4.75.35 Fraud and Abusive Transaction Procedures

Manual Transmittal

August 19, 2016

Purpose

(1) This transmits revised IRM 4.75.35, Exempt Organizations Examination Procedures, Fraud and Abusive Transaction Procedures.

Background

This manual, formerly titled "EO ATAT Committee Operating Procedures," historically and primarily targets forensic agents in the EO Examinations Financial Investigations Unit (FIU) and their managers. This manual was established to address egregious forms of non-compliance. Since the last revision of this manual, the EO ATAT Committee as a body has been disbanded in recognition of existing procedures in IRM Chapter 4.32, Abusive Transactions. However, IRM 4.75.35 continues to be a source for information on addressing alleged abusive transactions within EO, as well as guidance for the FIU. But abusive transactions is one aspect of egregious non-compliance for which the FIU has primary responsibility. Other extreme forms of non-compliance includes fraud matters, which are also under FIU oversight. As a result, this manual incorporates fraud and federal grand jury procedures. These procedures have been relocated from IRM 4.75.21, EO Special Examination Procedures, to this manual. Consequently, this manual assumes the new title, "Fraud and Abusive Transactions."

Material Changes

(1) This manual removes the old title, "EO ATAT Committee Operating Procedures," , and inserts a new title, "Fraud and Abusive Transactions." See Background section of this manual transmittal for an explanation. Servicewide ATAT procedures can be found at IRM Chapter 4.32, Abusive Transactions.

(2) This manual incorporates, revises, and supersedes procedures in IRM 4.75.21.5, IRM 4.75.21.6,IRM 4.75.21.7, and IRM 4.75.21.8. See "Effect on Other Documents" below.

(3) This manual is converted to plain language to comply with the Plain Writing Act of 2010, P.L. 111-274.

(4) Where appropriate, terms such as "Field Audit Agent" , "Revenue Agent" , "EO examiner" , "examiner" and "examining agent" will be referred to as "agent." The terms, "examination" and "examine" were changed to "audit" where appropriate, in connection with the Plain Writing Act. The term, "EO compliance employees" is intended to mean agents and their group managers in TE/GE EO Examinations.

(5) IRM Exhibit 4.75.35-1, deleted

Effect on Other Documents


IRM 4.75.21.5, EO Special Examination Procedures, Federal Grand Juries, dated May 22, 2012, is superseded.
IRM 4.75.21.6, EO Special Examination Procedures, EO Fraud Referral Procedures, dated May 22, 2012, is superseded.
IRM 4.75.21.7, EO Special Examination Procedures, Cooperating Examiner and Summary Witness Request Procedures, dated May 22, 2012, is superseded.
IRM 4.75.21.8, EO Special Examination Procedures, Forensic Investigation Unit, dated May 22, 2012, is superseded.
The publication of this manual obsoletes Interim Guidance Memorandum TEGE-07-0914-0026, The EO Emerging Issue Committee, dated September 30, 2014. The Emerging Issue Committee is disbanded as of August 5, 2016.

Audience

Tax Exempt and Government Entities
Exempt Organizations
Exempt Organizations Examinations and
Exempt Organizations Examinations Financial Investigations Unit (FIU)

Effective Date

(08-19-2016)

Tamera L. Ripperda
Director, Exempt Organizations
Tax Exempt and Government Entities

Introduction

  1. This manual section provides specific procedures and guidelines for TE/GE Exempt Organizations (EO) agents and managers for considering tax fraud (hereinafter referred to as "fraud" unless stated otherwise), identifying the elements of fraud, and developing fraud issues. This manual also provides instruction on the various compliance actions involving cases where fraud and abusive transactions and where other noncompliance matters are involved.

