4.71.25 EP Exam Fraud Procedures

Manual Transmittal

December 04, 2018

Purpose

(1) This transmits revised IRM 4.71.25, Employee Plans Examination of Returns, EP Exam Fraud Procedures.

Background

IRM 4.71.25 provides guidance and information to assist agents in developing fraud referrals on fraud related activities found during EP examinations.

Material Changes

(1) Added and replaced terms throughout manual section and added clarifying language surrounding those terms as warranted, to reflect changes in personnel.

Effect on Other Documents


This supersedes IRM 4.71.25 dated September 21, 2017.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(12-04-2018)


Catherine L Jones
Acting Director, Employee Plans
Tax Exempt and Government Entities

Program, Scope and Objectives

  1. Purpose: IRM 4.71.25, Employee Plans Examination of Returns, EP Exam Fraud Procedures, provides the basic examination procedures that will enable Employee Plans (EP) agents and their managers to properly process EP case files when fraud indicators are present. It provides guidance and information to assist agents in developing fraud referrals on fraud related activities found during EP examinations.

  2. Audience: This IRM provides procedures for agents, managers, and support staff in EP Exam.

  3. Program Owner: Director, EP Examination sets the program for the EP examination program.

  4. Program Authority: EP Examination’s authority to resolve issues is derived from its authority to make determinations of tax liability under IRC 6201.

Authority

  1. EP Examination’s authority to resolve issues is derived from its authority to make determinations of tax liability under IRC 6201. EP Examination is the division designated to determine if a retirement plan is qualified under IRC 401, and the underlying regulations, and thus, exempt from tax under IRC 501.

Program Controls

  1. Tax Exempt Quality Measurement System (TEQMS) is the quality control system used to oversee the entire examination program. For more information on TEQMS, see IRM 4.71.15.1.3, Program Controls and Program Reports - TEQMS.

  2. All examinations will be done in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).

    Note:

    Additional information may be found on the irs.gov website at www.irs.gov/taxpayer-bill-of-rights.

Acronyms, Abbreviations and Forms

  1. This manual uses the following acronyms and references the following forms.

    Acronyms and Abbreviations

    Acronym Definition
    AIMS Audit Information Management System AIMS
    ASED Assessment Statute Expiration Date
    AUSA Assistant U.S. Attorney
    BMF Business Master File
    CI Criminal Investigation
    CP&C Compliance Planning & Classification
    DOJ Department of Justice- Tax Division
    EFU Exam Functional Unit (e.g., SB/SE, LB&I, or W&I)
    EP Employee Plans
    EPCRS Employee Plans Compliance Resolution System
    EP SME EP Exam Fraud Subject Matter Expert
    EPMF Employee Plans Master File
    FSU Fraud Suspense Unit (FSU)
    FTA Fraud Technical Advisor (SB/SE)
    IDRS Integrated Data Retrieval System
    IMF Individual Master File
    IRC Internal Revenue Code
    IRM Internal Revenue Manual
    LB&I Large Business and International
    LUQ Large, Unusual and Questionable
    MFT Master File Tax
    RAR Revenue Agent Report
    RCCMS Reporting Compliance Case Management System
    SSA Supervisory Special Agent (CI)
    SA Special Agent (CI)
    SAR Special Agent Report
    SB/SE Small Business/Self-Employed
    SOL Statute of Limitations
    TS Technical Services (SB/SE)
    W&I Wage and Investment

     

    Forms and Pubs

    Form Name
    895-EP Notice of Statute Expiration
    Form 990-T Exempt Organization Business Income Tax Return
    Form 1040 U.S. Individual Income Tax Return
    1041 U.S. Income Tax Return for Estates and Trusts
    Form 1120 U.S. Corporation Income Tax Return
    2797 Referral Report of Potential Criminal Fraud Cases
    Form 4549-E Income Tax Discrepancy Adjustments
    4665 Report Transmittal
    Form 5330 Return of Excise Taxes Related to Employee Benefit Plans
    Form 5464 Case Chronology Record
    Form 5500 Annual Return/Report of Employee Benefit Plan
    Form 5599 TE/GE Examined Closing Record
    Form 5666 TE/GE Referral Information Report
    6544 Request for Cooperating Examiner
    5772-EP EP Workpaper Summary
    6663 Numerical Pocket Commission Record
    8278 Assessment and Abatement of Miscellaneous Civil Penalties
    10498-A Joint Investigations Intent to Commence Civil Action
    10498-B Joint Investigations Intent to Solicit Consent to Extend Statute
    11660 Fraud Development Checksheet
    11661 Fraud Development Recommendation – Examination
    13308 Criminal Investigation Closing Report (Tax and Tax Related Only)
    14584 IRS-Criminal Investigation-Check for and Suspend Civil Activity Notification
    TDF 15-05.11 (catalog 56033J) Sensitive But Unclassified (SBU) Cover Sheet

     

Overview of Fraud Procedures

  1. The IRS Commissioners have consistently stressed the importance of the fraud referral program in meeting the mission of the Internal Revenue Service (IRS) to provide service to all taxpayers and to fairly administer the law.

  2. This IRM addresses the procedures Employee Plans (EP) employees should follow when fraud becomes an issue on an EP examination.

  3. In an effort to work toward the detection and deterrence of fraud in EP Examination (EP Exam), EP has combined resources with the Small Business/Self-Employed (SB/SE) National Fraud Program.

  4. The EP SME will serve as contact person jointly with the TE/GE Fraud Specialist and the SB/SE Fraud Technical Advisor (FTA).

  5. The EP SME, TE/GE Fraud Specialist, and FTA provide EP Exam agents and managers with guidance and assistance in developing cases with fraud potential.

  6. Unless stated otherwise, this IRM is written to provide instructions to EP agents.

  7. References to "agent" or "manager" in this section refer to EP Exam agents and their managers unless otherwise specified.

  8. IRM 25.1, Fraud Handbook, must be considered in conjunction with this IRM section since it encompasses a broad range of information regarding fraud that is not included in the procedures contained in this IRM.

  9. This IRM section is intended to provide supplemental information specific to fraud and fraud related activities in EP and is not intended to replace IRM 25.1, Fraud Handbook, or IRM 4.71.1, Employee Plans Examination of Returns, Overview of Form 5500 Procedures.

Fraud Development Procedures

  1. When indicators (signs or symptoms) of fraud are identified, initiate a discussion with your group manager and document your case chronology accordingly.

  2. There are numerous indicators of fraud that encompass income, expenses and deductions, books and records, taxpayer conduct, methods of concealment, and large, unusual and questionable (LUQ) items. A complete list is available in IRM 25.1.2.3, Indicators of Fraud.

  3. INCOME: common indicators of fraud for retirement plans include:

    • Assets shown as real estate or other assets when in fact it may be a commercial business or an income producing venture (legal or illegal).

    • Concealment of bank accounts, brokerage accounts, and other property.

    • Failure to deposit receipts to trust accounts (such as employee deferrals, employer contributions, rollovers, etc.).

    • Failure to file a tax return (such as Form 990-T, Exempt Organization Business Income Tax Return), especially for a period of several years although substantial amounts of taxable income were received.

  4. EXPENSES: common indicators of fraud for retirement plans include:

    • Annual funding of a defined benefit plan based upon unreasonable actuarial assumptions leading to excessive tax deductions.

    • Claiming fictitious deductions as retirement plan contributions or expenses of the trust.

    • Diversion of funds by trustees or fiduciaries of employee plans.

    • Failure to pay terminated and retired participants their benefits.

    • Fictitious or deceased participants receiving distributions from employee plans or the denial of the receipt of trust assets.

    • Improper expenses paid by trust officials.

    • Substantial amounts of personal expenditures paid with trust funds.

    • Substantial overstatement of retirement plan deductions or understatement of contributions (underfunded plans).

  5. BOOKS AND RECORDS: common indicators of fraud for retirement plans include:

    • Amounts on return, in books and other source records that do not reconcile.

    • Backdated or postdated plan documents, false applications for benefits, loans, hardship distributions or other false documents.

    • Checks made payable to third parties endorsed by plan fiduciaries or checks made payable to consultants and cashed by the plan fiduciaries or trustees.

    • Failure to keep adequate records, concealment/destruction of records, or refusal to make certain records available.

    • False statements used to obtain minimum funding waivers or determination letters, which may lead to a referral for examination.

  6. TAXPAYER CONDUCT: common indicators of fraud for retirement plans include:

    • Any breach of a fiduciary relationship, such as salary payments in excess of the amount indicated in the service provider agreement or the receiving of kickbacks related to some aspect of plan operation.

    • Attempts to hinder the examination.

      Example:

      Failure to answer pertinent questions, repeated cancellations of appointments, refusal to provide records, threatening potential witnesses including the agent, or assaulting the agent.

    • Attempts to bribe an agent.

    • Backdating of applications and related documents in order to qualify for tax deductions a year early.

    • Destruction of books and records, especially just after the start of the examination.

    • Fabricating documents in an attempt to substantiate false, material statements.

    • Failure to follow the advice of accountant, attorney or third party administrator.

    • Failure to make full disclosure of relevant facts to a return (including an information return) preparer.

    • False statement about a material fact involved in the examination.

    • Involvement by a convicted felon as a trustee or service provider to a retirement plan.

    • Involvement in prohibited transactions, as defined in IRC 4975.

    • Making false statements on Employee Plans Determination Letter Applications or on Forms 5500, Annual Return/Report of Employee Benefit Plan.

    • Submitting a false affidavit.

    • Transfer of assets for purposes of concealment or diversion of funds by officers, trustees or representatives.

    • Willful and intentional failure to execute pension plan amendments.

  7. METHODS OF CONCEALMENT: common indicators of fraud for retirement plans include:

    • Assets placed in the names of others rather than in the trust’s name.

    • Close relationship between parties to an asset transfer.

    • Failure to deposit contributions to the proper account.

    • Inadequacy of consideration related to asset purchases.

    • Transactions surrounded by secrecy.

    • Unexplained expenditure of currency coupled with loss of plan assets.

    • Use of secret bank accounts for diversion of trust assets or income.

    • Use of false names in transactions involving trusts.

    • Use of offshore transactions and bank accounts to disguise the true source and/or application of funds.

  8. Do not issue a report or offer another type of civil resolution to the taxpayer if fraud is suspected. For example, do not:

    1. Issue any type of examination report.

    2. Initiate resolution of the exam through the Employee Plans Compliance Resolution System (EPCRS).

    3. Solicit any type of delinquent return.

    4. Enter into a discussion about how to make the trust whole.

      Caution:

      Once the taxpayer perceives that a civil resolution has been offered, a criminal resolution is generally unavailable.

  9. If your manager agrees that there are indicators of fraud, contact the EP SME to get advice and to discuss the indicators of fraud.

    Reminder:

    Timely and appropriate actions are very important if the potential for fraud exists.

  10. If the EP SME concurs that there are indicators of fraud, then the EP SME will arrange a meeting with the local FTA to discuss the issue(s).

  11. If the FTA agrees that the potential for fraud exists, then the EP SME will arrange a four-way conference call or meeting with you, your manager, the EP SME and the FTA to discuss the case.

  12. If all parties agree that the case warrants fraud development, then you will need to prepare Form 11661, Fraud Development Recommendation – Examination, Attachment A, Indicators of Fraud, Attachment B, Background Information, Attachment C, Schedule of Monies, and Attachment D, Schedule of Documents Retained to Support Fraud, (or their equivalent). See IRM 4.71.25 Exhibits 1 through 5 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a completed Form 11661 and attachments.

    Note:

    Attachments A, B, C and D are available to help you prepare your summary of the indicators of fraud and case background, calculate tax due, and list documents obtained supporting fraud.

