SSN or EIN) of any persons other than the person to whom the explanation is sent. Other tax return information (such as full names, addresses, telephone numbers, or other information that can uniquely identify a person) of other persons should be included in the explanation only if an exception to IRC 6103 is applicable and the information is necessary to explain the liability for the penalties. See IRC 6103, Confidentiality and Disclosure of Returns and Return Information.

Case File Assembly
  1. Penalty case files include the following:

    1. IRC 6700/IRC 6701 Investigation Workpaper or Form 4318, Examination Workpapers Index.

    2. Form 886-A, Explanation of Items.

    3. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

    4. Form 3198, Special Handling Notice for Examination Case Processing.

    5. Form 4665Report Transmittal.

    6. Form 3244-A, Payment Posting Voucher - Examination (if applicable).

IRC 6700 / IRC 6701 Investigation Workpaper or Form 4318, Examination Workpapers Index
  1. Examiners can utilize the IRC 6700 Investigation Workpaper or Form 4318 to summarize the investigation information and applicable penalties.

  2. Generally, the IRC 6700 Investigation Workpaper is better suited than Form 4318 for an SB/SE promoter investigation. This workpaper is available on My SB/SE, Promoter Investigations.

  3. Detailed penalty computations should be included in the workpapers along with supporting documentation for each penalty.

Form 886-A - Explanation of Items
  1. Form 886-A, Explanation of Items, should be used to explain the penalty adjustments. However, it is not mandatory for SB/SE examiners to use Form 886-A for these reports if an EIR was already prepared for an injunction referral.

  2. The penalty explanation summarizes the facts, applicable law, promoter’s position (if known), argument,, and conclusion. See report-writing guidelines in IRM 4.10.8.11.2, Explanation of Items. It should specify

    • The name of the person assessed the penalty.

    • The taxpayer identification number of that person.

    • The year or period of the assessment.

    • The type of penalty to be assessed.

    • The amount of the penalty.

    • The penalty computation.

  3. A detailed explanation and computation of the penalties, including a listing of clients and penalties per client or evidence of the gross income derived, or to be derived from the promoter activity, should be included as an exhibit to the penalty report.

  4. Examiners should number each page of the document with the page number and the total number of pages (e.g., 1 of 5). Page numbers help future users of the reports know whether they have a complete document.

  5. LB&I examiners should prepare Form 886-A using the following format:

    1. Issue

    2. Facts

    3. Law

    4. Position of Promoter (if known)

    5. Conclusion

    6. Exhibits

Form 8278 - Assessment and Abatement of Miscellaneous Civil Penalties
  1. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is used for assessment and abatement of miscellaneous civil penalties. Examiners should complete the Form 8278 following the instructions on the form.

  2. A separate form is required for each type of penalty and each penalty period; however, multiple assessments of the same penalty for a single period may be consolidated.

  3. For IRC 6700 and IRC 6701 penalties, the tax period is a calendar year period (12/31/XXXX) for all taxpayers, including fiscal year filing taxpayers. The penalty is imposed for actions during the calendar year.

  4. For IRC 6707 and IRC 6708 penalties, the tax period used on Form 8278 is the period that the registration or disclosure was required to be filed or maintained.

  5. If a penalty is assessed against an individual, use MFT 55; if it is assessed against a business entity, use MFT 13.

  6. A statute date should not be entered on Form 8278 unless there is a corresponding statute of limitations for the penalty. See IRM 4.32.11, Promoter Penalties, and IRM 25.6, Statute of Limitations.

Form 3198 - Special Handling Notice for Examination Case Processing
  1. Form 3198, Special Handling Notice for Examination Case Processing, is attached to the outside cover of the penalty case file.

  2. A notation "Civil Penalty Assessment IRC xxxx," citing the applicable penalty code section(s) should be made on the Form 3198.

  3. If the promoter does not pay the aggregate balance due or make satisfactory arrangements to pay, attach a Special Handling Alert for ATTI Case with Collection Issue form on top of the Form 3198. See IRM Exhibit 4.32.2-1 for this form. This will ensure the case is properly routed to Collection after it has been processed and the liability has been assessed. The name and address of the Collection AT Coordinator for the area where the taxpayer resides should be listed on the Special Handling Sheet before closing the case.

Form 4665 - Report Transmittal
  1. Form 4665, Report Transmittal, is used to provide summary information regarding the penalty investigation. It can also be used for transfers, discontinuations, suspended penalty cases and investigations with injunctions but not penalties.

  2. LB&I examiners should include a Form 4665 in all promoter investigation closures

  3. The information on the Form 4665 should supplement, not duplicate or replace, information in the case file and may include:

    1. Background on the issue(s).

    2. Explanation of the disposition of the issue(s).

    3. A summary of the basis for the penalty.

    4. Identification of related cases.

    5. A summary of unagreed issues.

    6. Other relevant information not suitable for inclusion in the Form 886-A.

    Caution:

    As per Rev. Proc. 2012-18 regarding ex parte communications with Appeals, the Form 4665 or any similar document should not include statements or comments intended to influence Appeals' decision-making process. See Rev. Proc. 2012-18 for a full discussion of ex parte rules.

Form 3244-A - Payment Posting Voucher - Examination
  1. Form 3244-A, Payment Posting Voucher – Examination, is used if a promoter makes an advance payment of the penalty.

  2. Enter the payment as TC 640 and MFT 55 for individual assessments or MFT 13 if assessed against a business entity.

  3. The tax year is the year for which the penalty will be assessed.

  4. Send Part 1 of Form 3244-A with the check separately via overnight traceable method to the remittance teller at the aligned Submission Processing Center for your area using IRM 4.4.24, Payments and Remittances procedures. Attach Part 2 of Form 3244-A to the front of Form 8278.

Case Closing Procedures
  1. Procedures for case closing depend on the type of closure and whether it is an SB/SE or LB&I investigation.

Penalty Assessments
  1. Generally, penalties should be recommended if an injunction has been granted; however, there might be circumstances that warrant non-assertion of the penalties. See IRM 4.32.2.8.1.2, Injunctions - No Penalty Assessment.

  2. Examiners may recommend asserting promoter penalties regardless of whether injunctive relief is pursued by the government so long as sufficient evidence has been obtained to demonstrate that the promoter engaged in conduct subject to penalty under IRC 6694, IRC 6695, IRC 6700, IRC 6701, IRC 6707, or IRC 6708.

  3. IRC 6751 requires managerial approval of penalties, including IRC 6700, IRC 6701, IRC 6707, and IRC 6708. See IRM 4.32.2.11.1, Approval of Penalties, and IRM 20.1.1.2.3, Managerial Approval for Penalty Assessments.

  4. In parallel investigations, CI may request suspending penalty assessment until conclusion of the criminal investigation. See IRM 4.32.2.11.8.3.1.3, Parallel Investigations.

  5. Examiners should prepare a promoter penalty report and a penalty investigative file as discussed in IRM 4.32.2.11.8.1, Penalty Report, and IRM 4.32.2.11.8.2, Case File Assembly.

SB/SE Penalty Assessment Procedures
  1. In SB/SE, after approval by the group manager, the promoter investigation penalty case is forwarded to Area Counsel for review.

  2. Once Area Counsel reviews the proposed penalty, the case file is returned to the examiner for closing through the group manager to Centralized Case Processing (CCP) for assessment.

  3. A copy of the Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is sent to the SB/SE LDC and to the local AT Collection group or AT revenue officer assigned to the penalty case.

  4. CCP assigns a DLN to the investigation and assesses the penalty.

  5. The disposal code is DC 12 whether the case has been closed agreed or unagreed if penalties are being assessed.

  6. Always use the most current version of Form 8278 available from the electronic publishing website. Doing so will ensure that the penalty will be assessed with the correct penalty reference number.

  7. For step by step instructions, see Exhibit 4.32.2-12, Case Closing Job Aid Completed Investigation. The Promoter Penalty Case Closing Job Aid Completed Investigation With an Injunction and/or Penalties,is available on MySB/SE, Promoter Investigations.

LB&I Penalty Assessment Procedures
  1. In LB&I, a promoter investigation must have the approval of the LB&I:F DFO, Manhattan in order to close.

  2. The disposal code should reflect whether the case has been closed agreed or unagreed. Disposal Code 12 should be used for withdrawal cases.

Parallel Investigations
  1. If CI has requested suspension of the penalty assessment and the examiner has completed all investigation actions, the examiner will assemble the investigative case file and place the case in group suspense.

  2. The examiner must prepare the penalty report and a detailed penalty computation based on all available information.

  3. The case is updated to Status Code 16 on ERCS.

  4. While the investigation is in group suspense, the examiner should continue to have six-way conferences with CI and monitor the status of the criminal investigation.

  5. When the decision is made to proceed with closing the investigation and assessing the appropriate penalties, examiners must follow the closing procedures discussed in IRM 4.32.2.11.8, Penalty Case Processing Procedures.

  6. See IRM 4.32.2.6, Parallel Investigations, for additional information on parallel investigations.

No Penalty Assessment
  1. In limited instances, examiners may determine assessment of penalties may not be in the best interest of the government, even if an injunction has been secured. See IRM 4.32.2.8.1.2, Injunctions - No Penalty Assessment.