  2. For a comprehensive guide for all IRS employees on the recognition and development of potential fraud issues, see IRM 25.1, Fraud Handbook. Refer to this service-wide manual for the most up-to-date procedures wherever there may be interpretive conflict with this manual. Topics covered in IRM 25.1 include:

    • Referrals for criminal fraud

    • Duties and responsibilities in joint investigations

    • Civil fraud cases

    • Other related fraud issues

  3. Refer to the manuals in IRM 4.32, Abusive Transactions for specific procedures on abusive transactions. All manuals in IRM 4.32 are relevant to TE/GE.

  4. Refer to TE/GE Connect, TE/GE Fraud Coordinators page for a list of the various coordinators stated in this manual, their post of duty addresses and phone numbers.

Background and Definitions

  1. The primary objective of the fraud program is to foster compliance through the recommendation of criminal prosecutions and civil penalties against taxpayers who evade the assessment and payment of taxes known to be due and owing.

  2. The discovery and development of fraud are the result of effective investigative techniques. Techniques employed by EO compliance employees are designed to disclose not only errors in accounting and application of tax law, but also irregularities that indicate the possibility of fraud.

  3. Generally, for fraud to be present, the EO compliance employee must show either:

    1. An additional tax due and owing as the result of an intent to evade tax, or

    2. The willful and material submission of false statements or false documents in connection with an application or return.

  4. In all cases under audit, comment on your consideration of fraud in section J-4 of Form 5773, EO Workpaper Summary Continuation Sheet, (correlating with item J-4 of Form 5772, EO Workpaper Summary).

  5. The Fraud Technical Advisor (FTA) plays a vital role in the development of a potential fraud case. Along with the TE/GE Fraud Specialist (TFS), consult with the FTA in all cases involving potential criminal fraud, as well as those cases that have potential for a civil fraud penalty. The FTA serves as a resource and liaison to compliance employees in all operating divisions. The FTA is available to assist you in fraud investigations and offer advice on matters concerning tax fraud.

  6. The FTA Program is a service-wide program administered by seven groups.

    1. The groups consist of revenue agents and revenue officers who are located strategically throughout the country to assist with the development of fraud.

    2. You can find a list of the groups, the FTAs and their group managers on the National Fraud Program (NFP) website, http://sbseservicewide.web.irs.gov/Fraud/default.aspx.

Definition of Fraud

  1. Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit.

  2. Specifically, tax fraud is often defined as an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both:

    • A tax due and owing

    • Fraudulent intent

Definitions - Other
  1. Familiarize yourself with the following legal terms to understand the requirements of proof:

    1. Burden of Proof - the obligation to offer evidence that a court (judge or jury) could reasonably believe in support of a contention. In tax fraud cases, the burden of proof is on the Government.

    2. Evidence - data presented to a judge or jury in proof of the facts in issue and, which may include the testimony of witnesses, records, documents, or objects. Evidence is distinguished from proof, in that, proof is the result or effect of evidence.

    3. Direct Evidence - evidence, which if believed, proves existence of fact in issue without inference or presumption. Examples include testimony from a witness who actually saw, heard or touched the subject of questioning or documents that establish on their face the occurrence of an event (e.g., a check shows that the drafter transferred specific funds to a specific person on a specific date).

    4. Circumstantial Evidence - evidence based on inference and not personal observation.

    5. Presumption (of law) - a rule of law that a judge or jury will draw a particular inference from a particular fact, or from particular evidence, unless and until the truth of such inference is disproved.

    6. Inference - a logical conclusion from given facts.

    7. Preponderance of Evidence - evidence that will incline an impartial mind to one side rather than the other so as to remove the cause from the realm of speculation. It does not relate merely to the quantity of evidence. Simply stated, evidence, which is more convincing than the evidence offered in opposition.

    8. Reasonable Doubt - a doubt that would cause a prudent person to hesitate before acting in matters of importance to themselves. Such a doubt will leave a juror’s mind uncertain after examination of the evidence.

    9. Willful Intent to Defraud - an intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be owing.

    10. Clear and Convincing Evidence - evidence showing that the assertion made is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.