  13. Form 11661 and the four Attachments are available to help document information about the case and the indicators of fraud. Form 11661 is used to:

    1. Document FTA involvement

    2. Recommend that the agent place the case in Fraud Development status by updating the Automated Inventory Management System (AIMS) to status code 17 (Fraud Development Status)

    3. Recommend assertion of the civil fraud penalty under IRC 6663 and/or fraudulent failure to file penalty under IRC 6651(f)

    4. Return a case to AIMS status code 17 from AIMS status code 18 (Accepted by CI)

    5. Return a case to the prior AIMS status code 12 (Assigned, Taxpayer Contact)

  14. The completion of Form 11661 is mandatory. The use of the Attachments is optional, but strongly encouraged since they aid in the proper development of fraud.

    Note:

    The EP SME is available to assist with the preparation of these documents.

  15. Upon completion of Form 11661 and Attachments, forward these documents to your group manager for signature via secure email.

  16. Upon receipt of Form 11661, the group manager will review the form and any Attachments, and forward the signed Form 11661 along with the Attachments to the FTA and EP SME using secure email.

  17. Do not update the case into or out of AIMS status 17 (Fraud Development) without consulting the EP SME and the FTA. If a disagreement exists as to whether a case should or should not be placed in status 17, the ultimate decision rests with your group manager.

  18. The FTA recommends placing the case in status 17 by completing section 9a of Form 11661, and returning the signed form via secure email to the agent, the group manager and the EP SME. A copy of the FTA-signed Form 11661 must be sent to the TE/GE Fraud Specialist.

    Note:

    The cycle time of the case while in status 17 will be excluded from the cycle time that is reported for all case closures when the case is closed by Examinations Special Support and Processing (ESSP).

    Note:

    Timely action is required on all cases that are in status 17.

  19. A case will stay in status 17 as long as there is active involvement in an ongoing examination, or until a decision is made to do any of the following:

    1. Assert the civil fraud penalty, or the fraudulent failure to file penalty, or both (the case remains in status 17).

    2. Update the case on AIMS to status code 18, if Criminal Investigation (CI) accepts the criminal referral.

    3. Return the case on AIMS to status code 12 (Assigned, Taxpayer Contact).

      Reminder:

      A case should be returned to status 12 if it is determined that the potential for fraud no longer exists. The reason(s) and recommendation to return the case to status 12 should be documented by the FTA on Form 11661.

  20. A plan of action will be developed jointly between you, your manager, the EP SME and the FTA to identify the steps that will be used to develop and document the affirmative acts, or firm indicators, of fraud.

    1. The jointly developed plan of action is an integral part of fraud development.

    2. The plan of action sets out how you will establish that sufficient affirmative acts exist to confirm fraud.

    3. The plan of action will help guide the case to its appropriate conclusion in a timely manner.

    4. The jointly developed plan of action will specify any direct assistance the FTA will provide.

      Note:

      The role of the FTA is to advise or consult.

    5. Generally, an FTA will meet with you at your post of duty. This is preferable to telephone or email consultations, although these may be appropriate in certain cases.

  21. The FTA will provide a written plan of action to the agent in one of the following formats:

    • Form 11660, Fraud Development Checksheet

    • Page 2 of Form 11661, Plan of Action

    • Memoranda

      Note:

      See IRM 4.71.25 Exhibit 6 at IRM 4.71 - Employee Plans Examination Exhibits for a copy of Form 11660.

  22. Upon receipt of an approved Form 11661:

    1. Forward an electronic copy of the approved Form 11661 and all attachments to the EP SME and the TE/GE Fraud Specialist.

    2. Update the case to status 17 on AIMS (with your group manager's approval).

    3. Contact TE/GE Division Counsel and determine if a request of the original Form 5500 return(s) is necessary.

    4. Place a paper copy of Form 11661, all attachments and the written plan of action received from the FTA in the case file. These items should be indexed according to Form 5772-EP, EP Workpaper Summary, under T3, Referral. These documents should also be saved in the RCCMS Office Documents folder using the RCCMS Naming Convention contained in Exhibit 2 of IRM 4.71.3 at IRM 4.71 - Employee Plans Examination Exhibits.

    5. Proceed with the plan of action until affirmative acts of fraud are established or a determination is made that fraud is not an issue.

  23. Follow the procedures in IRM 4.71.25.3, Civil Fraud Penalties, if civil fraud is being pursued and IRM 4.71.25.4, Criminal Fraud, if criminal fraud is being pursued.

  24. Fraud development on an EP case may have an impact on other tax returns and warrant a collateral referral to Large Business and International (LB&I), Small Business/Self-Employed (SB/SE) or Wage and Investment (W&I), which are collectively referred to as Exam Functional Units (EFUs). See IRM 4.71.6.7, Referrals to Examination Functional Units.

  25. Cases in status 17 must be worked in a timely manner. Under no circumstances should you or your manager contact CI at this stage. Such contact may jeopardize the criminal case. See U.S. v. Tweel, 550 F.2d 297.

  26. At no time during an examination or the development of a fraud case will a taxpayer be told that a criminal investigation is being considered.

    1. If you are asked by the taxpayer or representative if a fraud referral is being considered or whether CI is involved, you must not give a false or deceitful response. See paragraph (1) of IRM 25.1.3.2, Preparation of Form 2797, for guidance on how to respond to this type of inquiry.

    2. The FTA and/or the EP SME are available to assist if disclosure becomes an issue.

  27. If you discover information that may include evidence of a potential non-tax federal criminal violation outside of IRS jurisdiction, you will report the information by memorandum through functional channels to the appropriate Disclosure Office. See IRM 11.3.28.7, IRS Initiated Disclosures of Return Information Concerning Non-Tax Criminal Violations and IRM 11.3.28.7.1, Disclosures of Return Information (Other than Taxpayer Return Information) Concerning Non-Tax Criminal Non-Tax Violations.

Civil Fraud Penalties

  1. Per IRC 6663, the civil fraud penalty is 75% of the portion of the tax underpayment attributable to fraud. If any portion of the underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud except for that portion of the underpayment which the taxpayer shows by a preponderance of evidence, is not attributable to fraud.

  2. Civil fraud penalty procedures are found in IRM 4.71.18.10, Civil Fraud and Fraudulent Failure to File penalties – IRC 6663 and IRC 6651(f). As mentioned in that IRM section, to prepare the case for penalty assessment, enter transaction code (TC) 320 and the amount of IRC 6663 penalties that are being assessed on Form 5599, Item 12– Penalties (+). See IRM 4.71.25 Exhibit 7 at IRM 4.71 - Employee Plans Examination Exhibits for an example of Form 5599 completed to reflect the assessment of civil fraud penalties.

  3. Per IRC 6651(f), if a taxpayer fails to file a tax return and it’s determined that the failure to file is fraudulent, the penalty for failure to file increases from 5% to 15% per month and the maximum penalty increases from 25% to 75%. This increase applies in cases involving the fraudulent failure to file tax returns such as:

    • Form 5330

    • Form 990-T

    • Form 1041

  4. The fraudulent failure to file penalty is also assessed on Form 5599 but is handled differently than the civil fraud penalty.

    1. Reference code 686 and the dollar amount of the IRC 6651(f) penalty are entered in item 15, Credit and Tax Computation Adjustments. See IRM 4.71.25 Exhibit 8 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a Form 5599 completed to reflect the assessment of fraudulent failure to file penalties.

    2. There should be no entries in Item 12 of Form 5599. This will allow ESSP to properly assess the penalty.

      Note:

      Do not prepare a Form 8278 for the assessment of this penalty.

Criminal Fraud

  1. When you establish that an affirmative act or firm indication of fraud exists, then suspend the examination, including any contact with the taxpayer and/or representative. Discuss the identified affirmative acts with your group manager, the EP SME and the FTA. Document your case chronology accordingly.

  2. If the FTA and the EP SME agree that the case meets criminal criteria, prepare Form 2797, with the Form 2797 attachment. See IRM 4.71.25 Exhibit 9 and Exhibit 10 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a completed Form 2797 and its attachment.

    Note:

    The FTA and the EP SME are available to assist with the preparation of Form 2797, if needed.

  3. Upon completion of the Form 2797, forward the form to your group manager for signature using secure email.

  4. Upon receipt of Form 2797 from the agent, the group manager will:

    1. Review the form in its entirety.

    2. Ensure that the proper PBC, SBC Area and group are entered.

    3. Approve the form.

    4. Electronically forward the form to the FTA for consideration.

    5. Retain a copy of the approved Form 2797 for the case file.

    6. Forward a copy of the signed form to the EP SME and the TE/GE Fraud Specialist via secure email.

      Note:

      The group manager will receive a final approved Form 2797 from the FTA manager via secure email when the form is sent to CI for consideration. The manager will forward a copy of the final approved Form 2797 to the agent, the TE/GE Fraud Specialist, and the EP SME via secure email when it is received.

  5. The FTA will:

    1. Review and approve the referral.

    2. Prepare a one-page narrative (used to describe additional facts and/or the fraud development process).

    3. If necessary, insert the narrative into Form 2797.

    4. Forward it to his or her group manager via secure email for consideration.

  6. The FTA group manager will:

    1. Review and approve the referral.

    2. Enter the FTA Management Control Number.

    3. Electronically forward it to the appropriate CI field office.

    4. Send a copy of the approved Form 2797 via secure email to the EP agent's group manager.

  7. Within ten days of receiving the Form 2797 from the FTA manager, CI will schedule a "ten-day conference" with you , your manager, CI’s special agent (SA), CI’s supervisory special agent (SSA) and the FTA.

    Note:

    The "ten-day conference" is a discovery meeting with CI where all relevant information is presented and discussed. CI’s preliminary decision to accept or decline the referral is based on the meeting.

    1. You and your manager are asked to have the EP SME included in the conference.

    2. The presence of the EP SME ensures that all relevant information is presented.

  8. After considering the facts presented in the "ten-day conference" , CI will schedule a "thirty-day conference" with you, your manager, the SA, the SSA and the FTA.

    1. You and your group manager are asked to have the EP SME included in the "thirty- day conference" .

    2. CI will provide its final decision to accept or decline the referral at this conference.

    Note:

    See IRM 25.1.3.3, Referral Evaluation, through IRM 25.1.3.5, Declined Criminal Referrals, for a description of CI’s evaluation process.

  9. You will forward a copy of the accepted or declined referral via secure email to the EP SME and the TE/GE Fraud Specialist.

  10. If CI accepts the referral, CI will:

    1. Complete the applicable lines of Form 2797 indicating the referral is "Accepted for Investigation" .

    2. Return the accepted Form 2797 via secure email to you and your group manager through the FTA’s group manager and FTA.

    3. Input a TC 914/-Z freeze on IDRS for all applicable modules.

  11. If CI accepts the referral, you or your manager will:

    1. Update the case to AIMS status code 18.

    2. Send a copy of the accepted Form 2797 via secure email to the EP SME and TE/GE Fraud Specialist

  12. If CI declines the criminal referral, CI will:

    1. Complete the applicable lines of Form 2797 indicating the referral is being "Declined Before Investigation" .

    2. Return the declined Form 2797 via secure email to you and your manager through the FTA’s group manager and FTA.

  13. If CI declines the criminal referral, it is essential that the reasons for the declination are fully explained. This information needs to be provided to the EP SME if he or she is not included in the "thirty-day conference" . You or your manager will send a copy of the declined Form 2797 to the EP SME and TE/GE Fraud Specialist via secure email.

  14. If criminal criteria are not met or CI declines the referral:

    1. The civil fraud procedures under IRM 25.1.6, Civil Fraud, and/or IRM 25.1.7, Failure to File, should be considered. Also, see IRM 4.71.25.3, Civil Fraud Penalties. Discuss this issue with your manager, EP SME and FTA.

    2. Resubmit Form 11661 to the FTA for his or her recommendation to assert either the civil fraud penalty or the fraudulent failure to file penalty. Send a copy of the FTA-approved Form 11661 to the EP SME and TE/GE Fraud Specialist.