  2. An investigation may be surveyed or discontinued before or after contacting the promoter. See IRM 4.32.2.8.5, Survey, and IRM 4.32.2.8.3, Discontinuations, for additional information.

  3. SB/SE examiners should consult with Area Counsel, AT/IMT SPA) and the SB/SE LDC prior to closing the investigation without a penalty assessment.

  4. LB&I examiners must contact Area Counsel prior to closing the investigation. Approval of the LB&I DFO with jurisdiction over the promoter investigation and the LB&I Financial Services, DFO, Manhattan must be obtained prior to closing the investigation.

Injunctions - No Penalty Assessment
  1. Generally, if an injunction has been secured, penalties are proposed since conduct or activity subject to penalties under the various promoter penalty code sections is a requirement in order to seek an injunction pursuant to IRC 7407 or IRC 7408. However, there may be circumstances when a decision is made not to assess penalties. See IRM 4.32.2.8.1.2, Injunctions - No Penalty Assessment, for additional information.

  2. Examiners must consult with Area Counsel and the SB/SE LDC or the LB&I:F Promoter Program Manager prior to closing an enjoined promoter investigation without a penalty assessment.

  3. Form 4665, Report Transmittal, is used to document the basis for the non-assertion of penalties. A copy of this form is provided to the SB/SE LDC or to the LB&I:F DFO, Manhattan.

  4. Letter 1866, Discontinuance Letter, is not sent to the promoter if an injunction has been secured against the promoter.

  5. Cases are closed from the field compliance group using DC 12 through CCP when an injunction has been granted but no penalties are assessed.

  6. Form 8278 is completed and included in the case file. Column {c} is left blank and column {d} of the form for the applicable penalty will reflect the amount of zero (the 3 digit reference code is a mandatory field). CCP must insert a dummy blocking number to establish MFT 55 or 13 modules, as appropriate. CCP processes the zero posting after the MFT is established on Master File.

Discontinuations
  1. A discontinued investigation is an investigation, other than a survey, that is closed without an injunction or penalty assessment regardless of whether or not the promoter was notified of the investigation. See IRM 4.32.2.8.3, Discontinuations, for additional information.

    Note:

    Only SB/SE has the option to survey an investigation.

  2. Letter 1866, Discontinuance Letter, is required unless:

    • There has been no contact with the promoter, or

    • CI requests that the discontinuation letter not be sent.

  3. For all discontinued investigations, examiners must close the case through CCP and complete Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. Column {c} is left blank and column {d} of the form for the applicable penalty will reflect the amount of zero (the 3 digit reference code is a mandatory field). The discontinuation will be posted to the penalty module as -0- with an associated DLN assigned. The assignment of a DLN will allow for the subsequent retrieval of the administrative investigation file, if necessary.

  4. Examiners prepare Form 4665 explaining the reason(s) why the investigation is not being pursued.

  5. For SB/SE cases, a copy of the completed Form 4665 and the Form 8278 are sent to the SB/SE LDC.

  6. Once the Form 4665 is received by the SB/SE LDC, a reason code is assigned based upon the explanation provided by the examiner. The LDC will maintain a record of the closure and reason code.

  7. SB/SE groups should update ERCS to Status Code 51 using an appropriate disposal code.

  8. LB&I groups should update ERCS to Status Code 90 using Disposal Code 12 after approval by the LB&I Financial Services, DFO Manhattan.

  9. SB/SE groups should use one of the following disposal codes when closing promoter investigations:

    Disposal Code Reasons
    02 No Change
    31 Insufficient Information
    33 Established in Error
    39 Promoter Deceased or Other (age, health, no current activity or any other reason penalties are not assessed).
    40 Unable to Locate

  10. SB/SE groups follow local procedures to close the case to Memphis CCP using Form 3210, Document Transmittal. LB&I groups send the administrative case file to the LB&I:F DFO, Manhattan for approval using Form 3210. The LB&I:F DFO Manhattan's approval must be obtained for all penalty determinations for LB&I cases.

  11. For SB/SE Investigations, see Exhibit 4.32.2-13, Case Closing Job Aid Discontinuations for instructions. The Promoter Penalty Investigation Case Closing Job Aid/Discontinued Investigation job aid is available on MySB/SE, Promoter Investigations.

SB/SE Surveys
  1. An investigation may be surveyed rather than discontinued if the promoter was not contacted and less than 10 hours was applied to the investigation.

  2. If more than 10 hours are charged to the investigation, follow closing procedures for discontinuations before contact. See IRM 4.32.2.11.8.3.2.2, Discontinuations.

  3. Examiners prepare Form 4665 explaining the reason(s) why the investigation is being surveyed. A copy of the completed Form 4665 is sent to the SB/SE LDC.

  4. Once the Form 4665 is received by the SB/SE LDC, a reason code is assigned based upon the explanation provided by the examiner. The LDC will maintain a record of the closure and reason code.

  5. SB/SE groups update ERCS to Status Code 41 using an appropriate disposal code.

  6. Use the most appropriate disposal code (other than DC 02) per the chart noted above in IRM 4.32.2.11.8.3.2.2, Discontinuations.

  7. For SB/SE, see Exhibit 4.32.2-14, Case Closing Job Aid Survey, for instructions. The job aid Promoter Penalty Investigation Case Closing Job Aid//Survey/No Contact >10 hours,is available on MySB/SE, Promoter Investigations,.

Transfers
  1. There may be instances where a promoter investigation is transferred between areas (e.g., promoter moved, for association with related investigations, or workload management (case brokering)).

  2. Examiners should prepare Form 4665, Report Transmittal, explaining the reasons for transferring the promoter investigation.

  3. The promoter investigation must be closed on the ERCS database by the transferor area and a new ERCS record is established by the receiving area.

  4. For SB/SE cases, see Exhibit 4.32.2-15, Case Closing Job Aid Transfers, for detailed instructions to transfer an investigation. The job aidPromoter Penalty Investigation Case Closing Job Aid is available on MySB/SE, Promoter Investigations,.

Claims for Refunds Procedures - SB/SE
  1. All IRC 6703 promoter claims are addressed by examiners following the procedures in IRM 4.32.2.11.7.1.1, Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701.

  2. The IRC 6700 and IRC 6701 penalty claims are sent to the SB/SE LDC for review and assignment to a field compliance group. All attempts are made to secure the original examination file and associate it with the claim.

  3. Detailed instructions for processing promoter penalty claims can be found in Exhibit 4.32.2-16, Case Closing Job Aid Promoter Penalty Claim Allowed and Exhibit 4.32.2-17, Case Closing Job Aid Promoter Penalty Claim Disallowed In Full. They are also available on MySB/SE; see Promoter Penalty Investigation Job Aid Promoter Penalty Claims , Promoter Penalty Claims.

Post-Injunction Activities

  1. After an injunction is granted and/or penalties are assessed, examiners need to consider additional steps to ensure the maximum compliance impact on the promoter and participants.

  2. A preliminary injunction granted by the court generally stops a promoter from engaging in unlawful activity. The work and actions of the DOJ attorney will continue, including filing a motion for a permanent injunction and, if necessary, contempt hearings.

  3. Additional compliance actions to be considered include:

    • Publicizing court actions including injunction.

    • Sharing information with the states.

    • Taking steps to bar the promoter from practicing before the IRS.

    • Moving participant returns into the examination stream.

    • Responding to claims for refund.

    • Monitoring compliance with court order(s).

  4. Results of an injunction or penalty assessment are shared with state agencies following disclosure procedures. The SPA assigned to participant case building coordinates this action. It is imperative that the Disclosure Office review any information prior to its release. This includes the name of the promoter, the names of any participants identified, the name of the abusive shelter, and the tax benefits the promotion promised to do for the participants.

Publicizing Court Actions

  1. The injunction process allows the IRS to publicize civil enforcement actions taken against a promoter. This publicity informs the public of the government’s position regarding the promotion and enforcement actions being taken, and it deters others from participation in abusive promotions.

  2. Information regarding the government's enforcement actions should have the widest possible dissemination.

  3. DOJ is primarily responsible for the distribution of any press releases. The local Office of Communications and Liaison is informed of any pending press releases and assists in any local responses. Examiners and Area Counsel work closely with DOJ and the local media relations specialist in the Office of Communications and Liaison throughout the litigation process to get the releases to the national and local media as soon as possible.

  4. Press releases are generally made by DOJ at the:

    • Filing of the injunction suit.

    • Imposition of a temporary restraining order (TRO).

    • Order of a preliminary or permanent injunction.

    • Initiation of any contempt actions.

  5. In parallel investigations, DOJ coordinates the filing of the injunction with specific criminal actions to foster maximum press coverage. For example, the filing of an injunction may be postponed until a search warrant is executed on the promoter, so that both actions can be included in the press release.

State Memoranda of Understandings

  1. SB/SE has a memoranda of understanding (MOU) with various states, Washington D.C. and some territories to share information regarding abusive tax transactions.