Requirements of Proof

  1. Understanding the requirements of proof is essential in establishing fraud. In all criminal and civil tax fraud cases, the burden of proof is on the Government.

  2. The major difference between civil and criminal fraud is the degree of proof required.

    1. In civil fraud cases, the Government must prove fraud by clear and convincing evidence.

    2. In criminal cases, the Government must present sufficient evidence to prove guilt beyond a reasonable doubt.

Civil vs. Criminal
  1. Civil fraud results in a remedial action taken by the Government, such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as part of the unpaid balance of assessment.

  2. Criminal fraud results in a punitive action with penalties consisting of fines and/or imprisonment. Criminal penalties:

    • Are enforced only by prosecution

    • Are provided to punish the taxpayer for wrongdoings, and

    • Serve as a deterrent to other taxpayers.

  3. A tax fraud offense may result in both civil and criminal penalties. Restitution may be ordered in criminal tax cases pursuant to a plea agreement or a conviction under Title 18 of the United States Code (U.S.C.) and may be required as a condition of probation.

  4. Effective for restitution ordered payable to the IRS after August 16, 2010, SB/SE Technical Services will have exclusive responsibility for all Criminal Restitution assessments. Follow Interim Guidance Memorandum SBSE-04-1014-0056 dated October 7, 2014, Interim Guidance for Restitution-Based Assessment Procedures, until IRM 4.8.6, Criminal Restitution, is published. General information on restitution can be found in IRM 25.26, Restitution.

Avoidance vs. Evasion

  1. Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent, but rather shapes and pre-plans events to reduce or eliminate tax liability within the parameters of the law.

  2. Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.

  3. Common evasion schemes include:

    • Intentional understatement or omission of income

    • Claiming fictitious or improper deductions

    • False allocation of income

    • Improper claims, credits, or exemptions

    • Concealment of assets

    Note:

    For examples of fraud involving exempt organizations, see IRM 4.75.35.3.

Indicators of Fraud vs. Affirmative Acts of Fraud
  1. Indicators of fraud include the following:

    a. Taxpayers who knowingly understate their tax liability often leave evidence in the form of identifying earmarks (or indicators).
    b. A sign or symptom that actions may have been done for the purpose of deceit, concealment or to make things seem other than what they are. Indications, in and of themselves, do not establish that a particular action was done.
    c. Examples include:
    • Substantial unexplained increases in net worth

    • Substantial excess of personal expenditures over available resources

    • Bank deposits from unexplained sources substantially exceeding reported income

    • Documents that appear to be altered or false

  2. Affirmative acts (firm indications) of fraud include:

    a. Those actions that establish that a particular action was deliberately done for the purpose of deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than what they are.
    b. Fraud cannot be established without affirmative acts of fraud.
    c. Examples include:
    • Omissions of specific items where similar items are included

    • Concealment of bank accounts or other assets

    • Failure to deposit receipts to business accounts

    • Covering up sources of receipts

Criminal Statutes

  1. Willfulness is a common element of tax crimes. Willfulness is defined as a voluntary, intentional violation of a known legal duty. A good faith misunderstanding of the law or good faith belief that one is not violating the law negates willfulness.

  2. The elements necessary for the most common statutes under which criminal prosecution may be recommended by Criminal Investigations (CI) are listed in IRM Exhibit 25.1.1-1, Criminal Violations.