      Note:

      The FTA and EP SME will assist with the development and/or write-up of the penalty, if necessary.

    3. These two penalties should also be considered if the criminal investigation is discontinued or upon completion of prosecution.

    4. If you will be developing and/or asserting either civil penalty then the case will be updated on AIMS back to status code 17.

  15. When CI discontinues or completes an investigation, civil penalties should be considered by the EP exam group. If it is determined that exam and civil penalty potential exists and the EP group manager agrees, the FTA will make a recommendation on the Form 11661 to update the case back to AIMS status code 17 while civil fraud or fraudulent failure to file penalties are being developed for consideration. Send a copy of the FTA-signed Form 11661 to the EP SME and TE/GE Fraud Specialist. See IRM 4.71.25.3 for civil fraud procedures.

  16. If it is determined that the potential for civil fraud no longer exists, the FTA will:

    1. Document on Form 11661 the reasons for the decision and will make the recommendation to update the case back to AIMS status code 12.

    2. Return Form 11661 through secure email to the assigned agent, his or her manager and the EP SME. Send a copy of the FTA-approved Form 11661 EP SME and TE/GE Fraud Specialist.

      Note:

      Upon receipt of Form 11661 from the FTA with the recommendation to update the case back to AIMS status 12, you will need to update the case to status 12 through RCCMS.

  17. In all instances when a criminal fraud referral has been made, include a copy of Form 11661 (with all Attachments), Form 2797 and the written plan of action received from the FTA in the case file.

    1. The Form 11661 (and any Attachments) and all other fraud development workpapers and documents should be indexed according to Form 5772-EP, under K6, Fraud.

    2. A complete copy of the Form 2797 referral to CI should be indexed according to Form 5772-EP under T3, Referrals.

    3. Form 11661, Form 2797 and any attachments should also be saved in the RCCMS Office Documents folder.

      Note:

      Regardless of whether CI accepts or declines the referral, it is mandatory that copies of all documents related to the Form 2797 referral be included with the paper file (if the case is unagreed) and in the RCCMS Office Documents folder (whether the case is agreed or unagreed). A Form TDF 15-05.11 should be used as the cover sheet for the fraud referral.

  18. The EP SME will maintain copies of all forms submitted to the EP SME to document his or her involvement. The TE/GE Fraud Specialist must also receive copies of the form.

Overview of Joint Investigations

  1. This section provides a brief overview of joint investigations and the responsibilities of the cooperating EP agent and the SA.

  2. Please also refer to the following IRM sections for the listed information:

    • IRM 25.1.4, Administrative Joint Investigations, and IRM 25.1.5, Grand Jury Investigations, for a full discussion of the procedures followed in administrative joint investigations and grand jury investigations for other compliance functions

    • IRM 25.1.4.3.10, paragraphs (2)(a) through (e), for guidance on information to be included in the EP case file prior to placing the case in administrative fraud suspense

    • IRM 25.1.5.2, paragraphs (2) through (4) for guidance on information to be included in the EP case file prior to placing the case in grand jury suspense

    • IRM 25.1.5.2, paragraph (5) for guidance on AIMS controls for prior and subsequent periods after notification of the grand jury investigation.

    • IRM 25.1.5.2, paragraph (7) for guidance on AIMS controls and statute protection if the target of the grand jury investigation is not currently under examination

  3. A joint investigation is conducted by CI together with SB/SE, LB&I, W&I, or TE/GE. This discussion focuses on the joint investigations conducted by CI with EP agents.

    1. Investigations involving alleged tax evasion, willful failure to file a tax return and willful failure to pay a tax are usually jointly investigated by CI and a civil enforcement function.

    2. CI must request the assistance of the EP agent as a cooperating agent in order for a joint investigation between EP and CI to exist.

  4. The EP agent is responsible for:

    • The examination features of the EP-related investigation

    • Taking actions necessary to protect the interests of the Government with respect to the statutory periods of assessment related to the EP examination

    • EP Exam actions on prior and/or subsequent years, and related returns

  5. A joint investigation can originate from one of two sources:

    1. A compliance-initiated criminal fraud referral (submission of Form 2797)

    2. A CI-initiated criminal investigation

  6. There are two types of joint investigations:

    1. Administrative (non-grand jury)

    2. Grand jury

  7. Upon involvement in a joint investigation, the assigned cooperating EP agent will usually have been advised of the investigation type (administrative or grand jury). IRM 4.71.25.6, IRM 4.71.25.7 and IRM 4.71.25.8 provide guidance for both administrative and grand jury joint investigations.

    1. IRM 4.71.25.6, Request for Cooperating EP Exam Agent, covers how CI requests the assistance of a cooperating agent.

    2. IRM 4.71.25.7, Administrative Joint Investigations, covers the EP Exam procedures followed in administrative, or non-grand jury, joint investigations.

    3. IRM 4.71.25.8, Grand Jury Investigations Involving EP Exams - Overview, covers the EP Exam procedures followed in approved grand jury investigations.

Request for Cooperating EP Exam Agent

  1. Retirement plan tax law is complex. The involvement of an EP agent is useful in properly developing investigations involving retirement plans, related entities, and individuals.

  2. CI requests the cooperation of EP when technical assistance is needed with an issue over which EP has jurisdiction . Generally, the assistance of an EP agent is required when issues relate to plan form and operations or the interrelationship of plan issues to other entities and individuals, tax assessments or audit issues.

  3. When needed, the request is made by the CI Special Agent in Charge (SAC) via Form 6544, Request for Cooperating Examiner. See IRM 4.71.25 Exhibit 11 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a completed Form 6544.

  4. The SAC will forward the request to the centralized TE/GE mailbox. The TE/GE Fraud Specialist will forward the request to the EP SME. The EP SME will forward it to the EP Area Manager authorized to make the assignment. The EP SME is available to assist the EP Area Manager with the processing of the Form 6544 .

  5. If the request is granted, the EP SME and/or the Area Manager will:

    1. Complete Form 6544, including all pertinent information. The EP Area Manager will sign and date the form.

    2. Return Form 6544 to the SAC within 30 days of receipt of the request from the SAC, or by any agreed-to extension date.

    3. Send a copy of the signed and dated Form 6544 to the EP SME, TE/GE Fraud Specialist, and the cooperating EP agent’s manager.

  6. If Form 6544 was handled solely by the Area Manager, the Area Manager will:

    1. Advise the EP SME and TE/GE Fraud Specialist of the form’s receipt.

    2. Send a copy of the signed form and the pertinent assignment information to the EP SME, TE/GE Fraud Specialist ,and the cooperating EP agent’s manager.

  7. The cooperating EP agent will charge his or time to a control number issued by the TE/GE Fraud Specialist for the assignment. See IRM 25.1.9.3, Time Tracking - Fraud/Fraud Related Activities, for information on TE/GE time tracking requirements for fraud and fraud related activities.

  8. A cooperating EP agent will charge his or her time as operational time to:

    1. Activity code 155 and project code 1554 for grand jury investigations.

    2. Activity code 155, and project code 1555 for administrative fraud investigations.

  9. If the reasons stated or duties requested appear unwarranted, the Area Manager will prepare a memorandum explaining the reason(s) why the request is not granted and will forward it to the originating SAC.

  10. If the SAC does not agree with the Area Manager's decision, the matter will be elevated to the Director, EP Exam and the CI Director of Field Operations. If they are unable to agree, the final decision will be made by the next higher level of management.

  11. CI will retain all original tax returns as evidence and provide copies of the retained tax returns for all open periods and for related taxpayers to the cooperating EP agent. This should occur within 30 days of the approval of the request for a cooperating EP agent or when the original returns are received.

  12. EP agents should check with TE/GE Division Counsel before attempting to secure original Form 5500 returns.

  13. The cooperating EP agent will request AIMS controls on all years involved in an administrative joint investigation that are not currently under audit. If there is a TC 914/-Z freeze on the module being controlled then the exam control request will be made using:

    • Push code 049, Joint Investigation/CI Freeze

    • Activity code 155, Fraud/Fraud Related Activities

    • Project code 1555, CI Assistance, Administrative Case

    Note:

    See IRM 4.71.25.7.5, Examination Controls– AIMS, below for further guidance on requesting control of EP examinations when assisting with an administrative investigation. Examination controls are typically not secured by the EP agent once notification of a grand jury investigation is received. See paragraph (7) of IRM 4.71.25.8.1, Grand Jury Suspense for EP Cases.

    Note:

    Push Code 049 will generally not be required for EP examinations. CI inputs a TC 914 on most IMF and BMF modules to post a –Z freeze. This indicates that the taxpayer is under criminal investigation. Currently, CI does not post TC 914/-Z freezes to any EPMF MFT 74 module or to BMF modules for MFTs 76 (F-5330) or 34 (F-990T) or 74 (Failure to File penalty assessments on F-5500). However, even if the EP-related modules lack the TC 914/-Z freeze, EP Exam cases are subject to the same freeze on examination activity as all other open exams that do have the posted freeze code. Push code 049 only used if there is a TC 914/-Z freeze posted to the return module and only after discussion with the EP SME.

  14. EP agents assisting with administrative investigations are responsible for monitoring the assessment statute expiration date (ASED) of all return(s) established on AIMS. Cooperating grand jury EP agents do not monitor the ASED of any civil examination.

    Note:

    AIMS controls do not have to be established on returns that were inspected and determined to have no civil tax consequence.

Administrative Joint Investigations

  1. This subsection covers a range of topics that may arise during a joint investigation as well as the procedures that apply specifically to administrative joint investigations.

  2. Topics specific to grand jury investigations are covered in IRM 4.71.25.8, Grand Jury Investigations Involving EP Exams - Overview, and the subsections thereunder.

  3. An administrative joint investigation may arise after the EP agent has submitted a criminal referral to CI that has been accepted or it may arise outside of the EP exam.

    1. If the EP agent has submitted a criminal referral that CI accepted then the EP agent is often asked to assist CI as the cooperating EP agent. EP’s contact with the taxpayer and/or representative will have already stopped when the referral was submitted to CI.

    2. If CI initiates the investigation outside of a referral from EP then CI will notify EP of the need to suspend contact with the taxpayer or representative if CI is aware of the EP examination. The EP agent will be asked to assist as an administrative cooperating EP agent if CI feels the expertise of the EP agent is needed.

  4. The sub-sections that follow are written for the EP agent who has been assigned to assist CI as an administrative cooperating EP agent.

Duties and Responsibilities

  1. As an administrative cooperating EP agent you are primarily concerned with the determination of the plan’s qualified status, any related tax liability and applicable penalties. You will also need to advise CI of how the plan was used to further the fraudulent scheme and if there were plan participants who were not involved in the fraudulent scheme who were harmed by the actions of the individuals who were involved in the scheme. In general, you may perform the following tasks:

    1. Analyzing plan and trust bank and other financial accounts and records

    2. Assisting with the computation of criminal tax liability for the Special Agent's Report (SAR)

    3. Computing civil tax liabilities addressed by EP for a pre-prosecution report

    4. Determining if the plan secured a favorable determination letter

    5. Determining if there is any unrelated business taxable income

    6. Determining if there are any transactions that may give rise to excise tax

    7. Determining plan form and operational issues that affect the plan’s qualified status under IRC 401(a) and the trust’s exempt status under IRC 501(a)

    8. Examining plan and trust books and records to determine adjustments

    9. Maintaining a chronological record of time charged to the case

    10. Participating in interviews of the taxpayer and witnesses

    11. Preparing an administrative file and an administrative record prior to placing case in fraud suspense

    12. Protecting the statute of limitation (SOL)

      Note:

      See IRM 4.71.25.7.7, Statute Protection - Including the Use of Form 10498-B, and IRM 4.71.9.4, Agent Responsibilities and Procedures, for procedures.