  2. Results of an injunction or penalty assessment are shared with state agencies in accordance with disclosure procedures. Release of this information is coordinated by an AT SPA and must be reviewed by the Disclosure Office prior to its release.

  3. IRS personnel should contact the Area Governmental Liaison if they receive information from the states. The liaison routes this information to the AT Coordinator in the Area PSP.

Barring a Promoter From Practice

  1. Promoters frequently represent their clients before the IRS. Examiners can take the following actions to bar the promoter from practicing before the IRS:

    • Seek prohibition to practice as part of the injunction process.

    • Make referrals to OPR.

    • Notify state licensing agencies of the conduct outlined in public documents.

  2. The action taken is dependent upon the specific provisions which allow the promoter the right to practice before the IRS as well as the circumstances surrounding the injunction.

  3. If the promoter or the promoter’s power-of-attorney also represents participants in their examinations, a potential conflict of interest exists. If this situation occurs, the examiner should consult with Area Counsel regarding the appropriate action to take.

  4. Section 10.29 of Circular 230 discusses the rules regarding conflict of interest. It states that a conflict exists if "the representation of one client will be directly adverse to another client" or "there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner."

  5. Circular 230 further states that the POA can still represent the client if "each affected client waives the conflict of interest and gives informed consent, confirmed in writing." Copies of these informed consents must be provided to the IRS upon request. "Informed consent" means more than simply obtaining a client's consent. There are occasions where, despite a client's consent, a practitioner cannot reasonably or effectively provide competent and diligent representation to each affected client. When these situations arise during an examination, Area Counsel should be consulted. If a suspected conflict of interest(s) occurred/occurs during the examination, a referral to OPR should be made at the conclusion of the examination.

Courts Barring Promoters From Practice
  1. The injunction court order may include a provision permanently prohibiting individuals from practicing before the IRS.

  2. This court order has the practical effect of barring an enjoined promoter from practice before the IRS, but it is not a disbarment, suspension, or censure resulting from a Circular 230 proceeding. Historically, a Circular 230 proceeding was the only way that a barred practitioner’s name was publicized. See related discussion in IRM 4.32.2.12.3.2, Referrals to Office of Professional Responsibility (OPR).

Referrals to Office of Professional Responsibility (OPR)
  1. OPR has oversight responsibility of tax practitioners authorized to practice before the IRS.

  2. Referrals should be made to OPR as soon as it appears that a practitioner may be in violation of Circular 230, Regulations Governing Practice before the Internal Revenue Service, (Circular 230, section 10.53(a)).

  3. Form 8484, Report of Suspected Practitioner Misconduct, is used to make a referral to OPR.

  4. Referrals to OPR are mandatory when penalties are asserted under IRC 6694(b) for willful or reckless conduct or when IRC 6700 or IRC 6701 penalties are asserted. For further information regarding referrals to OPR and instructions, see IRM 20.1.6.12.3, Referral to the Office of Professional Responsibility (OPR), for preparer and promoter penalties.

  5. Referrals to OPR should be made when penalties are asserted under IRC 6707 or IRC 6708 whether or not the promoter agrees to the penalties, See IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties, for more information.

  6. The AJCA of 2004 added IRC 7408(c)(2) to allow injunctive relief to be sought for violations under Circular 230.

  7. If the statutory requirements of IRC 7408, IRC 7407, or IRC 7402 are met, an injunction referral should be made to DOJ. A referral to OPR should not be used in lieu of an injunction referral to DOJ but rather in addition to the DOJ referral. The injunction is generally a faster means to stop the promoter from engaging in prohibited conduct and is broader in scope.

  8. Refer to IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties, for additional information on referrals to DOJ.

Revocation of IRS e-file Participation
  1. An individual’s or firm’s participation in the IRS e-file program may be revoked as a result of the granting of an injunction.

  2. The LDC monitors court injunctions and may recommend revocation or other sanctions depending on the prohibitions outlined in a court order.

  3. See IRM 3.42.10.3.1, Court Injunctions and Revocation of IRS e-file Participation, and IRM 3.42.10.3.2, Court Injunctions and Sanctioning of Authorized IRS e-file Providers.

Participant Returns

  1. Placing participant returns into the examination stream is an important aspect of AT compliance actions. See IRM 4.32.2.13, Participant/Investor/Advisee Lists, for information on processing of participant lists.

Claims for Refund

  1. Post-assessment appeal procedures may apply to promoter penalties. The promoter may file a claim for refund. See IRM 4.32.2.11.7, Post-Assessment Rights, for a discussion of promoter post-assessment rights and procedures.

  2. See IRM 20.1.6.19, Appeal Rights, for additional information regarding IRC 6694(a) and IRC 6694(b) penalties.

Monitoring Compliance

  1. The SB/SE LDC is responsible for monitoring compliance with injunction orders against SB/SE promoters. OTSA is responsible for monitoring compliance with injunction orders against LB&I promoters.

  2. IRS employees who learn of any new or continuing unlawful activity by an enjoined promoter must make a referral to the SB/SE LDC or OTSA.

  3. LB&I examiners should solicit future compliance agreements (Form 906). These agreements include provisions requiring promoters to adopt quality-control procedures to ensure compliance with the IRC 6111 and IRC 6112 requirements and allowing the Service to monitor such procedures.

  4. Form 906 agreements are not used by SB/SE in promoter investigations.

Contempt Investigations
  1. A court order enjoining a promoter from certain activities has the effect of law and monitoring this compliance is important. Violations of a court order can result in civil or criminal contempt sanctions.

  2. A civil contempt sanction is designed to compel the promoter to comply with the injunction’s terms. A criminal contempt sanction is designed to punish the promoter for a violation of the injunction.

  3. The court’s injunction order outlines required actions and any prohibited acts by the promoter. Subject to the specific requirements of the court order, examples of potential violations include:

    1. Failing to shut down a website or starting a new website.

    2. Failing to inform participants of the court action.

    3. Failing to terminate the preparation of income tax returns.

    4. Continuing to conduct seminars or advertisements that advertise abusive promotions.

    5. Failing to provide a participant list to the IRS.

    6. Continuing to advise participants of the mechanics of an abusive tax promotion.

    7. Failing to comply with any portion of the court order.

    8. Any conduct or activity subject to penalties under IRC 6700, IRC 6701, IRC 6694, or IRC 6695, and violations of IRC 6111 and IRC 6112 subject to penalty under IRC 6707 and IRC 6708.

    9. Any acts which impair or impede the administration of the Internal Revenue Laws.

  4. If evidence of violations of the preliminary or permanent injunction order are found and DOJ still has an open litigation case, examiners and Area Counsel will notify the DOJ attorney and the SB/SE LDC or OTSA.

  5. If DOJ has closed its case, examiners should contact the SB/SE LDC or OTSA. If sufficient facts can be developed to prove injunction violations, a referral is made through Area Counsel to DOJ requesting initiation of a contempt proceeding.

  6. If there is sufficient evidence of contempt, DOJ will ask the court to find the promoter in civil contempt and order monetary fines, incarceration, or both. If the promoter's actions warrant a criminal contempt action, DOJ Tax Division Civil Section makes a referral to the criminal section in the Tax Division.

  7. Any IRS employee who learns of a potential injunction violation should contact the examiner assigned to the promoter, contempt investigation, the SB/SE LDC, or OTSA.

Service of Injunction on Related Promoters

  1. An injunction order against the primary promoter is binding on any individuals acting in concert with the promoter. The order has the effect of law and generally enjoins any sub-promoter or co-promoter. This is true even if the sub-promoter/co-promoter was not referred to DOJ.

  2. Examiners, Area Counsel and DOJ attorneys coordinate their efforts to inform any known sub-promoters/co-promoters not specifically named in the injunction suit of the court action and its effect upon them. Failure to obey the court order may subject the sub-promoter/co-promoter to contempt proceedings.

  3. The injunction must be personally served on sub-promoters/co-promoters to be legally binding. An IRS employee, US Marshall or private process server may be used for this purpose.

  4. Examiners should not perform the personal service if the promoter's behavior demonstrates any propensity towards violence. In such cases, a special agent is requested to accompany the examiner, or the US Marshall or a private process server completes the service.

  5. The original certificate of service is returned to DOJ.

  6. Any IRS employee who discovers information related to ongoing or new unlawful activity by a sub-promoter/co-promoter should contact the SB/SE LDC or OTSA.

Injunction Litigation Appeals

  1. Promoters may appeal any type of injunction or restraining order imposed by the courts. Examiners and Area Counsel continue to assist DOJ during the appeal process. Assistance could be in the form of obtaining evidence on the current actions of the promoter, providing updated calculations on the harm to the government, or other information about compliance with a court order.

Participant/Investor/Advisee Lists

  1. This section covers procedures for submitting lists of participants/investors/advisees involved in AT promotions.

  2. Addressing participant non-compliance is a key aspect of AT compliance activities. Examiners should secure or develop a participant list as early as possible in the investigation.

  3. SB/SE and LB&I have different procedures for processing participant lists. For SB/SE see IRM 4.32.2.13.2, SB/SE Participant List Procedures. For LB&I see IRM 4.32.2.13.3, LB&I Participant Procedures.