Other Types of Fraud

  1. For information on Bankruptcy Fraud, see IRM 25.1.2.6.

  2. For information on Employment Tax Fraud, see IRM 25.1.2.7.

  3. For information on Excise Tax Fraud (other than Internal Revenue Code Section (IRC) 4958), see IRM 25.1.2.8.

Fraud in Exempt Organizations (EO)

  1. For specific fraud procedures concerning Exempt Organizations including contacting the FIU, refer to IRM 25.1.9.5.

Scenarios

  1. For various types of fraudulent scenarios, refer to IRM 25.1.9.5.4.

Financial Investigations Unit

  1. The Financial Investigations Unit (FIU) is an Area within Exempt Organizations that includes forensic investigators, who perform forensic investigations and audits of the most complex exempt organizations and other related activities. The investigator:

    1. Leads or participates on teams involved with forensic financial investigations and related matters with other forensic investigators, special agents or inspectors

    2. Provides consultation and advice to prosecutors and other members of the investigative team

    3. Provides expert testimony

    4. Provides consultation and training to other agents

    5. Conducts conferences and briefings related to all of the above

  2. The FIU addresses potentially illegal activities including fraud, money laundering, funding terrorism and other illegal and abusive transactions involving the misuse of charities. Due to the increased demand for the FIU’s specialized skill set and limited resources, it is necessary to prioritize the FIU’s work.

  3. The FIU managers are responsible for reviewing the priority list below to ensure that appropriate cases are put into the work stream. The priority listing is meant to provide only general guidance. Situations may arise that require shifts in priorities.

  4. The FIU works cases in the following priority order:

    1. Joint Terrorism Task Force (JTTF) Cases – These cases are generally defined as the unlawful use of force or violence against persons or property to intimidate or coerce a government, civilian population or any segment thereof in furtherance of political or social objectives that threaten our National Security. JTTF cases involve, but are not limited to:
    • Entities or individuals on the OFAC Specially Designated Nationals List.

    • Entities or individuals that have been identified by CI as potentially being involved in terrorism.

    • Grants and allocations being made to questionable organizations or individuals, either foreign or domestic.

    • Prohibited transactions involving OFAC-sanctioned countries.

    Note:

    The OFAC terrorist list is located at http://www.treasury.gov/resource-center/sanctions/Pages/default.aspx. The State Department list is located at http://www.state.gov/j/ct/list/index.htm.

    2. Money Laundering – These cases involve engaging in financial transactions to disguise the origin and ownership of illicit funds that may be used to assist in terrorist financing, income tax evasion and other illegal activities.
    3. Public Corruption – These cases involve a breach of public trust and/or abuse of position by federal, state, or local officials and their private sector accomplices including exempt organizations.
    4. Other potentially illegal activities – These cases include:
    • Income Tax Evasion Cases

    • Conspiracy including Klein conspiracy

    • Complex schemes with multiple entities

    • Fictitious entities and/or false returns

    • Requests for testimony in front of a grand jury or at a criminal trial

    5. Project cases with indicators of fraud – These cases could be related to any one of the EO project cases where indicators of fraud have been identified.
    6. Programs and cases needing the FIU support – These are programs and cases arising from stakeholder requests and may include:
    • Fraud case(s) and/or program development

    • Promoter case(s) and/or program development

  5. EO FIU groups also work cooperating agent cases with Criminal Investigation. CI requests for cooperating agents are to be forwarded to the Great Lakes/FIU Area Manager. See IRM 4.75.35.8, Cooperating Agent and Summary Witness Request Procedures.

  6. Based on a lack of sufficient information in the classification process or subsequent development, cases meeting the FIU criteria may initially be assigned to another field audit group or a team audit group. When it is discovered that the case meets the FIU criteria, a determination must be made as to whether to work the case in the assigned group or refer the case to the FIU. See Exhibit 4.75.35-1, Financial Investigations Unit (FIU) - Case Selection Criteria for Referrals.

  7. During an agent’s pre-audit analysis of a return, a review of the information in the case file may identify substantial indicators of potential fraud. Some indicators of potential fraud include, but are not limited to:

    • Specific indicators involving the misuse of EO assets (diversion, embezzlement, inurement). Indicators may include evidence of funds going overseas without the appropriate control or oversight, or allegations of fraud that include specific documentation.

    • Indication of unreported taxable income (UBIT), willful intent or intentional disregard by the exempt organization or disqualified person(s).