    13. Providing original tax returns to the Special Agent (SA) within 30 days of the joint investigation initiation or when received

    14. Reconciling the plan and trust books and records to the return

    15. Reviewing the handling of the plan and trust assets

    16. Reviewing prior and subsequent period returns, and related returns for examination potential

    17. Verifying assets held by the plan and trust

  2. The criminal component is predominant in any joint investigation. The Special Agent's (SA's) main responsibility is to gather evidence to prove criminal violation(s). The SA is responsible for the following actions as it relates to the criminal case:

    1. Arrests

    2. Computing the criminal tax liability

    3. Conducting necessary surveillance and undercover work

    4. Developing and documenting evidence of intent

    5. Executing search warrants and/or seizures of property

    6. Obtaining testimony of witnesses

    7. Preparing and issuing Form 2039, Summons

    8. Providing the agent with copies of original tax returns for all open periods and related taxpayers within 30 days of the joint investigation initiation or when received

    9. Advising the “non-custodial rights" as it relates to a jointly-conducted interview of the subject during the course of an investigation.

    10. Scheduling and prioritizing investigative actions

  3. The EP agent and the SA will work together in the government's best interest and consider the following additional actions:

    1. Ensuring both the SA and EP agent are present at taxpayer and witness interviews when feasible

    2. Planning the joint investigation

    3. Using non-technical employees to perform voluminous and/or clerical tasks

Required Communications

  1. All criminal investigations involving cooperating EP agents are subject to mandatory quarterly (four-way) conferences.

  2. The CI SSA should contact the EP group manager to schedule the required four-way conference.

  3. The EP group manager may also request a four-way conference when one is due. The conference may be jointly held with other EFUs.

  4. The four-way conference must be attended by the SSA, SA, EP group manager and cooperating EP agent. The (FTA) and EP SME may also attend, when necessary.

  5. The purpose of the four-way conference is to review the status of the criminal investigation and plan actions required of the cooperating EP agent and the SA.

  6. Appropriate follow-up should be done periodically to ensure prompt completion of the investigation and proper use of resources.

  7. The inclusion of the FTA and EP SME does not override the EP group manager's responsibility for case and resource oversight.

  8. Form 6084, Quarterly Joint Workplan and Conference Memorandum, is used to document the conference discussion. The form is completed by the SSA and should include the following information:

    1. Coordination of related investigations with other field offices (venue issues, similar investigative agendas/plans)

    2. Discussions of civil actions (statute extensions, statutory notices of deficiency, prior/subsequent year and related return considerations)

    3. Investigative obstacles (technical issues, noteworthy defenses)

    4. Planned activities of both the SA and the cooperating EP agent

    5. Status/progress of the investigation

      Note:

      A copy of the completed form must be issued to all attendees.

Jeopardy Assessments

  1. When collection of a civil liability is threatened and a jeopardy assessment is recommended, coordination among IRS functions is necessary and care must be taken to avoid unnecessary disclosures that may place a criminal investigation or prosecution at risk. Jeopardy assessments will not be made if they imperil a criminal investigation or prosecution.

  2. Because of the urgency of jeopardy assessments, such cases must be given the highest priority by the coordinating functions.

  3. When fraud is an issue, additional approval is required from the SAC before assessment.

  4. The FTA will also be consulted if the civil fraud penalty applies.

  5. Recommendations for jeopardy assessments should be made in accordance with IRM 4.15, Jeopardy/Termination Assessments for Examination Functions, and IRM 5.1.4, Jeopardy, Termination, Quick and Prompt Assessments for Collection.

Prior, Subsequent and Related Returns - Including the Use of Form 10498-A

  1. During an administrative joint investigation:

    1. Secure all returns related to those included in the joint investigation, including prior and subsequent year returns and related returns, and review them for examination potential.

    2. Determine if examination controls need to be established for an initial year examination, prior or subsequent year examinations or any related examinations.

    3. Ensure administrative actions on prior and subsequent year returns and related returns do not imperil a prosecution before establishing any examination controls. Establish examination controls only after securing CI’s approval.

      Note:

      CI must be notified of any proposed action such as examining returns, soliciting consents or issuing a notice of deficiency.

      Note:

      Form 10498-A, Intent to Commence Civil Action - Expansion of Examination, is used to notify CI of EP’s desire to examine prior and subsequent years, or related returns. The EP SME can provide assistance in completing and forwarding this form. See IRM 4.71.25 Exhibit 12 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a completed Form 10498-A.

  2. Your Area Manager approves and forwards completed Forms 10498-A to the SAC indicating EP’s request to examine the prior, subsequent or related tax returns.

    Note:

    Form 10498-A is used to document CI concurrence or non-concurrence with the proposed action.

  3. If an agreement to proceed cannot be reached between EP and CI then the Director, EP Exam and the CI Director of Field Operations will make the decision, consistent with Policy Statement 4-26. If an agreement is not reached, the case is elevated to the Commissioner of Tax Exempt and Government Entities and the Chief, CI for resolution.

Examination Controls - AIMS

  1. The administrative cooperating EP agent often needs to secure control of Form 5500, Form 5330 and Form 990-T after the commencement of the administrative joint investigation. As discussed in IRM 4.71.25.7.4, Prior, Subsequent and Related Returns including the Use of Form 10498-A, secure all returns related to those included in the joint investigation, including prior and subsequent period returns, and review the return(s) for examination potential. Notify CI of any proposed action to examine a return before opening an exam.

    1. See IRM 4.71.1.14.1, Prior Year, Subsequent Year and Related Returns, for instructions for opening a Form 5500 exam.

    2. See IRM 4.71.5, Employee Plans Examination of Returns - Form 5330 Examinations, for Form 5330 examination procedures.

    3. See IRM 4.71.10, Employee Plans Examination of Returns - Form 990-T Examinations, for Form 990-T examination procedures.

      Note:

      Forms 5330 and 990-T will be established on AIMS and RCCMS by EP Classification after filed returns or substitute for returns (SFR) have been processed by the Ogden Campus and the return has been posted to the Business Master File (BMF) as evidenced by a transaction code (TC) 150.

  2. If EP needs to request exam control of an unfiled return and there is no TC 150 or TC 424 on the module, but CI has notified EP of the need to suspend civil exam activity, the agent should:

    1. Secure CI's approval prior to establishing the return(s) on AIMS.

    2. Request Master File controls of the return after securing CI’s approval by submitting a request to EP Classification to establish the return.

    3. See IRM 4.71.25.7.4, Prior, Subsequent and Related Returns including the Use of Form 10498-A, and IRM 4.4.9.2.3.1, CI Freeze, for further information.

    .

  3. In instances where returns are filed (i.e., a TC 150 is present on the module and CI has a TC 914/-Z freeze on the module or has otherwise notified EP of the need to suspend civil exam activity), the agent should:

    1. Secure CI's approval prior to establishing the return(s) on AIMS.

    2. Request Master File controls of the return after securing CI’s approval by submitting a request to EP Classification to establish the return.

    3. Use push code 049 (Joint Investigations/CI Freeze) to overcome a TC 914/-Z freeze on the module. This push code should be used only if there is a TC 914/-Z freeze on the return module and after consultation with the EP SME.

      Note:

      CI inputs a TC 914 on most IMF and BMF modules to post a –Z freeze. This indicates that the taxpayer is under criminal investigation.

      Note:

      Push code 049 will generally not be required for EP examinations. Currently, CI does not post TC 914/-Z freezes to any EPMF MFT 74 module or to BMF modules for MFTs 76 (F-5330), 34 (F-990T) or 74 (Failure to File penalty assessments on F-5500). However, even if the EP-related modules lack the TC 914/-Z freeze, EP-Exam cases are subject to the same freeze on examination activity as all other open exams that do have the posted freeze code.

  4. Secure the request for AIMS controls on all years involved in the administrative joint investigation using push code 049 (as required), activity code 155, and project code 1555.

Parallel Investigations

  1. The purpose of a parallel investigation is to balance both the civil and criminal aspects of a case under criminal investigation.

  2. Consideration should be given to continuing the civil enforcement action with respect to any related taxpayer that does not adversely impact the criminal proceedings.

  3. If you are involved in a parallel investigation, follow the procedures prescribed in IRM 4.32.2.6, Parallel Investigations.

  4. Policy Statement 4-26 (formerly P-4-84), Criminal and Civil Aspects in Enforcement, under IRM 1.2.13.1.11, Policy Statement 4-26, provides that civil enforcement actions with respect to a taxable period or a return not included in the criminal investigation, generally does not imperil criminal investigation or subsequent prosecution. Policy Statement 4-26 concludes that civil enforcement actions in these cases should proceed concurrently, unless there is agreement with CI to suspend action, in whole or part, during the duration of the criminal investigation.

  5. During required discussions involving the SSA, SA, EP group manager and EP agent, the EP group manager may propose concurrent civil enforcement action consistent with Policy Statement 4-26. If the proposal is unresolved between CI and EP, the decision to proceed will be elevated to the next management level.

Statute Protection - Including the Use of Form 10498-B

  1. You are responsible for protecting the statute of limitations (SOL) for all related returns under EP jurisdiction (including prior and subsequent years) during an administrative joint investigation.

  2. Check AIMS periodically to determine if the taxpayer filed returns (in instances where the taxpayer did not previously file) and keep track of any subsequent filings of tax returns in order to protect the SOL(s).

  3. Protect the earliest SOL of each tax return.

    1. The IRC 6501(a) statute (three-year statute for filed returns) expires three years after the date the tax return was due or filed, whichever is later.

    2. If the three-year SOL has expired or the taxpayer refuses to extend the period for assessment, the six-year SOL (omission of income in excess of 25% of reported gross income), under IRC 6501(e), should be considered. See IRM 4.71.25.7.7.1, Six-Year Statute of Limitations, and IRM 25.6.22.6.17.2, More Than 25% Omission of Gross Income.

    3. All efforts should be made to secure the taxpayer's consent to extend the period for assessment before the normal three-year SOL expires (or six-year if the three has already expired) . The fraud SOL under IRC 6501(c) should be relied upon only as a last resort.

      Note:

      There are other IRC 6501 mechanisms where the period to assess may be beyond 3 years.

  4. Written approval of the SSA and the SAC must be obtained on a Form 10498-B, Intent to Commence Civil Action - Statute Protection, before soliciting a statute extension.

  5. When fewer than 210 days remain on the assessment SOL , complete Form 10498-B to request CI's permission to solicit the taxpayer's consent to extend the statutory period for assessment or issue a notice of deficiency.

    1. The completed Form 10498-B will be sent by your group manager to your Area Manager for signature. The EP SME can help you complete and forward this form. See IRM 4.71.25 Exhibit 13 at IRM 4.71 - Employee Plans Examination Exhibits for an example of a completed Form 10498-B.

    2. The Area Manager will forward the signed Form 10498-B to the SAC to request a decision on EP’s intent to solicit the taxpayer's consent to extend the statute of limitations period for assessment or on EP’s intent to issue a notice of deficiency.

    3. CI must accept or decline the request within 10 workdays after receipt of the Form 10498-B.

    4. Any required statute updates must be made on AIMS through RCCMS. See IRM 4.71.9, Employee Plans Examination of Returns, Statute Control Procedures and the Form 10498-B instructions for the procedures used to extend the period for assessment.

  6. If CI approves the request to solicit the taxpayer's consent to extend the period for assessment the following applies:

    1. If the statute is being extended for a trust, including the statute for the Form 5500/1041 or Form 990-T, use Letter 907-A, Request to Extend Statute, Form 56, Notice Concerning Fiduciary Relationship, and Pub 1035, Extending the Tax Assessment Period.

    2. If the statute is being extended for Form 5330, Form 1040 or Form 1120, use Letter 907-A and Pub 1035.

    3. If the consent is solicited by mail, send Letter 907-A, Form 56 (if applicable), and Pub 1035 to the last known address of the taxpayer.