  4. Various compliance actions may be taken by the IRS regarding participants, including, but not limited to:

    • Income tax examinations by field examiners or campus correspondence units.

    • Referrals to revenue officers for promotions involving attempts to impede collection efforts.

    • Correspondence to known participants soliciting self-correction of erroneous returns.

    • Referrals on erroneous refund cases or prevention of potential erroneous refunds.

    • Servicewide Electronic Research Program (SERP) alerts to flag returns or claims reflecting the abusive promotion during processing, to be worked as AT inventory.

    • Correspondence to participants as part of a Pre-Filing Letter Initiative (PFLI).

  5. A PFLI involves correspondence to participants prior to the filing of their income tax returns, advising of the unallowable promotion benefits and possible consequences if the promotion benefits are claimed. PFLI letters are not issued by examiners and must be coordinated with National Office Compliance and Area Counsel. See also IRM 4.32.2.7.3.5, Participant Contacts, and IRM 4.32.2.7.3.6, Participant Tax Examinations, for additional guidance on participant third-party contacts and examinations.

Obtaining Participant Lists

  1. Participant lists are solicited from the promoter during the promoter investigation. See IRM 4.32.2.7.2.1, Commencement of SB/SE Investigations, and IRM 4.32.2.7.2.2, Commencement of LB&I Material Advisor Investigations.

  2. Participant lists should be secured from the promoter or prepared from other sources as quickly as possible to allow sufficient time for analysis and selection of returns for examination within the assessment statute of limitations.

  3. The court can order the promoter to provide a participant list as part of the injunction litigation or DOJ may obtain a list during the discovery phase of the litigation.

  4. Participant lists may also be constructed from evidence obtained during the investigation such as:

    • Bank records.

    • Third-party payees, such as credit card companies and Paypal®.

    • IDRS.

    • RPVUE (for tax return preparers).

    • CI search warrants.

    • Other federal or state agencies, such as the Securities and Exchange Commission.

    • Informants.

    • Participant lists provided pursuant to IRC 6107(b) for preparers and IRC 6112 for material advisors.

SB/SE Participant List Procedures

  1. This section describes specific procedures for examinations related to participants in SB/SE promoter investigations.

Completing the Participant List Package
  1. Once SB/SE examiners secure a complete participant list, the participant list package should be sent to the headquarters ATTI SPA using secure e-mail at *ATAT Listkeeper.

  2. A copy of the participant list should also be sent to the local PSP ATTI Coordinator.

  3. The participant package sent to the *ATAT Listkeeper should include:

    • Name of promoter.

    • Name and description of the promotion.

    • Background information on the promotion.

    • Description of how the promotion appears on the income tax return.

    • Name and telephone number of the examiner, group manager, and assigned Area Counsel.

    • Participants’ names, address (if available), and TINs.

    • Participant Job Aid. See IRM 4.32.2.7.3.6.1, Participant Job Aid.

    • Issue position papers.

    • Sample or standardized revenue agent report (RAR), if available.

    • Coordinated issue paper, if available.

  4. A participant list package must include, at a minimum, the participant’s name, TIN, form, and tax period. A sample template for compiling the participant list is available on MySB/SE, Promoter Investigations. See Exhibit 4.32.2-18, Participant List Template.

  5. If examiners are unable to provide the necessary information in the required format, they should contact the headquarters AT SPA by e-mail using secure messaging at *ATAT Listkeeper. Participant TIN research should not be conducted by the examiner or group manager except as necessary to identify participants for third-party contacts in the development of the promoter investigation.

  6. The ATAT listkeeper reviews participant list packages, coordinates the appropriate case-building requirements with the examiner and other AT stakeholders and forwards case-building requests to the appropriate campus.

Local Case Building for SB/SE
  1. If it is determined that examinations are necessary for successful development of a promoter investigation, a maximum of 20 income tax returns can be built by the Area PSP office. No case-building activity is to be conducted at the group level.

  2. Examiners and group managers coordinate the identification of returns with the headquarters AT SPA and the local Area PSP office.

  3. All functions are responsible for ensuring that the proper source, project and tracking codes are placed on the selected participant tax returns.

LB&I Participant Procedures

  1. This section describes specific procedures for examinations related to participants in LB&I promoter investigations.

Participant List Processing Procedures
  1. Investor lists are forwarded to OTSA using a standard spreadsheet. Contact Financial Services Promoter SPA for a copy of the spreadsheet. A copy of all investor lists must also be sent to the Senior Program Specialist, Tax Shelters – Financial Services.

  2. The list should include the following information:

    • Investor names and TINs

    • Related entities and TINs

    • Year of investment along with projected tax benefit

    • Names of any sub-promoters or co-promoters

    • Shelter type or listed notice number

  3. OTSA incorporates the participant information in its database, identifies similar or related activity, and coordinates examination activity among the various examination groups.

  4. OTSA forwards investor information to the appropriate LB&I Industry PSP Analyst(s) and other operating division designated contacts, as necessary.

Partnership Anti-Abuse Regulation

  1. Partnership Anti-Abuse Regulation

    • The partnership anti-abuse regulations give the Service the ability to recast transactions which may comply with the literal language of the code and regulations, but which produce tax results never contemplated by Subchapter K. The regulations refer to and incorporate the established judicial doctrines of the business purpose and substance over form. Partnership transactions, like all other business transactions, are subject to those doctrines. The anti-abuse regulations reiterate this point. The anti-abuse regulations are intended to clearly signal that partnerships are not a vehicle for non-economic, tax-motivated transactions. See Treas. Reg. 1.702-2

    • Given the Service's broad authorization to recast transactions to reflect the intent of Subchapter K, examiners must coordinate the application of the regulations with both the Partnership Technical Specialists (LB&I - Office of Pre-filing and Technical Guidance) and the IRS National Office, Associate Chief Counsel, Passthroughs and Special Industries. The practice is intended to result in fair and consistent use of the partnership anti-abuse regulations.

    • With the exception of the abuse of entity regulations, which were effective December 29, 1994 (see Treas. Reg. 1.702-2(e)), the partnership anti-abuse regulations became effective May 12, 1994.

Special Handling Alert for ATTI Case With Collection Issue

SPECIAL HANDLING ALERT FOR ATTI CASE WITH COLLECTION ISSUE
TAXPAYER NAME: ________________________________
CASE TYPE
PROMOTER CASE
OTHER ATTI (CODE SECTION)___________________
DIRECTIONS FOR:
Exam, Appeals, EQMS, Case Processing Units
To ensure ATTI cases receive priority attention, case files must be expedited to Collection. After assessment, please recharge the Exam file to the local Collection Coordinator. Mail the entire administrative file and RARs to the Collection Coordinator for the area in which the taxpayer is located. Refer to IRM 4.32.2 for instructions on locating the Collection Coordinator.
Collection Coord: ________________________________
Address Line 1: _________________________________
Address Line 2: _________________________________
City, State, Zip: _________________________________
Phone Number: _________________________________

Sample Summons Log

No. Date Issued Description Response Comments Reference Number
1. 04/23/02 Notice 2002-21, 2002-14 IRB 730, transactions involving the use of loan assumption agreement to claim an inflated basis asset acquired from another party. Yes – responded by affidavit on 6/14/02 Taxpayer did not enter into any transactions
2. 04/23/02 Rev. Rul. 90-105. Contribution to qualified cash or defined arrangement. Partial response 05/12/02. Will provide remaining response by 06/30/02
3.
4.
5.
6.
7.
8.
9.

LB&I Monthly Progress Report

Monthly Update of Promoter Penalty Case
Month Ended: Insert MMYY
LB&I FS Industry Director
Page 1 of 2
Your PROMOTER's Name:
NAMES
Territory Manager:
Team Manager
Lead Agent:
Team Members:
Specialists (Financial Products, IEs, etc.):

TELEPHONE NUMBERS
Soft Letter Sent:
Audit Letter Sent:
ECD if restricted promoter, put R.
Transactions Promoted and Co-Promoters
For listed transactions, please give name and Notice No. or Cite.
For unlisted transactions, please give name and note that it is unlisted.
Transaction Notice Co-Promoters
1.
2.
3.
4.
5.
6.
Additional Resources Needed:
If Yes, Additional Number of Agents Needed:
Yes/No
Impediments to Case Closing, If Applicable:
Impediment YES NO
Restricted Promoter
Resource Issue
Inadequate Responses by promoter/
Summonses to be issued/
Summonses not responded to
Summons Referred for Enforcement
Counsel Advice and Support
Other - please indicate the impediment (below)
Not Applicable

Audit Tools

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Six-Way Conference Discussion Job Aid

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Elevation of Parallel Investigation - Record of Actions