    • Intentional misuse of exempt status (use of exempt status for non-exempt activity).

    Note:

    For indicators of fraud, see IRM 25.1.2.3.

Contacting the FIU: Examination Not Started

  1. Agent: If you believe there may be fraudulent issues, you must first discuss the issues of the case with your manager.

  2. EO Group Manager: Determine whether FIU involvement is needed. If FIU involvement is merited, schedule a conference call with the TE/GE Fraud Specialist (TFS) and FTA, to discuss the issues with your agent, and the TFS.

  3. The TFS will consult with the Great Lakes/FIU Area Manager and the appropriate FIU Manager to assist in making a determination whether the case should be transferred to the FIU or remain in the group with FIU technical assistance in an advisory role. Inventory considerations and complexity of the issues will play a role in this determination.

  4. If a mutual resolution cannot be made during the call, raise the issue with the appropriate area manager(s) for a final disposition.

Contacting the FIU: Examination Started

  1. Once an audit is started, discuss with the TFS any case with indicators of fraud. See IRM 4.75.35.2.

  2. Agent: For cases where the audit has just started, or indicators have yet to be identified, discuss the case with your manager to determine whether the TFS and/or FIU involvement is needed.

  3. Agent: If no involvement is required, continue to work the case to conclusion.

  4. EO Group Manager: If FIU involvement is needed, schedule a conference call with the TFS and the FIU Manager. Include your agent in the call to determine the appropriate level of FIU involvement.

  5. FIU involvement may include technical assistance in an advisory role or a request to transfer the case to the FIU. Inventory consideration and complexity of the case will play a role as to whether the case should be transferred.

  6. If a mutual resolution cannot be made during the call, raise the issue to the appropriate area managers for a final disposition.

Fraud Development Procedures

  1. When indicators (signs or symptoms) of fraud are identified in the audit, initiate a discussion with your group manager. Refer to IRM 25.1.9.5.1, Fraud Development Procedures.

Criminal Referrals

  1. This subsection discusses the purpose and processing of criminal fraud referrals. An important part of this process is the compliance employee’s ability to identify potential criminal fraud.

  2. When affirmative acts (firm indications) of fraud/willfulness are identified and criminal criteria are met, refer the case through the Fraud Technical Advisor (FTA) to Criminal Investigation (CI) via Form 2797, Referral Report of Potential Criminal Fraud Cases. The FTA is available to assist in determining if firm indications of fraud/willfulness are present, criminal criteria has been met, etc.

  3. Send a copy of the signed Form 2797 to the TE/GE Fraud Specialist (TFS). The TFS must receive a copy of all Forms 2797 that involve a TE/GE issue and/or a TE/GE entity.

    Note:

    The National Fraud Program (NFP) analyst also sends a copy of the Form 2797 at the end of the month to the TFS.

  4. CI’s mission is to serve the American public by investigating potential criminal violations of the Internal Revenue Code (IRC) and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law.

  5. The primary objective of CI is the prosecution, conviction and incarceration of individuals who violate criminal tax laws and commit related offenses.

  6. Criminal prosecutions serve to enhance voluntary compliance.

  7. While you develop the fraud case, keep the case in AIMS Status Code 17. If a referral has been sent to CI, keep the case in AIMS Status Code 17 until CI accepts the case. If CI accepts the case, update the AIMS Status Code to 18, Accepted by CI. If CI does not accept the case and the decision is made to pursue civil fraud, keep the AIMS Status Code at 17 until the case is closed. If the decision is made that civil fraud will not be pursued, then update the AIMS Status Code to 12.