    4. Document solicitation of the consent and the required notification of taxpayer's rights on Form 5464 and Form 895-EP, Notice of Statute Expiration. See IRM 4.71.9, Employee Plans Examination of Returns, Statute Control Procedures, and IRM 25.6.22.5.11, Extension of Assessment Statute of Limitation By Consent.

    5. A copy of Letter 907-A, Form 56, (if applicable) and Pub 1035 must be maintained in the case file and in the electronic RCCMS. Any subsequent inquiries received from the taxpayer should be referred to the SA assigned to the case.

    6. CI should be informed of the results of solicitation of the taxpayer's consent.

  7. If CI approves the decision to issue a statutory notice of deficiency, the case will be prepared for unagreed closure and forwarded to EP Mandatory Review (MR) for notice preparation. MR will obtain TE/GE Division Counsel concurrence prior to issuing the notice of deficiency. See IRM 4.71.3, Unagreed Form 5500 Examinations and EP Exam Closing Agreements, for unagreed Form 5500 closures, IRM 4.71.4, Discrepancy Adjustments, for unagreed Form 1040 or Forms 1120 closures, IRM 4.71.5, Form 5330 Examinations, for unagreed Form 5330 closures and IRM 4.71.10, Form 990-T Processing, for unagreed Form 990-T closures.

  8. If a consent to extend the period for assessment is not secured, and the SAC does not approve the decision to issue a notice of deficiency, a decision must be made whether to rely on the fraud statute in IRC 6501(c)(1) and/or allow the three and/or six year periods for assessment to expire.

    1. This decision must be approved by the EP agent’s Area Manager. TE/GE Division Counsel may need to be consulted.

    2. Document the decision in the Form 5464 and on Form 895-EP.

    3. Refer to IRM 4.71.25.7.4, Prior, Subsequent and Related Returns - Including the Use of Form 10498-A, IRM 25.6.23.6.6.2, Reliance on IRC Provisions Which Extend Normal Assessment Statute, and IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS.

  9. The decision to allow expiration of the three-year and/or the six-year periods for assessment will be documented on Form 10498-B with signatures of the EP Area Manager, the SSA and the SAC.

    1. Attach the properly executed Form 10498-B to page two of the applicable return.

    2. Update the SOL immediately on AIMS through RCCMS using the appropriate alpha code (if applicable). Consult TE/GE Division Counsel if there are any questions concerning the statute.

    3. Update Form 895-EP to reflect the correct statute expiration date using the procedures in IRM 4.71.9.4, Agent Responsibilities and Procedures.

  10. If an agreement cannot be reached, the Director, EP Exam and the CI Director of Field Operations will decide. If an agreement is still not reached, the issue will be elevated to the Commissioner of Tax Exempt and Government Entities and the Chief, CI for resolution.

Six-Year Statute of Limitations
  1. IRC 6501(e) replaces the three-year period for assessment with a six-year period for assessment under certain circumstances.

    1. IRC 6501(e)(1)(A) replaces the three-year period for assessment with a six-year period for assessment when the taxpayer omits from gross income an amount properly includible on the taxpayer’s return that is in excess of 25% of the amount of gross income stated in the return. This IRC section applies only to subtitle A income tax.

    2. IRC 6501(e)(1)(C) replaces the three-year period for assessment with a six-year period for assessment when the taxpayer omits from gross income an amount properly includible therein under IRC 951(a) (constructive dividends paid to U.S. shareholders of foreign controlled corporations).

  2. Fraud does not need to be proven for IRC 6501(e) to apply. However, all efforts should be made to protect the three-year period for assessment before relying on the six-year period for assessment.

    Note:

    This six-year period for assessment under IRC 6501(e) has a fixed and determinable expiration date that also must be protected.

  3. The Government carries the burden of proof for the omission of gross income.

    1. TE/GE Division Counsel must formally approve the use of any six-year statute and the Counsel memo approving its use must be included in the administrative case file.

    2. Only reportable income, omitted from the return, is included in the computation.

    3. Omitted or overstated deductions and expenses are not considered in the computation.

  4. For purposes of IRC 6501(e) gross income includes, but is not limited to, the following:

    1. Gross income in the case of a trade or business means the total of the amounts received or accrued from the sale of goods or services (gross receipts), without reduction for the costs of those goods or services.

    2. Gross income, other than from the sale of goods or services in a trade or business, has the same meaning as provided under IRC 61(a), and includes the total amounts received or accrued, to the extent required to be shown on the return. When the amounts received or accrued relate to the disposition of property, gross income means the excess of the amount realized from the disposition of the property over the unrecovered cost or other basis of the property.

      Note:

      Section 2005 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, 129 Stat. 443 (2015), added language to IRC 6501(e)(1)(B) providing that an understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income. This legislation applies to returns filed after July 31, 2015. It also applies to returns filed on or before July 31, 2015, if the period of limitations under IRC 6501 (determined without regard to the legislation) has not expired as of that date. See IRM 25.1.4.3.8.1(4)(c).

    3. In the case of a partner in a partnership, gross income for this computation includes his or her share of the partnership’s gross income, not the net flow-through. Thus, a copy of the partnership return is required to correctly determine the taxpayer’s gross income.

    4. In the case of a shareholder in an S corporation, gross income for this computation includes his or her share of the S corporation’s gross income, not the net flow-through or distributed and undistributed taxable income. Thus, a copy of the S corporation return is required to correctly determine the taxpayer’s gross income.

    5. Only the net amount of capital gain (sales price less cost basis) on a transaction is included in the computation. Also, capital losses on transactions may not reduce gross income because some capital losses are not netted against capital gains.

    6. In the case of a taxpayer deemed to be in the trade or business of selling stock, the gross income for this calculation is the gross sales price of the stock (no reduction for cost basis).

    7. The taxable portions of pension and annuity distributions are gross income.

  5. An amount is not considered as omitted from gross income if information sufficient to determine the nature and amount of the item is disclosed in the return, including any schedule or statement attached to the return.

  6. Be careful when using an indirect method of computing income. Determining the understatement of adjusted gross income (which includes expenses) is not the same as the IRC 6501(e) computation of gross income.

  7. The six-year statute can be extended on Form 872, Consent to Extend the Time to Assess Tax, for income and excise tax returns and Form 872-H, Consent to Extend the Time to Assess Tax on a Trust, for Form 5500/1041 and Form 990-T returns. Additional language or reference to IRC 6501(e) should not be included on the consent.

  8. If the Service proves a 25% omission of gross income, a taxpayer's entire tax year is subject to the six-year period for assessment. Therefore, the entire year is open for adjustment, allowing the Service to determine deficiencies attributable to items other than those creating the substantial omission. Colestock v. Commissioner, 102 T.C. 380 (1994).

  9. The agent must provide documentation that the omission of income exceeds 25% in order to pursue the six-year statute. See IRM 4.71.25 Exhibit 14 at IRM 4.71 - Employee Plans Examination Exhibits for a table used to compute the percentage of omitted income.

    1. This or a similar spreadsheet must be attached to Form 10498-B to support using the statutory period under IRC 6501(e) when he form is submitted for approval.

    2. Care should be exercised in preparing this computation, especially if the return contains income from a flow-through entity.

    3. Some common errors include failure to use net capital gains, failure to use the partner's share of partnership gross income, or using figures from an amended tax return.

  10. If a tax return contains a 25% omission of gross income, expiration of the three-year period for assessment is imminent, and Form 10498-B has been properly executed to allow the three-year statute to expire, the AIMS statute and the Form 895-EP will be updated to the six-year statute date. See IRM 4.71.9, Employee Plans Examination of Returns, Statute Control Procedures.

Discontinued Investigation

  1. CI will withdraw from all investigations when it is determined the case no longer has criminal potential.

    1. If Cl withdraws from the joint investigation, the SA will notify all cooperating agents and their group managers by preparing a discontinued investigation report stating the reason(s) for the withdrawal. CI will notify SB/SE Technical Services (TS) of the formal closing of the criminal case by use of Form 13308, Criminal Investigation Closing Report (Tax and Tax Related Only), and advise that civil actions on the case should resume. See IRM 4.71.25 Exhibit 15 at IRM 4.71 - Employee Plans Examination Exhibits for a copy of this form.

    2. CI will notify EP of the discontinuance through a centralized TE/GE mailbox or at least through the required quarterly conference, and provide a copy of the Form 13308 package to the TE/GE Fraud Specialist or EP SME.

    3. The TE/GE Fraud Suspense Coordinator will return the suspended case to the field with a memorandum explaining the required procedures for civil resolution.

      Note:

      EP Determinations will also be notified if a related application for a favorable determination letter has been held in suspense.

  2. If the EP agent’s manager objects to the proposed withdrawal, he or she may discuss it with the Area Manager who may discuss the objection with the SAC. If agreement cannot be reached, the Director, EP Exam and the CI Director of Field Operations will make the decision.

    Note:

    The EP agent’s manager may choose to discuss the proposed withdrawal with the FTA's group manager prior to elevating it to the EP Area Manager.

  3. If the civil fraud penalty under IRC 6663 and/or the fraudulent failure to file penalty under IRC 6651(f) are being pursued, the years under penalty consideration will be updated to AIMS status code 17 and be documented by the FTA on Form 11661.

Preparation of the Pre-Prosecution Report

  1. Upon the completion of an ongoing joint administrative investigation, if income or excise tax adjustments are to be proposed by EP, the cooperating EP agent will prepare a report to be sent to CI.

    1. If income tax adjustments are being proposed by EP, prepare Form 4549-E and an RAR on Form 886-A, Explanation of Items, explaining all tax adjustments and penalties in detail. The top of the report should be labeled "Pre-Prosecution Report" . See IRM 4.71.4.4.5, Employee Plans Examination of Returns, Discrepancy Adjustments for additional information on the preparation of this type of report.

      Note:

      It is not necessary to state the taxpayer’s position in this report.

    2. If excise tax is being proposed by EP, prepare an RAR on a Form 886-A, explaining all excise tax and penalties in detail. See IRM 4.71.5.9.1.1, Revenue Agent Report (RAR), for additional information on the preparation of this type of report.

      Note:

      CI will need an easily understood write-up of the excise tax issues and a detailed schedule of the excise taxes being asserted.

    3. With TE/GE Division Counsel’s approval, civil fraud penalties and/or fraudulent failure to file penalties should be asserted for all applicable years. TE/GE Division Counsel’s approval of the assertion of these penalties should be documented in the Form 5464. Accuracy-related and/or delinquency penalties should be proposed as an alternative position.

  2. Prepare Form 4665, and attach it to the front of the RAR. See IRM 4.71.25 Exhibit 16 at IRM 4.71 - Employee Plans Examination Exhibits for a copy of this form. The top margin of the Report Transmittal should be labeled, "Pre-Prosecution Report" and should contain:

    • Background of the case including current status

    • Comments regarding innocent spouse relief under both IRC 6015 and IRC 66

    • Computation of 25% omission of gross income for all tax years regardless of reliance on the IRC 6501(e), six-year statute

    • Current power of attorney status

    • Information that may be helpful when the case is returned for civil settlement, including potential civil issues not fully developed

    • Information of a confidential nature, including informant information

      Note:

      The informant should not be identified by name nor should the report contain information that might reveal the identity of the informant.

    • Recommendations regarding audit potential of subsequent year returns and/or related returns

    • Summary of SOL expiration dates for all years/periods involved

      Caution:

      Items that need safeguarding from unauthorized or inadvertent disclosure should have a Form TDF 15-05.11 attached. These protected items should not be included or referenced on Form 4665. Examples include fraud referrals and identification of informants. In addition, the Form 4665 must not include statements or comments intended to influence Appeals’ decision-making process in case the EP case goes to Appeals at a later date.