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Sample Action Plan

Activity or Action Resp. Party ECD Comp. By
A Initiation of IRC 6700 investigation and IRC 7408 Injunction.
1. Assignment of Investigation to Group made by PSP according to local procedures. PSP
2. Area Counsel and Collection assignments are requested according to local procedures. PSP/Group Manager/RA
3. Insure/confirm that case is established on ERCS, appropriate tracking codes and project codes are input. Group Manager/RA
4. Group Manager assigns investigation to Revenue Agent within a maximum of 5 business days. Group Manager
B Examination Startup Phase
1. Confirm whether CID is involved in your case or not:
a. CID not involved - Set up a 4 way meeting with the following individuals within target date of 30 days after assignment:
1. Assigned Counsel attorney RA
2. AT Group Managers (Examination and Collection) Management if necessary
3. Assigned Revenue Agent and Officer
b. CID involved - Set up a 6 way meeting including the additional individuals, again within target date of 30 days after assignment:
1. Assigned Special Agent
2. Special Agent in Charge
2. Send prepared (with Counsel approval) Letter 1844 notification letter and IDR to the promoter within target date of 30 days of assignment. RA
3. Schedule initial appointment within target date of 45 days after assignment. RA/Officer
4. Issue Letter 3164P within target date of 45 days after assignment. RA
5. Conduct initial interview with the promoter. RA/Officer and Area Counsel
6. Initiate income tax audit of promoter as appropriate. RA/Manager
7. Contact Fraud Referral Specialist if warranted. RA/Officer
8. As appropriate, use Summons authority, coordinate with Counsel for necessary approvals. RA/Officer
9. Use Summons enforcement if necessary. RA/Officer and Area Counsel
10. Identify and link previously identified participants with the promoter case using the ERCS tracking codes. RA/PSP
C Identification of Participants
1. Secure list of participants:
a. From promoter if possible RA/Officer
b. Develop/expand client/participant list by: Management Involvement if necessary
1. Summons of promoter bank records.
2. Review revenue agents' case files for additional participants.
3. Identify TDI cases associated with the promotion.
4. Contact CID regarding any ongoing or past investigations of principals/participants involved in this promotion.
2. Explore alternative methods to identify participants in the package:
a. Consult with SPAs from ATTI and LDC. RA/Officer
b. Obtain information on consumer complaints filed with local and state agencies. PSP
c. Consider use of CAF (preparer) database to identify taxpayers represented by the promoters or related parties. PSP
3. Prepare to send investor list to campus for case building based on the instructions for participant lists:
a. Notify SPA assigned to the promotion. RA/Officer
b. Complete the participant spreadsheet template.
c. Include a background memo, pro forma RAR if available, pro forma work papers, Counsel opinions, and any other supporting documentation.
d. Transmit/send to appropriate campus.
D Investigation Case Development and Injunction Phase
1. Determine if it is necessary to examine participant(s) return(s) for evidence in the promoter case. RA/Manager
2. Identify promoters and other individuals directly or indirectly marketing the promotion. RA/Officer
3. Forward newly identified marketers of the promotion to the LDC for expedited approval and association back to your promoter case. RA/Officer
4. Prepare promotion organization flow-chart. RA
5. Secure copies of the promotional materials, trust packages, reliance letter packages, etc. RA/Officer
6. Obtain affidavits from taxpayers that have participated in the scheme. RA/Officer
7. Identify other parties subject to potential IRC 6700 penalties and IRC 7408 injunctions. RA/Officer
8. Coordinate with Area Counsel to consider readiness of case for temporary (quick) or permanent injunction procedures with DOJ. This step may require another meeting with Area Counsel (as in step B 1 above). RA/Officer
a. If not appropriate to enjoin, consider additional development or move to penalty phase (see E). Management involvement if necessary
b. If appropriate to enjoin prepare IRC 7408 referral letter to DOJ with the help of Area Counsel. Area Counsel
E Penalty Phase
1. Continue to work the case while awaiting the quick injunction. RA/Officer
2. Determine if IRC 6700 or IRC 6701 penalty should be applied to promoter. RA/Officer and Area Counsel
3. Prepare penalty report and case file for Area Counsel approval. RA and Area Counsel
4. If permanent injunction is pending suspend the penalty case. RA/Officer
5. Secure Area Director approval for proposed assessment, if necessary. RA/Officer and Manager
6. If penalty does not apply, discontinue investigation and mail promoter Letter 1866. RA/Officer
F Outreach, Education and Promoter Monitoring Activities
1. At any point during the investigation consideration should be made to contact/coordination with either or both the Rapid Response Team and TEC for assistance in: RA/Officer and Manager
a. Tool Kits
b. Outreach Activities
c. New Release
d. Coordination with operating divisions
2. Consider referral to the Director of Professional Responsibility. RA/Officer and Manager
3. Insure news releases reach local media outlets. RA/Officer

Sample Interview Questions for Promoter and/or Preparer

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Sample Interview Questions for Sub-Promoters and/or Co-Promoters

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Sample Interview Questions for Participants

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Sample Pattern Letter - Penalty Report

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Case Closing Job Aid Completed Investigation

Group Steps Workpaper Ref or Date

Note:

The steps in this job aid apply to all promoter penalty cases that are closed where an injunction was secured and/or promoter penalties are being assessed.

1 Verify the promoter's last known address is the address shown on Master File. See Rev. Proc. 2010-16, IRB. 2010-19 and Treas. Reg. 301.6212-2 for the definition of last known address.
2 If necessary, update the address on Master File using Form 2363, Master File Entity Change. On Form 2363 complete the following items:
At the top of the form, enter the promoter’s name.
On the left side of the form, enter the name control, TIN, (check the box for SSN or EIN), and place a check mark next to Transaction Code 014 (address change).
On the right side of the form, enter the new address.
Complete the bottom of the form (prepared by, org. symbols, area office, and telephone number).
Fax the form to Centralized Case Processing (CCP) – SB/SE use 901-786-7106, LB&I use 801-620-2103, all others use 859-669-2674.
Retain a copy of the form in the file.

Note:

The campus will issue a notice of penalty assessment to the promoter. It is important that this notice is issued to the last known address of the promoter (as defined in the Treasury Regulations). The Form 2363 needs to be sent to case processing as soon as possible so the address on Master File is updated before the campus sends the notice of assessment. It may be necessary to delay closing the case for one or two cycles (weeks) to allow the new address to post to Master File.

3 If penalties are being asserted, you must verify that there is an entity module established for the individual or entity on IDRS. If there is not (in the case of a non-filer) you will need to create one. To do so, you must properly complete a Form 2363 and fax it to CCP - (SB/SE use 901-786-7106, LB& I use 801-620-2103) for processing before closing your case.
Request an IMFOLE, BMFOLE for the individual/entity you are planning to assert penalties on.
If the research shows no record, then a MF entity must be established using Form 2363, checking either IMF or BMF at top left of the form and the TC 000 box. Input the promoter, preparer or entity’s complete name and address, and TIN. Complete the originator information as explained in step 2 above. Fax to CCP.
This will create a module and allows the penalty to be assessed.
4 If there is no injunction, or there is an injunction but no penalties, prepare a memorandum for the case file to explain the reasons either for not securing an injunction or for not asserting penalties. The memorandum should contain the opinion of Counsel assigned to the promoter investigation, and the opinion of either the IMT SPA or IMT Counsel (if the case is covered by an IMT) on the decision not to pursue an injunction or penalties.
5 For parallel investigations, contact CI to make sure the penalty assessment will not conflict with the criminal case.

Note:

Check ALL the promoter’s modules on IDRS for Z freezes or TC 914s. These must be removed prior to closing your case or your penalties will not assess. Contact CI if any of these conditions exist to correct.

It may be necessary to delay closing the case until all CI freeze codes or TC codes have been reversed.
6 If there is an injunction, contact the Department of Justice to ensure penalty assessment will not conflict with the injunction case.
7 Organize and index the workpapers.
8 Following local procedures, secure the approval of the group manager to assess the penalties, and document this approval in the case file.
9 Report writing: prepare the penalty report and computation that will be closed with the case (see Lesson 12 of the Abusive tax Promotions text and IRM 4.32.2.11.8, Penalty Case Processing Procedures). Then prepare the copy of the report and penalty computation that will be provided to the promoter or preparer. Review the penalty report and remove any personally identifiable information, inappropriate disclosures, or other information that is not necessary to provide an explanation of the determination of the investigation and an explanation of the penalty assessment to the person against whom the penalty will be assessed. See IRM 4.32.2.7 and IRM 4.32.2.11 for additional information on this topic. Seek assistance from Counsel regarding material to remove.
10 Prior to closing the case, the examiner must establish on ERCS each tax year for each person and entity that will be assessed a penalty. The year of the penalty assessment is determined as follows:
IRC 6700 – the year the activity occurs
IRC 6701 – the year to which the document relates
Use Form 5345-D, Examination Request – ERCS, to establish each tax year there will be a penalty assessed:
IRC 6700 penalty: use MFT P6 and Activity Code 593
IRC 6701 penalty: use MFT P7 and Activity Code 594
Use the tracking code and project code that have been assigned, if any

Note:

Any years currently on ERCS that will have no penalty assessments will be closed at the same time as the years with penalty assessments. Prepare a Form 8278 for the year and MFT/activity code being closed showing -0- penalty amount to close that year.