Preparation of Form 2797 - Referral Report of Potential Criminal Fraud Cases

  1. If after consultation with the FTA, it is determined that a potential fraud case has firm indications of fraud/willfulness and meets criminal criteria, the EO compliance employee will immediately discontinue the audit and collection activity without disclosing to the taxpayer or representative the reason for the discontinuance. When the taxpayer asks if a fraud referral is being considered or whether CI is involved, the agent or revenue officer must not give a false or deceitful response. Guidance from the courts provides that EO compliance employees:

    • May decline to answer questions about criminal potential

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

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

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

    1. Each case is unique. Contact your local FTA and/or TFS for additional guidance.

    2. The EO compliance employee will complete the current version of Form 2797 (accessed through the Forms Repository). Electronic Publishing provides a fillable form that can be downloaded, saved as a PDF file, edited and electronically transmitted via Microsoft Outlook/Secured Messaging. The FTA and/or TFS is available to assist the compliance employee with preparation of Form 2797.

  2. Preparation of Form 2797

    a. The referral will be a detailed presentation of the facts that establish firm indications of fraud/willfulness, including, but not limited to:
    • A description of the firm indications/willfulness defined in IRM 4.75.35.2.3.1, Indicators of Fraud vs. Affirmative Acts of Fraud

    • Taxpayer’s explanation of the firm indications/willfulness

    • The estimated criminal tax liability; and

    • The method of proof used for income verification.

    b. If the fraudulent scheme involves multiple parties (e.g., husband and wife, corporation and corporate officers, etc.), the most culpable party (individual or entity) likely to be numbered as the primary investigation (PI)) will be identified in items 1a and 1b. All known parties involved in the fraudulent scheme (including the one identified in items 1a and 1b) will be listed in item 1c.
    c. If the referral is a joint referral from multiple sources, the FTA group manager will ensure that each operating division and/or business unit is properly identified and credited for the referral.
    d. No workpapers or documents are required with the referral. If attachments are necessary to enhance the referral, they must be embedded in the Form 2797 as a PDF file. The initial conference between the referring EO compliance employee, the FTA, the evaluating special agent (SA), and/or the TFS allows the EO compliance employee the opportunity to explain the case in detail and address any questions regarding the potential criminal violations. CI will be provided access to all work papers and documents needed to effectively evaluate the referral during the initial conference.
  3. The EO compliance employee will enter his/her name and grade, and enter the date the referral is being forwarded via secured e-mail to the EO compliance employee’s group manager.

  4. The EO compliance employee’s group manager will review the referral, and if in agreement, will ensure that the proper Area/Territory/Group is entered, approve the referral and forward it via secured e-mail to the FTA and TFS for consideration. The EO compliance employee’s group manager will retain a copy of the referral for the case file.

  5. The FTA will review the referral, and if in agreement, will approve the referral and prepare a one-page narrative (used to describe additional facts or the fraud development process). If necessary, the FTA will embed the narrative in the Form 2797 PDF file, and forward it via secured e-mail to the FTA group manager for consideration.

  6. The FTA group manager will review the referral, and if in agreement, will approve the referral and enter the FTA Management Control Number and forward it via secure e-mail to the appropriate CI Field Office.

Referral Evaluation

  1. Within 10 workdays of receipt of the referral, the SA assigned to evaluate the referral will identify the subject (individual or entity under criminal investigation consideration) as the primary investigation (PI), assign a PI number to the case and set up the initial conference. At that conference, the referring EO compliance employee, his/her group manager, the evaluating SA, his/her supervisory special agent (SSA), the FTA (if available), and/or the TFS will meet to discuss the referral and review tax returns, evidence gathered to support the alleged offense, criminal tax computations, etc. Also, discuss the following issues at the initial conference:

    1. Verification of income

    2. Explanations offered by the taxpayer, the taxpayer’s representative, and/or the return preparer concerning the alleged offense

    3. Whether returns were solicited and attempts were made to resolve the civil issues, and prior IRS action(s) involving a similar alleged offense, and

    4. Observations about the age, health (physical and mental), education and occupation of the taxpayer

    5. Additional factors to consider during the evaluation of the referral include tax due to fraud, flagrancy, significance, public interest and the deterrent effect.