  3. Send the completed report with Form 4665 to your manager for review.

  4. The group manager will forward the approved report with Form 4665 , to the Area Manager.

  5. The Area Manager will review both the RAR and Form 4665 , for accuracy and, upon approval, forward it to the SAC.

    Note:

    This report will be provided to Cl for use in the Special Agent’s Report (SAR).

EP Exam Administrative Fraud Suspense

  1. Exams are placed into fraud suspense once an administrative joint investigation is completed and CI forwards the case to the Department of Justice for approval of criminal prosecution.

  2. When an administrative criminal investigation is completed and CI recommends criminal prosecution, CI will send Form 14584, IRS-Criminal Investigation-Check for and Suspend Civil Activity Notification, to SB/SE TS to notify SBSE that all civil activity should cease and the civil examination must be suspended.

  3. CI will concurrently send a copy of Form 14584 to a centralized TE/GE mailbox which will be monitored by the TE/GE Fraud Specialist.

  4. Form 14584 will then be forwarded by the TE/GE Fraud Specialist to the EP SME and the TE/GE Fraud Suspense Coordinator so the civil examination can be suspended.

  5. The TE/GE Fraud Suspense Coordinator will prepare a memorandum instructing the EP group manager to transfer the case to the TE/GE Fraud Suspense Unit (FSU) so that it can be placed into Administrative Fraud suspense. EP Determinations will also be notified to ensure that any related application for a favorable determination letter is also suspended.

  6. The EP group manager should ensure that the case is sent to the TE/GE Fraud Suspense Coordinator as expeditiously as possible to be placed into Administrative Fraud suspense.

    Note:

    The case will remain in suspense until the criminal aspects of the case have been completed.

  7. Prior to transferring the case to the FSU for placement into suspense, the EP case file should contain:

    1. Sufficient documentation in the workpapers to fully support the adjustments and penalties in the RAR. See IRM 4.71.25.7.9, Preparation of the Pre-Prosecution Report, for additional information on report preparation

    2. Original tax returns or documented requests for the tax returns, if they are not already in the possession of CI or TE/GE Division Counsel and Counsel has concurred in requesting the returns.

    3. A signed Form 2797 reflecting "Accepted for Investigation" by CI

    4. A current transcript (that may or may not reflect a TC 914) for each tax period in the case file

      Note:

      If the TC 914 is not present but should be, the group should contact the EP SME who will contact the SA and request the required action be taken to input the TC 914/-Z, freeze, if possible.

      Note:

      CI inputs a TC 914 on most IMF and BMF modules to post a –Z freeze. This indicates that the taxpayer is under criminal investigation. Currently, CI does not post TC 914/-Z freezes to any EPMF MFT 74 module or to BMF modules for MFTs 76 (F-5330), 34 (F-990T) or 74 (Failure to File penalty assessments on F-5500). However, even if the EP-related modules lack the TC 914/-Z freeze, EP Exam cases are subject to the same freeze on examination activity as all other open exams that do have the posted freeze code.

    5. Copies of sensitive documents should have a Form TDF 15-05.11 attached and must not be included in the workpapers. Examples of SBU data include fraud referrals and informant data. The workpapers should make no mention of an informant or specific agencies.

    6. If the Form 4665 contains confidential information, it should be placed into a confidential envelope with a Form TDF 15-05.11 attached to the envelope

    7. Documentation of the manager’s approval of the case file’s readiness to be placed into suspense.

      Note:

      The case will be transferred to the TE/GE FSU prior to the status 32 (Suspense, General Fraud) update. The TE/GE Fraud Suspense Coordinator will update the case to status 32 as soon as possible once the case is received. It’s the EP agent’s responsibility, not the EP SME, or TE/GE Fraud Suspense Coordinator, to prepare the case for suspense.

      Note:

      The TE/GE Fraud Suspense Coordinator will be responsible for ensuring that the organization code is manually updated to EP 7695.

  8. At least one year should be remaining on the statute of limitations (SOL) for each return being transferred to the TE/GE FSU for administrative fraud suspense.

    1. If there is not at least one year remaining on the SOL, you should secure joint approval (CI and EP) for the Service's reliance on the fraud statute (IRC 6501(c)(1) and/or IRC 6501(c)(2)) to keep the civil action (assessment and right to collect) open. See Form 10498-B and paragraph (4) of IRM 4.71.25.7.7, Statute Protection - Including the Use of Form 10498-B, for detailed instructions.

    2. Advise the TE/GE Fraud Suspense Coordinator if you are unable to ensure that there is more than a one year remaining on the SOL for any year before transferring the case to the TE/GE FSU.

  9. The EP group manager will notify the TE/GE Fraud Suspense Coordinator that the case is being transferred, transfer the electronic case on RCCMS to Special Review and mail the paper case files to the TE/GE FSU.

    Note:

    The TE/GE FSU’s mailing address can be located on the IRS intranet at the TE/GE Connect, Fraud Coordinator’s page or by contacting the TE/GE Fraud Suspense Coordinator directly.

    1. The group will transfer the case in its current AIMS status code to TE/GE FSU.

    2. The Manager, CP&C (or designee) will accept the transfer and assign the case(s) to the TE/GE Fraud Suspense Coordinator.

    3. The TE/GE Fraud Suspense Coordinator will review the case for statute considerations within three business days, using a review template specific to this purpose. The results of the statute review will be forwarded to the Manager, CP&C by the end of that three-day period.

    4. The TE/GE Fraud Suspense Coordinator will review the file for readiness to be placed into fraud suspense.

    5. If the case is ready to be placed into administrative fraud suspense, the TE/GE Fraud Suspense Coordinator will update the AIMS status code to 32 to place the case in administrative fraud suspense and prepare the manual updates of the organization code on AIMS and RCCMS.

  10. While the case is in administrative fraud suspense, the TE/GE Fraud Suspense Coordinator will:

    1. Maintain a separate Form 5464, headed "Suspense Case Chronology Report" to document all administrative work done with the case while it is in status 32.

      Note:

      Time spent on administrative tasks will not be charged to the exam case (or to the case’s control number entity on WebETS).

      Note:

      Time spent by the TE/GE Fraud Suspense Coordinator on administrative tasks conducted while the case is in suspense will be charged to 1551550, Fraud Coordination, Case Specific, or 1551551, Fraud Coordination, Non-Case Specific on WebETS.

    2. Monitor the civil statutes to ensure that the civil assessments can be made upon the completion of the criminal case.

    3. Monitor and update RCCMS as necessary.

    4. Make any required follow-ups with, and provide any necessary assistance to the SA, FTA, EP agent, EP group manager, TE/GE Division Counsel or an EFU, in order to ensure that the civil assessments can be made upon completion of the criminal case and that the case progresses.

    5. Submit Form 10498-A or Form 10498-B, and follow up on those forms as necessary.

  11. Once the criminal aspects of the CI investigation are complete, the TE/GE Fraud Suspense Coordinator will review the case to make a recommendation for examination potential given the results of the criminal investigation and will transfer the case back to the EP group to complete the civil exam.

Civil Settlement of Prosecution Cases

  1. When CI has completed their work on the case (i.e., criminal prosecution, including all appeals, is concluded) , CI will notify the SB/SE TS and TE/GE of the formal closing of the criminal investigation by use of Form 13308 and advise that the examination of the return(s) should resume.

    1. CI will send the Form 13308 to TS to notify SB/SE of the completion of the criminal prosecution aspects of the case.

    2. CI will also notify the TE/GE Fraud Specialist through a centralized TE/GE mailbox or, at least through the required quarterly conference, of the conclusion of its investigation and provide a complete copy of the Form 13308 package to the TE/GE Fraud Specialist for processing.

    3. The TE/GE Fraud Specialist will forward the Form 13308 package to the TE/GE Fraud Suspense Coordinator. The TE/GE Fraud Suspense Coordinator will review the case to make a recommendation for examination potential given the results of the criminal investigation and will transfer the case back to the EP group to complete the civil exam. In addition, the TE/GE Fraud Suspense Coordinator will prepare a memorandum advising the EP group manager of pertinent information for the exam resolution.

      Note:

      EP Determinations will also be notified if a related application for a favorable determination letter has been held in suspense.

  2. The EP agent and group manager will discuss the applicability of the civil fraud penalty and/or the fraudulent failure to file penalty with the EP SME and FTA as part of the civil exam resolution. If these penalties will be pursued, the FTA will document his or her approval on the Form 11661 and the returns to which these penalties are being assessed will be updated to AIMS status code 17. A copy of the FTA-signed Form 11661 must be sent to the TE/GE Fraud Specialist. The assertion of these penalties must be approved by TE/GE Division Counsel.

Special Conditions of Probation

  1. The court may order probation for the taxpayer as part of the sentence imposed.

    1. The order of probation may contain special conditions relating to the settlement and/or payment of civil tax liabilities and penalties.

    2. The SAC will notify TS via Form 13308, of the special conditions of probation.

    3. CI will also notify the TE/GE Fraud Specialist, through a centralized TE/GE mailbox, or at least through the required quarterly conference, of the conclusion of its investigation and provide a complete copy of the Form 13308 to the TE/GE Fraud Specialist for processing. The TE/GE Fraud Specialist will forward a copy of the Form 13308 package to the TE/GE Fraud Suspense Coordinator.

    4. The TE/GE Fraud Suspense Coordinator will prepare a memorandum to the appropriate EP Area Manager to return the case to the field for civil settlement and to consider the taxpayer's conditions of probation. The memorandum will instruct the EP Area Manager to provide a response to the SAC regarding the taxpayer's compliance with the conditions of probation no later than the earlier of the closing of the case or 180 days prior to the probation expiration date.

  2. Cl will reverse any posted TC 914/-Z freezes and establish TC 910 controls.

    1. The TC 910 will not be released until the special conditions of probation have been satisfied or the conditions are terminated by the court.

    2. If TC 914/-Z freezes have been placed on the EP return modules then the TE/GE Fraud Suspense Coordinator will follow up with CI to ensure the release of the freeze codes occurs.

  3. Although EP is generally not responsible for monitoring the taxpayer’s conditions of probation, if EP is involved the EP Area Manager may need to prepare a response memorandum to the SAC. The response memorandum will include information relative to the taxpayer’s compliance with the conditions of probation listed in the judgment and commitment order, and should indicate any unwarranted actions.

  4. The SAC will recommend legal action if the taxpayer fails to comply with the conditions of probation.

  5. IRC 6103(h)(4) allows for disclosure of returns and return information to a U.S. Probation Officer under the following circumstances:

    1. The tax returns and tax return information must relate to a taxpayer convicted of a criminal tax violation.

    2. The U.S. Probation Officer must have the responsibility of determining compliance with the tax-related conditions of probation.

    3. The returns and return information are limited to those years specified in the conditions of probation.

    4. The disclosure would not identify a confidential informant or seriously impair a civil or criminal tax investigation.

  6. Any disclosure to a U.S. Probation Officer must be coordinated with the Field Disclosure Manager. See IRM 11.3.22.18.2, Probation Proceedings.

Grand Jury Investigations Involving EP Exams - Overview

  1. This section addresses grand jury investigations involving EP Exam. See IRM 25.1.5, Grand Jury Investigations, for procedures applying to other compliance functions.

  2. By Federal Rules of Criminal Procedure 6(e), information obtained during a grand jury investigation is secret and cannot be disclosed or used in any civil proceeding.

  3. Criminal Investigation (CI) may request a grand jury investigation by referring the matter to the Department of Justice- Tax Division (DOJ) or an investigation may be initiated by the U.S. Attorney's Office, which requests the assistance of the IRS.