11 Prepare a separate Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, for each year for which an ERCS database was established. Always use the current version of the form. Complete the following items on this form:
Item 1 The name of the promoter or entity.
Item 2 The current address of the promoter or entity shown in Item 1.
Item 3 Check the appropriate MFT box (MFT 13 for an entity; MFT 55 for an individual).
Item 4 Place an X for a penalty that has no assessment statute (e.g. IRC 6700 or IRC 6701 penalties); otherwise leave blank.
Item 5 Enter the year.
Item 6 Enter the assessment statute date for the penalty; leave blank if there is no assessment statute (Item 4 must have an X if there is no assessment statute).
Item 7 Enter the TIN of the promoter or entity shown in Item 1.
Item 8 Check the appropriate box.
Item 9 In column C (number of violations), enter the number of penalties; for IRC 6700 penalties containing a false tax statement after October 22, 2004 (i.e. the penalty is computed on 50 percent of gross income), the number of penalties is 1.
In Column D (amount assessed), enter total dollar amount of penalties to be assessed (for discontinuations the amount is -0-).

Note:

Columns E and F are only used when abating penalties.

Items 10a/11a Completed by the agent (signature required).
Items 10b/11b Completed by the group manager (signature required).
Item 12 Enter the group code.
Item 13 Enter contact telephone number in case there are questions.
12 Send a copy of each signed Form 8278 to the LDC group manager to record the penalty information in the LDC database. You may use the *LDC e-mail address to do this or fax them to 949-389-5083.
Send a copy of each signed Form 8278 to the local AT Collection group or the AT revenue officer assigned to the penalty case. Also provide any information regarding assets or levy sources that will assist with the collection of the penalty assessments.
13
14 Review IRM 4.32.2.7, Promoter Investigation Guidelines. Hold closing conference to discuss report and penalty explanation as appropriate.
15 Prepare the cover letter for the report and penalty explanation to be sent to the promoter, if necessary. See Exhibit 4.32.2-11 for a pattern letter that can be used for this purpose. With the approval of Counsel, the pattern letter can be modified to suit the business needs of the case.
16 Send the cover letter, report and the penalty explanation to the last known address of the promoter, if necessary. Retain a copy of the package as mailed in the case file.
17 Prepare Form 3198, Special Handing Notice, and attach to the outside of the penalty case file. In additional to the regular entries on this form, complete the following items:
Just below the Business Unit box, check the "Other" box and write-in "6700 [or 6701] Penalties – send to Memphis CCP" .
If Form 2363 was sent to CCP to update the person’s address, check the box in the taxpayer name section and include a copy of Form 2363 in the case file. Note on the workpaper copy the date it was faxed or sent to CCP. If appropriate, also note that Form 3177 was sent to CCP in same box.
In the Special Features section:
Check the "Civil Penalties (Form 8278)" box.
Check the Other Instructions box and type write the following: "FILE ALL PENALTY CASE WORKPAPERS USING FORM 8278 DLN" .
At the bottom of the first page check the "Forward to CCP" box.
Complete the case information section:
Enter the tax period(s) that are to be closed.
Enter penalty MFT (P6 for 6700, P7 for 6701, P0 for 6707, P8 for 6708).
Disposal Code 12.
Penalty section (6700 or 6701); leave blank if no penalty is to be assessed in that year.
Penalty amount: Enter the amount shown on Form 8278; leave blank if no penalty is to be assessed in that year.
On the second page of the form, in the "Letter Instructions for CCP" area, check the "No letter required to be sent by CCP" box.
18

Note:

You can highlight these items on the printed Form 3198 to assist CCP with locating this information.

19 If a person is a practitioner under the jurisdiction of the Office of Professional Responsibility (e.g. attorney, CPA, enrolled agent, enrolled actuary) and a penalty is asserted under IRC 6649, IRC 6695(f) (negotiating a check), IRC 6700, or IRC 6701, a referral to OPM is mandatory. Form 8484, Report of Suspected Practitioner Misconduct, can be used to make the referral. See IRM 20.1.6.12.3.
20 On ERCS, update the Status Code to 51 for each closed year. Use Disposal Code 12 (Other).
21 Follow local procedures to close the case to Memphis Campus Case Processing.

Note:

30 days after closing the case the revenue agent should follow-up on ERCS to make sure the case goes to Status 90 (closed).

Case Closing Job Aid Discontinuations

Group Steps Workpaper Ref. or Date

Note:

The steps in this job aid apply to promoter investigations, other than surveys and discontinued w/ minimal development, that are closed without either an injunction or a penalty assessment, regardless of whether or not the promoter was notified of the investigation.

1 Discuss the case with Area Counsel before discontinuing the case.
2 If the case is covered by an IMT, discuss discontinuing the case with the IMT SPA or IMT counsel.
3 Contact the LDC SPA listed on the authorization memo to discuss discontinuing the case. If there isn’t one, go to the ATTI LDC Contacts webpage to find the appropriate contact.
4 Organize and index the workpapers
5 Prepare Form 4665, Report Transmittal, to provide a brief explanation why the case is being discontinued, the investigative steps taken to date, Counsel’s opinion on the discontinuation, the opinion of the IMT (if applicable), and why an injunction or penalties cannot be pursued.
6 The group manager signs Form 4665 to acknowledge the decision to discontinue the case.
7 For parallel investigations, contact CI and secure concurrence to discontinue the case. Inform CI if the promoter will receive a discontinuance letter.
For parallel investigations, if CI advises not to send the discontinuance letter to the promoter, update the case to Status 16 (group suspense) on ERCS. The penalty case files, including the workpapers and supporting documentation, must be maintained in the group until CI concurs with sending the discontinuation letter to the promoter.
The agent and group manager should continue to have quarterly six-way conferences and to request that CI concur with sending the discontinuation letter.
8 When CI concurs with sending the discontinuation letter, update the case to Status 12 (started) on ERCS and continue following the steps in this job aid.
9 If the IRS notified the person of the investigation, prepare Letter 1866, Discontinuance Letter, to send to the promoter. Always use the current version of this letter. If the published letter does not meet the business needs of the case, the letter may be modified with the approval of Counsel.
10 If required, send Letter 1866 to the last known address of the promoter.
11 If necessary, update the promoter’s address on Master File using Form 2363, Master File Entity Change, (retain a copy in the case file and fax form to CCP before closing the case (SB/SE use 901-786-7106, LB& I use 801-620-2103). Complete the following items:
At the top of the form, enter the promoter’s name.
On the left side of the form, enter the name control, TIN, (check the box for SSN or EIN), and place a check mark next to Transaction Code 014 (address change).
On the right side of the form, enter the new address.
Complete the bottom of the form (prepared by, org. symbols, area office, and telephone number).
12 You must verify that there is an entity module established for the individual or entity on IDRS. If there is not (in the case of a non-filer) you will need to create one. To do so, you must properly complete a Form 2363 and fax it to CCP (SB/SE use 901-786-7106, LB& I use 801-620-2103) for processing before closing your case.
Request an IMFOLE or BMFOLE for the individual/entity you are planning to assert penalties on.
If the research shows no record, then a MF entity must be established using Form 2363, checking either IMF or BMF at top left of the form and the TC 000 box. Input the promoter, preparer or entity’s complete name and address, and TIN. Complete the originator information as explained in step 2 above. Fax to CCP.
This will create a module and allows the penalty to be assessed.
13 Prepare Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, as follows so the case file (workpapers) can be filed at the campus. Always use the current version of the form. Complete the following items:
Item 1 The name of the promoter or entity.
Item 2 The current address of the promoter or entity shown in Item 1.
Item 3 Check the appropriate MFT box (MFT 13 for an entity; MFT 55 for an individual).
Item 4 Place an X for a penalty that has no assessment statute (e.g. IRC 6700 or IRC 6701 penalties); otherwise leave blank.
Item 5 Use the year that is established on ERCS.
Item 6 Enter the assessment statute date for the penalty; leave blank if there is no assessment statute (Item 4 must have an X if there is no assessment statute).
Item 7 Enter the TIN of the promoter or entity shown in Item 1.
Item 8 Check the appropriate box.
Item 9 In column C (number of violations), leave blank.
In Column D (amount assessed), enter 0.00.

Note:

Columns E and F are only used when abating penalties.

Items 10a and 11a Completed by the agent (signature required).
Items 10b and 11b Completed by the group manager (signature required).
Item 12 Enter the group code.
Item 13 Enter contact telephone number in case there are questions.
14 Using encrypted e-mail, send an electronic copy of the completed Forms 4665 and 8278 to the SB/SE LDC group manager. You may use the *LDC e-mail address to do this, or fax them to 949-389-5083.
15 Prepare Form 3198, Special Handing Notice. In addition to the regular entries on this form, complete the following items:
Just below the Business Unit box, check the "Other" box and write-in "6700 [or 6701] Penalties – send to Memphis CCP" .
If Form 2363 was sent to CCP to update the person’s address, check the box in the taxpayer name section and include a copy of Form 2363 in the case file.
In the Special Features section:
Check the "Civil Penalties (Form 8278)" box
Check the "Other Instructions" box and type write the following: "FILE ALL PENALTY CASE WORKPAPERS USING FORM 8278 DLN" .
At the bottom of the first page check the "Forward to CCP" box.
Complete the case information section:
Enter the tax period(s).
Enter penalty MFT (P6 for 6700, P7 for 6701).
Disposal Code 02.
Penalty section (6700 or 6701).
Penalty Amount: 0.00.
On the second page of the form, in the "Letter Instructions for CCP" area, check the "No letter required to be sent by CCP" box.