    Note:

    Remember to include a computation of income tax adjustments and related IRC 4958 excise taxes in the referral for consideration by CI, even if TE/GE EO Exam does not have jurisdiction over the Form 1040.

  2. Within 30 workdays of receipt of the referral, the same individuals will meet again (disposition conference) to discuss CI’s decision to accept or decline the referral. CI is required to provide written feedback to the referring EO compliance employee, as to their decision (see IRM 4.75.35.6.3 and IRM 4.75.35.6.4). Area Counsel will be invited to offer legal advice, if it is deemed necessary. Also, the transfer of original tax returns, the need for a cooperating compliance employee, and civil actions concerning statute and prior/subsequent/related return consideration need to be discussed.

  3. The FTA will monitor the conference dates and response obligations to ensure all actions occur in a timely manner.

  4. The decision to accept or decline a referral may be extended by written agreement of the appropriate field Area Manager. The agreement will specify the reason(s) for the request (e.g., delay in receiving original tax returns or an opinion from Counsel) and the date the referring office can expect a determination.

Accepted Criminal Referrals

  1. If CI accepts the referral, the PI will be elevated as a Subject Criminal Investigation (SCI). CI will provide feedback by completing the "For Criminal Investigation Use Only" portion of item 1c, item 10 and item 11 of Form 2797 and return it via secure e-mail to the FTA group manager.

  2. CI will place Transaction Code (TC) 914 controls in the Master File record. The FTA group manager will forward the accepted referral via secure e-mail to the referring FTA. The FTA will send the accepted referral via secure e-mail to the referring EO compliance employee, the TFS, and his/her group manager. If the referral was initiated by EO Examinations, the agent and/or group manager will update the case to AIMS Status Code 18.

  3. The SA will promptly meet with the referring EO compliance employee and determine whether a detailed memorandum is required concerning contacts with the taxpayer, the taxpayer’s representative, or the preparer of the returns (preparer) under criminal investigation. If a memorandum is needed, include the following areas:

    1. The date of each contact the referring EO compliance employee had with the taxpayer, the taxpayers representative, and/or the preparer; and

    2. A summary of what took place during each contact, any explanations offered concerning the alleged offense, and/or any action that could be construed as solicitation or an attempt at civil settlement.

  4. IRM 4.75.35.8.1, Administrative Joint Investigation, provides specific guidance to EO compliance employees assigned to a joint investigation case as a cooperating compliance employee.

    a. A joint investigation case can originate from one of two sources:
    • A compliance-initiated criminal fraud referral (submission of Form 2797), or

    • A CI initiated-criminal investigation

    b. There are two types of joint investigations, administrative (non-Grand Jury) and Grand Jury. Among the procedural distinctions are the roles and requirements that apply to mandatory quarterly (four-way) conferences.
    • Specific guidance for the compliance employee cooperating in administrative joint investigations is found in IRM 4.75.35.8.1, Administrative Joint Investigation.

    • Specific guidance for the compliance employee cooperating in Grand Jury investigations is found in IRM 4.75.35.11.2, Federal Grand Jury Suspense Procedures.

  5. All criminal investigations (administrative and Grand Jury) involving cooperating EO compliance employees (joint investigations) are subject to mandatory quarterly (four-way) conferences. Four-way conferences are also required for all accepted criminal referrals (administrative and Grand Jury) in which an EO compliance employee is not asked to participate (non-joint investigations). In this scenario, the mandatory four-way conferences are designed to inform the referring compliance function of the updated investigation status. A status update for this purpose includes: the SA is writing the special agent’s report (SAR), discontinuing the case, case forwarded to Department of Justice (DOJ) - Tax or the Assistant United States Attorneys (AUSAs) office, case is going to trial, etc.). The SSA and the group manager of the cooperating agent will exercise sufficient control and follow-up to ensure the conferences are conducted and the investigation is promptly completed. The SSA should contact the EO compliance group manager to schedule the required four-way conference. If the SSA has not contacted the EO compliance group manager to schedule a mandatory four-way conference when one is due, the EO compliance group manager may also contact the SA to schedule a four-way conference. However, CI has primary responsibility for scheduling the mandatory four-way conference.