Grand Jury Suspense for EP Cases

  1. When CI initiates a grand jury investigation which was not referred by a civil compliance function or when the grand jury was initiated by DOJ, the SA must determine if any civil action is being taken or planned. CI will send Form 14584, IRS- Criminal Investigation-Check for and Suspend Civil Activity Notification, to advise SB/SE to cease all civil actions and suspend all examination activity. CI will concurrently send a copy of the Form 14584 to a centralized TE/GE mailbox established for such purposes which will be monitored by the TE/GE Fraud Specialist. The memorandum will then be forwarded to the TE/GE Fraud Suspense Coordinator for processing.

  2. When an existing administrative criminal investigation, either with or without an assigned cooperating compliance employee, becomes an approved grand jury investigation, CI will send a notification memorandum to TS to initiate suspense action. CI should also send a copy of the notification memo to the centralized TE/GE mailbox, which will then be forwarded to the TE/GE Fraud Suspense Coordinator.

  3. Upon receipt of notification of the grand jury, taxpayer contact must immediately cease on tax years currently under examination unless a parallel investigation is authorized. This is because the IRS relinquishes control of a grand jury case to the Assistant US Attorney (AUSA) and no longer has jurisdiction to work the civil examination. The TE/GE Fraud Suspense Coordinator will advise the EP group manager of the grand jury approval and instruct the group to:

    1. Stop all exam activity immediately

    2. Prepare the case for transfer to grand jury suspense

  4. When notified of the grand jury investigation, the EP agent conducting the exam (hereafter referred to as the Field EP Agent) must:

    1. Cease all exam activity and suspend the case (unless a parallel investigation is authorized).

    2. Expeditiously prepare the case to be held in grand jury fraud suspense.

    3. Transfer the case to theTE/GE FSU.

  5. The Field EP Agent must prepare the case for grand jury suspense by taking the following actions:

    1. Prepare a Revenue Agent Report (RAR) in accordance with IRM 4.71.3.4.3, Revenue Agent Report, and IRM 4.71.5.9.1.1, Revenue Agent Report (RAR) (as applicable),

    2. Prepare an Administrative Record to the fullest extent possible if there are potential plan qualification issues.

    3. Reflect the results of the examination, as far as it has progressed, and support all known applicable adjustments and penalties in the workpapers. Reflect the date prepared on all workpapers and the date received on all documents in the case file. This helps to establish a demarcation line between the facts developed before the grand jury approval date and any later fact development. If the facts developed before the grand jury approval date are not clearly identified then the Field EP Agent risks having the facts existing prior to the grand jury investigation being deemed “tainted” and not admissible for subsequent civil purposes.

      Note:

      If additional documents were gathered by EP between the date of the grand jury’s commencement and the date when EP was notified about the grand jury proceedings, those documents should be included in the file, but separately marked. A statement about the existence of additional documents and when they were collected should be included on the Form 4665. See paragraph 6 below.

    4. The RAR, administrative record, workpapers and documentation should all be printed as well as retained in electronic format within RCCMS.

  6. The Field EP Agent will also prepare Form 4665, as explained in paragraph (2) of IRM 4.71.25.7.9, Preparation of the Pre-Prosecution Report, and IRM 25.1.4.3.10, Preparation of the Pre-Prosecution Report, except the transmittal should not be labeled "Pre-Prosecution Report" . The transmittal memorandum must include a statement about the existence of additional documents and the date(s) they were collected. The paper copy of the Form 4665 should be kept in a confidential envelope.

    Caution:

    The EP agent should place the Form 4665 in a confidential envelope with a TDF 15-05.11, (catalog 56033J) attached to the confidential envelope. Items that need safeguarding from unauthorized or inadvertent disclosure with Form TDF 15-05.11 should not be included or referenced on Form 4665. Examples include fraud referrals and identification of informants. The Form 4665 must not include statements or comments intended to influence Appeals’ decision-making process in case the EP case goes to Appeals at a later date.

  7. After notification of the grand jury investigation, the Field EP Agent should not establish AIMS controls for prior or subsequent periods.

  8. Prior to transferring the case to the TE/GE FSU, the Field EP Agent must ensure that all statutes of limitations are protected and a minimum of one year remains on the statute for each open return. Please note that statute protection is not the responsibility of the Cooperating Grand Jury EP Agent.

    Note:

    The TE/GE Fraud Suspense Coordinator should be notified before the case is transferred to fraud suspense if this cannot be accomplished.

  9. If the years that are the target of a grand jury investigation are not currently under EP exam, AIMS controls should not be established.

  10. The EP group manager will transfer the electronic case on RCCMS and mail the physical case files to the TE/GE FSU. The EP group manager will notify the TE/GE Fraud Suspense Coordinator that the case has been transferred.

    Note:

    The TE/GE Fraud Suspense Unit Coordinator mailing address can be located on the IRS intranet at the TE/GE Connect, Fraud Coordinator’s page or by contacting the EPFC directly.

    1. The EP group manager will transfer the case in the current AIMS status to the TE/GE FSU. The case will be transferred to the TE/GE FSU on RCCMS with the AIMS box unchecked.

    2. The Manager, CP&C, Classification (or designee) will accept the transfer, update RCCMS and AIMS, and assign the case(s) to the TE/GE Fraud Suspense Coordinator.

    3. The TE/GE Fraud Suspense Coordinator will review the case for statute considerations within three business days. The results of the statute review will be forwarded to the Manager, CP&C, Classification by the end of the three-day period.

    4. The TE/GE Fraud Suspense Coordinator will review the file for readiness to be placed into grand jury suspense.

    5. If the case is ready to be placed into suspense, the TE/GE Fraud Suspense Coordinator will update the AIMS status code to 36 (Suspense, Grand Jury) to place the case in grand jury suspense and prepare the manual updates of the organization code on AIMS and RCCMS .

      Note:

      The case will remain in status 36 until the criminal aspects of the case have been completed. The TE/GE Fraud Suspense Coordinator will review the case for exam potential after the CI investigation is closed and will then return the case to the EP group to complete the exam. EP Determinations will also be notified to ensure that any related application for a favorable determination letter is also properly suspended.

  11. While the case is in grand jury suspense, the TE/GE Fraud Suspense Coordinator will:

    1. Maintain a separate Form 5464 headed "Suspense Case Chronology Report" to document all administrative work done with the case while it is in status 36.

      Note:

      Time spent on administrative tasks will not be charged to the exam case (or to the case’s control number entity on WebETS). Time spent by the TE/GE Fraud Suspense Coordinator on administrative tasks conducted while the case is in suspense will be charged to an indirect time code such as 1551550, Fraud Coordination, Case Specific, or 1551551, Fraud Coordination, Non-Case Specific, on WebETS.

    2. Monitor the statutes of the case files and make sure the correct statute dates are reflected on RCCMS and AIMS.

    3. Make any required follow-ups with, and provide any necessary assistance to, the CI Special Agent, FTA, EP agent, EP group manager, TE/GE Division Counsel or EFUs in order to ensure that the civil assessments can be made upon completion of the criminal case and that the case progresses.

    4. Submit Form 10498-A, or Form 10498-B and follow up on those forms as necessary.

    .

Cooperating Grand Jury EP Agent Procedures

  1. If CI forwards a Form 6544, Request for Cooperating Examiner, to EP through the centralized TE/GE mailbox or directly to the EP SME to request the assistance of an EP agent with the grand jury investigation, the TE/GE Fraud Specialist and/or EP SME will notify the EP agent’s Area Manager of the need to assign a "Grand Jury" EP group manager and agent (referred to as the Cooperating Grand Jury EP Agent) to the case.

    1. There must be an assigned Cooperating Grand Jury EP Agent and group manager who handle the grand jury aspects of the case.

    2. The Cooperating Grand Jury EP Agent assists the Assistant U.S. Attorney (AUSA) with the consideration, review and resolution of technical issues related to the criminal charges being investigated.

    Note:

    The EP agent conducting the civil exam can become the Cooperating Grand Jury EP Agent. However, the agent would not be permitted to complete the civil exam once the case comes out of grand jury suspense. The case would have to be re-assigned to a different agent and group manager since both were privy to grand jury material.

  2. The names of all participants in the grand jury matter, including the Cooperating Grand Jury EP Agent and group manager, will appear on the "6(e) list" or official list filed with the court of those individuals authorized to view information protected by Fed. R. Crim. P. 6(e).

  3. Evidence obtained during a grand jury investigation is protected under the secrecy provisions of Rule 6(e) of the Federal Rules of Criminal Procedure. Therefore, in a civil case, the Cooperating Grand Jury EP Agent cannot disclose any information obtained by the grand jury, unless that grand jury information has been made a matter of public record.

  4. The Cooperating Grand Jury EP Agent’s workpapers will be part of the Cl grand jury files.

    1. The files will not be available for the civil EP exam activity without a Rule 6(e) court order.

    2. Workpapers, however, admitted or referenced and specifically discussed in open court, are available for use in the context of a civil settlement.

  5. Grand jury materials should be kept in a separate work area, inaccessible to other IRS personnel not assisting the AUSA.

  6. The Cooperating Grand Jury EP Agent is prohibited from gathering information useful only in a civil proceeding.

    1. The Cooperating Grand Jury EP Agent must be aware of the civil information received or developed during the grand jury investigation since the civil information can be used when the case is sent/returned to the field for the civil case resolution .

    2. Civil information is that information which is a matter of public record, was obtained prior to the convening of the grand jury or was independent of the grand jury. The Field EP Agent is allowed to use this civil information in the civil exam.

    3. One of the Cooperating Grand Jury EP Agent’s most important responsibilities is to ensure this information is gathered and made available for the Field EP Agent’s successful resolution of the civil side of the case.

  7. All grand jury investigations in which an EP agent is asked to participate as a Cooperating Grand Jury EP Agent, are subject to the mandatory four-way conference requirements prescribed in IRM 25.1.4.3.2, Required Communications.

    Note:

    The four-way conference may include the FTA when deemed necessary. In such instances, the FTA will be added to the 6(e) list but will not be able to assist in the civil settlement of the case.

    Note:

    The EP SME will typically not be added to the "6(e) list" because of his or her involvement with the civil examination

  8. During a grand jury investigation, the Cooperating Grand Jury EP Agent should be identified as an assistant to the AUSA and not an IRS employee. IRS credentials may only be used for identification purposes.

  9. There are generally four critical stages of the Cooperating Grand Jury EP Agent’s involvement in the grand jury investigation and subsequent criminal proceedings.

    1. During these stages pertinent civil assessment information (specific tax information, including the sources of income for each year under investigation), may be developed and preserved.

    2. During these four stages, the Cooperating Grand Jury EP Agent should identify and secure pre-grand jury information and grand jury information that is a matter of public record.

    3. The Cooperating Grand Jury EP Agent must take action to preserve all non-grand jury information for the subsequent civil settlement of the case (i.e., resolution of the EP exam when it recommences).

  10. The first stage of the Cooperating Grand Jury EP Agent’s involvement is the pre-investigation stage. Immediately after assignment, the Cooperating Grand Jury EP Agent must:

    1. Identify the records, evidence and other documents secured to date.

    2. Make sure the information secured prior to the grand jury involvement is identified and dated.

      Note:

      This information will be free of secrecy restrictions imposed by Rule 6(e) of the Federal Rules of Criminal Procedure and may be used for civil purposes.

  11. Examples of information excluded from the secrecy restrictions of the Federal Rules of Criminal Procedure include:

    • Interviews conducted and documents obtained by CI prior to referral to the grand jury

    • Information obtained by search warrants issued and executed prior to referral to the grand jury

    • Affidavits sworn by the Special Agent (SA) pursuant to securing a search warrant issued by the court. These affidavits reflect alleged offenses

      Note:

      The Cooperating Grand Jury EP Agent should segregate all documents in the case file prepared by the Field EP Agent assigned to the case prior to it being identified as a grand jury case. This information should be forwarded through the EP Area Manager back to the TE/GE Fraud Suspense Coordinator for inclusion in the grand jury suspense file.