Note:

You can highlight these items on the printed Form 3198 to assist CCP with locating this information.

16 Update the Status Code to 51 on ERCS.
17 If the promoter is under the jurisdiction of the Office of Professional Responsibility (e.g. attorney, CPA, enrolled agent), prepare an information referral to the Office of Professional Responsibility if required.
18 Follow local procedures to close the case to Memphis Campus Case Processing.

Note:

30 days after closing the case the revenue agent should follow-up on ERCS to make sure the case goes to Status 90 (closed).

Potential Descriptions for Decision to Discontinue Investigation
Insufficient evidence or information to support promoter/preparer involvement in the ATAT activity
Promotional activity not abusive in nature
No current promoter/preparer activity found
No recurrence of promoter/preparer conduct. No evidence of contempt.
Sub promoter/associate found not materially involved
Participants adjusted but insufficient evidence to support injunction or penalties on promoter/preparer
Field workload resources
Limited field resources or limited specialist resources (identify which one)
Criminal conviction and/or sentenced to substantial jail time
Serious health issues
Deceased
Unable to locate
Currently resides outside of the US. If promoter/preparer re-enters the US, will resume investigation
Referral to Counsel/DOJ resulted in dismissal or case was returned
IRC 6694/IRC 6695 penalties only. No injunction or IRC 6700/IRC 6701 penalties

Case Closing Job Aid Survey

Group Steps Workpaper Ref. or Date

Note:

The steps in this job aid apply to promoter investigations that are closed without either an injunction or penalty assessment, as a survey or discontinuation, no promoter contact and minimal developmental work (less than 10 hours generally).

1 Discuss the case with Area Counsel before discontinuing the case.
2 If the case is covered by an IMT, discuss discontinuing the case with the IMT SPA or IMT counsel.
3 Contact the LDC SPA listed on the authorization memo to discuss discontinuing the case. If there isn’t one, go to the ATTI LDC webpage to find the appropriate contact.
4 Organize and index any workpapers.
5 Prepare Form 4665, Report Transmittal, to provide a brief explanation why the case is being discontinued, the investigative steps taken to date, Counsel’s opinion on the discontinuation, the opinion of the IMT (if applicable), and why an injunction or penalties cannot be pursued.
6 The group manager signs Form 4665 to acknowledge the decision to discontinue the case.
7 For parallel investigations, contact CI and notify them of decision to discontinue the case.
8 A copy of the signed Form 4665 is sent by e-mail to the SB/SE LDC group manager. You may use the *LDC Outlook mailbox address to do this or fax the form to 949-389-5083.
9 Update case to Status 41 (PSP Suspense).
10 Use the most appropriate disposal code:
Insufficient information – Disposal Code 31
Established in error – Disposal Code 33
Deceased – Disposal Code 39
Cannot locate – Disposal Code 40
Other (age, health, no current activity or any other reason) – Disposal Code 39
11 Use Form 3210, Document Transmittal, to send admin file and signed Form 4665 to your Area PSP AT Coordinator.

Case Closing Job Aid Transfers

Group Steps Workpaper Ref. Or Date Compl.

Note:

The steps in this job aid apply to transfer of a promoter investigation from one Area to another.

1 Discuss the need to transfer with the LDC Group Manager or SPA to insure that the receiving Area is aware and willing to accept the case.
2 If the case is covered by an IMT, discuss transferring the case with the IMT SPA or IMT counsel.
3 Organize and index any workpapers.
4 Prepare Form 4665, Report Transmittal, to provide a brief explanation why the case is being transferred, the investigative steps taken to date, the opinion of the IMT (if applicable), and identify the Area the case is being sent to.
5 The group manager signs Form 4665 to acknowledge the decision to transfer the case.
6 For parallel investigations, contact CI and notify them of decision to transfer the case.
7 Update case to Status 41 (PSP Suspense).
8 Use Disposal Code 30 – transfer out of area.
9 Use Form 3210, Document Transmittal, to send admin file and signed Form 4665 to your Area PSP AT Coordinator.

Case Closing Job Aid Promoter Penalty Claim Allowed

Steps for Promoter Penalty Claims Allowed in Full or in Part Workpaper Ref or Date
1 Use Form 5345-D, Examination Request – ERCS, to establish each tax year there was a claim filed:
IRC 6700 penalty: use MFT P6 and Activity Code 593.
IRC 6701 penalty: use MFT P7 and Activity Code 594.
Status Code is 19 and Source Code is 99.
Use the tracking code and project code from the original case, if any.
2 Secure a current transcript of the penalty account (MFT 55 for IMF, MFT 13 for BMF). Verify that Transaction Code 470 Closing Code 95 was input. This will cause a stay in collection activity while the claim is addressed. If there is no TC 470 for a year, complete Form 3177, Notice of Action for Entry on Master File. E-mail to Collection CCP Campus at *CTR PHI CS GCP. Document action sheet. Follow up to insure transaction code posts correctly. Entries to complete the form are:
Complete the header information with appropriate agent info, TP data.
In blank box at bottom, enter 470.
Write in – "TP claim pending CC 95" .
Enter the IRC section for the penalty being protested.
Enter the appropriate MFT (55 for IMF, 13 for BMF).
Enter the tax period.
Complete a separate form for each year that a claim was filed.
3 Review file to determine basis for claim. If necessary, contact promoter/preparer to discuss.
4 Make determination and write workpaper(s).
Prepare and mail a closing letter to the taxpayer. Use Letter 4666 for full allowance, Letter 4667 for partial allowance.

Note:

Partial allowance letter may have to be modified if TP does not have time to file suit (it has been more than 6 months and 30 days since claim was filed). Allow TP time to respond. For additional assistance, contact LDC penalty claims coordinator at 949-389-4857.

Form 3363 and Form 2297, and the letters associated with these forms (e.g. Letter 569) are not used for promoter penalty claim cases.
5 Prepare Forms 8278:
Prepare a separate Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, for each year of the claim. Always use the current version of the form. Complete the following items on this form:
Item 1 The name of the promoter or entity.
Item 2 The current address of the person or entity shown in Item 1.
Item 3 Check the appropriate MFT box (MFT 13 for an entity; MFT 55 for an individual).
Item 4 Place an X for a penalty that has no assessment statute (e.g. IRC 6700 or IRC 6701 penalties).
Item 5 Enter the year.
Item 6 Leave blank (Item 4 must have an X).
Item 7 Enter the TIN of the promoter or entity shown in Item 1.
Item 8 Check the appropriate box.
Item 9 In column C (number of violations), enter the number of penalties; for IRC 6700 penalties containing a false tax statement after October 22, 2004 (i.e. the penalty is computed on 50 percent of gross income), the number of penalties is 1.
In Column E (amount abated), enter total dollar amount of penalties to be abated in parenthesis. Please insure that the amount abated does not exceed the amount originally assessed.
In Column F, enter the penalty reason code. See IRM 20.1.1-2 for a list of appropriate PRCs and explanations.
Items 10a and 11a Completed by the agent (signature required).
Items 10b and 11b Completed by the group manager (signature required).
Item 12 Enter the group code.
Item 13 Enter contact telephone number in case there are questions.
6 Fax a copy of each signed Form 8278 to the LDC claims coordinator to record the claim determination in the LDC database. The fax number is 949-389-5083.
7 Send a copy of each signed Form 8278 to the local AT Collection group or the AT revenue officer assigned to the penalty case. Also provide any information regarding assets or levy sources, if discovered, that will assist with the collection of the penalty assessments, if any, after the suspension period ends.
8 Prepare case for closure from the group.
Agreed (abated in full or in part and full paid) – Close the case to the Memphis campus.
Disposal Code is 03.
Status Code is 51.
Send case to CCP.

Note:

Closing steps below are same for Agreed and No Response or No Appeals request received, except for disposal code.

No Response or No Appeals Request Received (abated in part and TP did not respond to closing letter) - close the claim case to the Memphis campus.
Disposal Code is 12.
Status Code is 51.
Send case to CCP.
LB & I cases are sent to
IRS – Centralized Case Processing
Scowcroft Building, Mail Stop 4030,
1973 North Rulon White Blvd.
Ogden, UT 84404.
Prepare Form 3177, Notice of Action for Entry on Master File, to post TC 472, CC 95 for each year of the claim. E-mail to Collection CCP campus at *CTR PHI CS GCP. Document action sheet.
9 Prepare Form 3198, Special Handing Notice, and attach to the outside of the penalty case file. In additional to the regular entries on this form, complete the following items:
Just below the Business Unit box, check the "Other" box and write-in "6700 [or 6701] Penalties Claim Case – Send to CCP" .
If Form 2363 was sent to CCP to update the promoter’s address, check the box in the TP name section and include a copy of form in the case file. Note on the workpaper copy the date it was faxed or sent to CCP. If appropriate, also note that Form 3177 was sent to CCP in same box.
In the Special Features section:
Check the "Civil Penalties (Form 8278)" box.
Check the "Other Instructions" box and write the following: "FILE ALL PENALTY CASE WORKPAPERS USING NEW FORM 8278 DLN" .
At the bottom of the first page, check the "Forward to CCP" box.
Complete the case information section:
Enter the tax period(s) that are to be closed.
Enter penalty MFT (P6 for 6700, P7 for 6701).
Disposal Code 03 (agreed), or 12 (partial abatement no response).
Penalty section (6700 or 6701).
Adjustment amount: Enter the amount shown on Form 8278.
On the second page of the form, in the "Letter Instructions for CCP" area, check the "No letter required to be sent by CCP" box.

Note:

You can highlight these items on the printed Form 3198 to assist CCP with locating this information.

10 Prepare case for closure from the group. – Appeals Request
Prepare report of unagreed issues for Appeals. Rebut promoter’s position as stated in the Appeals request.
Close the claim case to the local Appeals office. Disposal Code for Appeals is 07. Update Status Code to 81. Send to local Appeals Office.
11 Prepare Form 3198, Special Handing Notice, and attach to the outside of the penalty case file. In additional to the regular entries on this form, complete the following items:
Just below the Business Unit box, check the "Other" box and write-in "6700 [or 6701] Penalties Claim Case – Send to Appeals" .
If Form 2363 was sent to CCP to update the person’s address, check the box in the TP name section and include a copy of form in the case file. Note on the workpaper copy the date it was sent to CCP. If appropriate, also note that Form 3177 was sent to CCP in same box.
In the Special Features section:
Check the "Civil Penalties (Form 8278)" box.
Check the "Other Instructions" box and write the following: "FILE ALL PENALTY CASE WORKPAPERS USING NEW FORM 8278 DLN" .
Also note "Form 3177, Notice of Action for Entry on Master File to post TC 472, CC 95 is completed by Appeals when they have concluded their actions and are closing the case to files, and e-mailed to *CTR PHI CS GCP for processing" .
Complete the case information section:
Enter the tax period(s) that are to be closed.
Enter penalty MFT (P6 for 6700, P7 for 6701).
Disposal Code 07 (Appeals request).
Penalty section (6700 or 6701).
Adjustment amount: Enter the amount shown on Form 8278.

Note:

You can highlight these items on the printed Form 3198 to assist CCP with locating this information.

Case Closing Job Aid Promoter Penalty Claim Disallowed In Full

Steps for Promoter Penalty Claim Disallowed In Full Workpaper Ref. or Date
1 Use Form 5345-D, Examination Request – ERCS, to establish on ERCS each tax year there was a claim filed:
IRC 6700 penalty: use MFT P6 and Activity Code 593.
IRC 6701 penalty: use MFT P7 and Activity Code 594.
Status Code is 19 and Source Code is 99.
Use the tracking code and project code from the original case, if any.
2 Secure a current transcript of the penalty account (MFT 55 for IMF, MFT 13 for BMF). Verify that Transaction Code 470 Closing Code 95 was input. This will cause a stay in collection activity while the claim is addressed. If there is no TC 470 for a year, complete Form 3177, Notice of Action for Entry on Master File. E-mail to Collection CCP campus at *CTR PHI CS GCP Document action sheet. Follow up to insure transaction code posts correctly. Entries to complete the form are:
Complete the header information with appropriate agent info, and TP data.
In blank box at bottom, enter 470.
Write in "TP claim pending CC 95" .
Enter the IRC section for the penalty being protested.
Enter the appropriate MFT (55 for IMF, 13 for BMF).
Enter the tax period.
Complete a separate form for each year that a claim was filed.
3 Review file to determine basis for claim. Contact the promoter/preparer to discuss as necessary.
4 Make determination and write workpaper(s).
Disallow claim in full -Send closing letter.

Note:

There are different letters to use based on length of time since the taxpayer received their notice and filed their claim.

Use Letter 4670 if it has been less than 6 months and 30 days since the taxpayer filed their claim, use Letter 4662 if it has been more than 6 months and 30 days. Letters are available from the forms repository.
For additional assistance, contact the LDC penalty claims coordinator at 949-389-4857.
Form 3363 and Form 2297, and the letters associated with these forms (e.g. Letter 569) are not used for promoter penalty claim cases.
5 Prepare Forms 8278
Prepare a separate Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, for each year of the claim. Always use the current version of the form. Complete the following items on this form:
Item 1 The name of the promoter or entity.
Item 2 The current address of the promoter or entity shown in Item 1.
Item 3 Check the appropriate MFT box (MFT 13 for an entity; MFT 55 for an individual).
Item 4 Place an X for a penalty that has no assessment statute (e.g. IRC 6700 or IRC 6701 penalties).
Item 5 Enter the year.
Item 6 Leave blank (Item 4 must have an X)
Item 7 Enter the TIN of the promoter or entity shown in Item 1
Item 8 Check the appropriate box
Item 9 In Column E enter (0) for full disallowance.
In the "Remarks" block enter "Claim Disallowed in FULL" .
Items 10a and 11a Completed by the agent (signature required).
Items 10b and 11b Completed by the group manager (signature required).
Item 12 Enter the group code.
Item 13 Enter contact telephone number in case there are questions.
6 Fax a copy of each signed Form 8278 to the LDC claims coordinator to record the claim determination in the LDC database. The fax number is 949-389-5083.
Send a copy of each signed Form 8278 to the local AT Collection group or the AT revenue officer assigned to the penalty case. Also provide any information regarding assets or levy sources, if discovered, that will assist with the collection of the penalty assessments, if any, after the suspension period ends.
7
8 Prepare case for closure - No Response or No Appeals Request Received
Close the claim case to the Memphis campus. Disposal Code for full disallowance is 01 – No change. Status Code is 51. Send to CCP.
LB & I cases are sent to:
IRS – Centralized Case Processing
Scowcroft Building, Mail Stop 4030
1973 North Rulon White Blvd.
Ogden, UT 84404
9 Prepare Form 3177, Notice of Action for Entry on Master File, to post Transaction Code 472, Closing Code 95 for each year of the claim as per the instructions in step 2. This will release the stay on Collections. E-mail to Collection CCP campus at *CTR PHI CS GCP. Document action sheet.
10 Prepare Form 3198, Special Handing Notice, and attach to the outside of the penalty case file. In additional to the regular entries on this form, complete the following items:
Just below the Business Unit box, check the "Other" box and write-in "6700 [or 6701] Penalties Claim Case – Send to CCP" .
If Form 2363 was sent to CCP to update the promoter’s address, check the box in the taxpayer name section and include a copy of Form 2363 in the case file. Note on the workpaper copy the date it was faxed or sent to CCP. If appropriate, also note that Form 3177 was sent to CCP in same box.
In the Special Features section:
Check the "Civil Penalties (Form 8278)" box.
Check the "Other Instructions" box and write the following: "FILE ALL PENALTY CASE WORKPAPERS USING NEW FORM 8278 DLN" .
At the bottom of the first page, check the "Forward to CCP" box.
Complete the case information section:
Enter the tax period(s) that are to be closed.
Enter penalty MFT (P6 for 6700, P7 for 6701).
Disposal Code 01 (full disallowance).
Penalty section (6700 or 6701).
Adjustment amount: Enter -0- for each year.
On the second page of the form, in the "Letter Instructions for CCP" area, check the "No letter required to be sent by CCP" box.

Note:

You can highlight these items on the printed Form 3198 to assist CCP with locating this information.

11 Prepare case for closure - Requests for Appeals
Prepare report of unagreed issues for Appeals. Rebut promoter’s position as stated in the Appeals request.
Close the claim case to the local Appeals office. Disposal Code for Appeals is 07. Update Status Code to 81. Send to local Appeals Office.
Prepare Form 3198, Special Handing Notice, and attach to the outside of the penalty case file. In additional to the regular entries on this form, complete the following items:
Just below the Business Unit box, check the "Other" box and write-in "6700 [or 6701] Penalties Claim Case – Send to CCP" .
If Form 2363 was sent to CCP to update the promoter’s address, check the box in the taxpayer name section and include a copy of Form 2363 in the case file. Note on the workpaper copy the date it was faxed or sent to CCP. If appropriate, also note that Form 3177 was sent to CCP in same box.
In the Special Features section:
Check the "Civil Penalties (Form 8278)" box
Check the "Other" Instructions box and write the following: "FILE ALL PENALTY CASE WORKPAPERS USING NEW FORM 8278 DLN" .
At the bottom of the first page, check the "Forward to CCP" box.
Complete the case information section:
Enter the tax period(s) that are to be closed.
Enter penalty MFT (P6 for 6700, P7 for 6701).
Disposal Code 07 (Appeals request).
Penalty section (6700 or 6701).
Adjustment amount: Enter -0- for each year.
On the second page of the form, in the "Letter Instructions for CCP" area, check the "No letter required to be sent by CCP" box.

Note:

You can highlight these items on the printed Form 3198 to assist CCP with locating this information.

Participant List Template

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