  12. The second stage of the Cooperating Grand Jury EP Agent’s involvement is the Indictment Stage. An indictment is the formal document identifying the grand jury's charges against the defendant. The indictment is a matter of public record.

    1. The Cooperating Grand Jury EP Agent, in cooperation with the AUSA, should include complete civil assessment information in the indictment.

    2. Depending on the charges alleged in the indictment, the AUSA may or may not be able to include this information in the indictment.

    3. If the case does not go to trial, the next opportunity for the Cooperating Grand Jury EP Agent to ensure that civil assessment information is preserved is during the plea agreement stage.

  13. The third stage of the Cooperating Grand Jury EP Agent’s involvement is the Plea Agreement Stage.

    1. Even though the Cooperating Grand Jury EP Agent usually does not participate in this stage, it is important that the Cooperating Grand Jury EP Agent convey to the AUSA the importance of including specific civil assessment information in the plea agreement.

    2. Plea negotiations generally result in the defendant pleading guilty to lesser charges.

    3. If there was limited disclosure of civil information in the indictment, the absence of specific civil assessment information in the plea agreement may result in the Field EP Agent not having enough non-grand jury information to propose adjustments, make assessments, address plan issues or provide information needed for the collection of taxes.

    4. Thus, the defendant may receive a criminal sentence but the plan issues may not be addressed or the defendant may not pay any tax and penalties due to lack of information in the public record.

    5. If specific civil assessment information is not made a matter of public record through the indictment or plea agreement, the last opportunity to achieve this objective is during formal sentencing proceedings.

  14. The fourth stage of the Cooperating Grand Jury EP Agent’s involvement is the Formal Sentencing Proceedings Stage.

    1. There are many statements and documents entered into the public record during this stage.

    2. One of the most important documents entered in the public record is the Government's Version of the Facts. This document is often read into the record by the prosecuting attorney. This document usually summarizes what the government would have proven if the case had gone to trial and covers years and/or charges to which the defendant did not plead.

    3. Because the Federal Sentencing Guidelines advise that the entire loss to the government be disclosed, including years not included in the plea agreement or indictment when sentencing an offender on a tax charge, the Cooperating Grand Jury EP Agent should request the AUSA read this information into the record. This is necessary because this information is often sealed as part of the probationary report.

      Note:

      Information entered into the record during sentencing proceedings must be relevant to the question of guilt or assist the court in sentencing the defendant. In United States v. Alexander, 860 F.2d 508 (2d. Cir. 1988), the court rejected the government's argument that unlimited public disclosure of grand jury materials was permissible during sentencing proceedings. Rather, the court stated that "[a] party moving for a relaxation of the normal rule of secrecy should structure its request to cover only material that is needed." This holding is consistent with the Supreme Court's interpretation of Rule 6(e) to "require a strong showing of particularized need for grand jury materials before any disclosure will be permitted." United States v. Sells Engineering, Inc., 463 U.S. 418, 443 (1983).

  15. The Cooperating Grand Jury EP Agent is responsible for assembling and forwarding documents and evidence, necessary for a civil tax closing of a grand jury investigation, to the SA and for association with Form 13308 used by CI when the criminal investigation is closed.

  16. The Cooperating Grand Jury EP Agent, in preparing to close the case after the grand jury investigation, should complete the following actions:

    1. Assist the SA in preparing a memorandum which informs the EP Area Manager that the grand jury investigation has been concluded and the case should be released for civil settlement if the investigation is discontinued and/or no indictment is returned, and the Cooperating Grand Jury EP Agent previously forwarded non-grand jury information to the EP Area Manager.

    2. Assist the SA in preparing a memorandum to the field stating there are no pre-grand jury documents if the investigation was entirely conducted using grand jury procedures and as a result there are no pre-grand jury documents.

    3. Segregate and assemble non-grand jury documents that will be used in completing the EP exam.

    4. Prepare Form 5666 addressing the civil aspects of the case immediately following the sentencing of the defendant. See IRM 4.71.25 Exhibit 17 at IRM 4.71 - Employee Plans Examination Exhibits for a copy of this form.

  17. Form 5666 should include the following non-grand jury information:

    1. A narrative summarizing the case history and the results of the investigation

    2. An index of documents included in the case file, briefly describing the source of the documents and their content

    3. Copies of trial documents such as jury books, evidence admitted during trial, transcripts of the trial proceedings, if available

    4. Cooperating Grand Jury EP Agent workpapers and schedules admitted or referenced, and specifically discussed in open court

    5. Cooperating Grand Jury EP Agent trial notes, if appropriate and useful in civil settlement

    6. Tax computations

    7. Any other pertinent and relevant public documents that the SA did not attach to Form 13308

  18. CI will notify the TS of the formal closing of the criminal case by use of Form 13308 and advise that the EP examination should resume.

    1. CI will concurrently send a copy of the Form 13308 and any related documents to a centralized TE/GE mailbox established for such purposes which will be monitored by the TE/GE Fraud Specialist.

    2. The Form 13308 and any related documents will then be forwarded to the centralized TE/GE mailbox for processing. The TE/GE Fraud Specialist will forward a copy of the Form 13308 closing package to the TE/GE Fraud Suspense Coordinator, who will process the suspended examination case back to the field. EP Determinations will also be notified if a related application for a favorable determination letter has been held in suspense.

  19. The completed Form 5666 prepared by the Cooperating Grand Jury EP Agent per paragraph (16) must be associated with Form 13308 so that it can be forwarded through the SSA to the TE/GE Fraud Specialist and the TE/GE Fraud Suspense Coordinator. The TE/GE Fraud Suspense Coordinator will forward the information to the originating EP group manager with a memorandum explaining the required procedures for completion of the EP exam.

  20. The Cooperating Grand Jury EP Agent’s time should be charged to activity code 155 (Fraud/Fraud Related Activities) and project code 1554 (CI Assistance, Grand Jury).

  21. See IRM 25.1.5.3, Cooperating Grand Jury Examiner/Revenue Officer Procedures, for additional information.

Civil Case Resolution

  1. Upon completion of the grand jury investigation, cases originating in an SB/SE Examination function will be released by TS from grand jury suspense and returned to the field SB/SE group for civil case resolution with a memorandum explaining the required procedures. A similar memo will be prepared by the TE/GE Fraud Suspense Coordinator for the EP Exam cases once the Form 13308 package is received from CI.

    1. The memo prepared by the Cooperating Grand Jury EP Agent and sent with the Form 13308 to the EP exam group is essential to help ensure that the Field EP Agent receives the non-grand jury material needed to conclude the civil EP examination.

    2. EP agents who had access to grand jury information are considered "tainted" for civil case resolution and cannot be assigned to complete the exam.

    3. Likewise, if the EP group manager had direct or indirect access to grand jury information, the case must be assigned to another manager to oversee completion of the exam.

    4. Rule 6(e) precludes the use of "matters occurring before the grand jury" in any subsequent civil action. Rule 6(e) states, "Any person to whom matters are disclosed under subparagraph (A)(ii) of this paragraph shall not utilize grand jury material for any purpose other than assisting the attorney for the government in the performance of such attorney's duty to enforce federal criminal law" .

  2. The Field EP Agent may use information in public record, including the search warrant, affidavit, indictment, plea agreement and other information in the court file for civil settlement purposes.

    1. As noted above in IRM 4.71.25.8.2, Cooperating Grand Jury EP Agent Procedures, the Cooperating Grand Jury EP Agent will gather this information during the grand jury investigation.

    2. At the conclusion of the grand jury investigation, that information will be given to the SA to attach to Form 13308 and will be forwarded to EP for association with the suspended EP exam file.

  3. Available information may be incomplete since the taxpayer may not have been convicted for all years listed in the indictment.

    1. A Rule 6(e) order may be requested through the AUSA to disclose grand jury information when the information is needed "preliminarily to or in connection with a judicial proceeding" .

    2. There must be a "particularized need" , meaning that the information cannot be obtained from some other source.

    3. An IRS civil examination does not meet this requirement.

    4. There must be specific litigation, such as a Tax Court or District Court proceeding.

  4. The touchstone of Rule 6(e)’s applicability is whether the disclosed material would "elucidate the inner workings of the grand jury" . The "inner workings" test would preclude disclosure of evidence, which tended to reveal the identity and/or testimony of witnesses, the direction of the investigation, and the deliberation of the grand jurors.

  5. The Field EP Agent may need to ask Cl if they have possession of specific documents known to be non-grand jury evidence. A memorandum from the Field EP Agent’s Area Manager to the Special Agent in Charge (SAC) should be prepared, providing a brief explanation of the situation and the specific documents requested.

  6. Grand jury evidence cannot be released even when the taxpayer volunteers to execute a waiver authorizing disclosure. However, the taxpayer can furnish records in their possession even though the grand jury subpoenaed the same records.

  7. If a court determines the IRS has improperly used grand jury material, the court may:

    • Refuse to admit the evidence

    • Reverse the burden of proof and/or require the IRS to proceed with evidence not derived from the grand jury

    • Decide to dismiss the case, without prejudice, due to government misconduct

    • Award attorney and legal fees to the taxpayer

EP Exam Fraud Scenarios

  1. A plan may be disqualified and determination letters revoked in conjunction with assertion of the fraud penalties.

    Example 1:
    A sole shareholder of a corporation that sponsors a qualified plan is also the corporate president and a participant in the qualified plan. He withdraws $500,000 from the plan’s trust funds over a two-year period and makes no repayments of these funds to the trust. The shareholder/president is aware of the plan’s loan provisions that explicitly prohibit loans in excess of $50,000 and require repayment of any monies borrowed. The shareholder/president does not seek the advice of a pension professional to determine the implications of his actions on the plan or how to resolve the issue once it has been done. The sole shareholder/president is a plan fiduciary who is knowingly using trust funds for his personal gain and/or improperly borrowing funds from the plan.
    • The actions of the shareholder/president are indications of potential fraud that may support a finding of fraudulent failure to file under IRC 6651(f) for the failure to file any required excise tax returns and/or a civil fraud penalty under IRC 6663 if the shareholder’s filed Form 1040 does not properly report the deemed distribution or withdrawal as taxable income.

    • The fraud issue must be developed prior to any discussion of possible civil resolution of the income tax issues or identified prohibited transactions.

    • If affirmative acts of fraud are identified then the submission of a criminal fraud referral should be considered.

    Note:

    See IRM 4.71.25.4, Criminal Fraud and IRM 25.1.3, Criminal Fraud, for procedures concerning the development of a criminal fraud referral, IRM 4.71.25.3, Civil Fraud Penalties, and IRM 25.1.6, Civil Fraud, for procedures concerning the development and assertion of the civil fraud penalty and IRM 25.1.7, Failure to File, for procedures pertaining to the development of willfulness and assertion of the fraudulent failure to file penalty.

    Example 2:
    A qualified plan’s trust purchased a house and property. The sole shareholder/president of the qualified plan’s sponsor is also the plan trustee and a plan participant. He and his family live in the house and use trust funds to pay for personal living expenses. He does not report any tax consequences from his use of the trust’s assets. The shareholder/president did not seek advice from a pension professional to determine the consequences of his actions or how to resolve the issue. The sole shareholder/president is a plan fiduciary who knowingly used trust funds for his personal gain and failed to report the income tax consequences stemming from his use of the trust funds.
    • The actions of the shareholder/president are indications of potential fraud that may support a finding of fraudulent failure to file under IRC 6651(f) for the failure to file any required excise tax returns and/or a civil fraud penalty under IRC 6663 if the shareholder’s filed Form 1040 does not properly report the tax consequences of the trust’s assets.

    • The fraud issue must be developed prior to any discussion of possible civil resolution of the income tax issues or identified prohibited transactions.

    • If affirmative acts of fraud are identified then the submission of a criminal fraud referral should be considered.