    a. The four-way conference must be attended by the SSA, SA, the EO compliance group manager and the cooperating compliance employee. The FTA, TFS, and Fraud Suspense Coordinator may also attend when necessary.
    b. The purpose of the four-way conference is to review the status of the investigation and plan actions required of the EO cooperating compliance employee and the SA. Periodically follow-up to ensure prompt completion of the investigation and proper use of resources. The inclusion of the FTA does not override the compliance group manager’s responsibility for case and resource oversight.
    c. Form 6084, Quarterly Joint Workplan and Conference Memorandum, is used to document the conference discussion. The SSA completes the form, which includes the following information:
    • Status/progress of the investigation;

    • Investigative obstacles (technical issues, noteworthy defenses);

    • Planned activities of both the SA and the EO cooperating agent and revenue officer;

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

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

    Note:

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

  6. If a taxpayer files a delinquent or amended return during a joint investigation (administrative or Grand Jury), the assigned EO cooperating compliance employee must discuss the filing with the assigned SA. The assigned SA must provide written guidance to the cooperating EO compliance employee as to whether or not any tax shown on such return should be immediately assessed. If the SA determines that such an assessment may jeopardize the criminal case, the SA will advise the EO cooperating compliance employee to not make the assessment at that time. At a minimum, however, the cooperating EO compliance employee must update the statute for assessment on AIMS to reflect receipt of the delinquent or amended return.

  7. The SA must advise EO Examinations if the case has been accepted by the DOJ for prosecution or the case is now the subject of a Grand Jury. If so, CI must submit a memorandum to EO Examination advising of such. The memorandum will serve as EO Examination’s supporting documentation to submit the case to fraud/Grand Jury suspense.

Declined Criminal Referrals

  1. If the referral is declined, CI will complete items 10 and 11 of Form 2797 and return it to the FTA group manager via secure e-mail along with a memorandum explaining the reason(s) for the declination.

  2. The FTA group manager will forward via secure e-mail the declined referral to the referring FTA. The FTA will send the declined referral via secure e-mail to the TFS, the referring EO compliance employee, and his/her group manager. The referring EO compliance employee will resume the audit once notification of the declination is received. The EO compliance employee and FTA will amend the plan of action (Form 11661 or Form 11661-A), which will include a schedule of future discussions, if warranted. If additional (new) firm indications of fraud develop, the case may again be referred to CI for criminal investigation consideration, as outlined in IRM 4.75.35.6.

  3. If the FTA group manager disagrees with the decision to decline the referral, the concerns will be addressed with the special agent in charge (SAC)/assistant special agent in charge (ASAC). If an agreement cannot be reached, the FTA group manager will discuss the matter with the FTA, the TFS, the EO compliance group manager, the initiating EO compliance employee and the area manager with group responsibility. If everyone concurs that the decision to decline the referral is inappropriate, the matter will be elevated to the area manager and the CI Director of Field Operations for resolution.

  4. The EO compliance employee will remove the case from fraud development status if no further actions related to criminal or civil fraud development are anticipated. Audit cases will be returned to AIMS Status Code 12 or another appropriate status code if civil fraud is not being pursued. See IRM 4.75.35.7.1, Procedures; IRM 25.1.7.7, Assessment Procedure for the Fraudulent Failure to File (FFTF) Penalty; and, IRM 25.1.7.8, Civil Closure for additional information.

Civil Fraud

  1. This subsection discusses the procedures to follow in a civil fraud case.

  2. A civil fraud penalty case may be developed based on facts and circumstances of a civil examination (audit) or result from a case initiated by Criminal Investigation (CI).

  3. Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness. In the case of a joint return, intent must be established separately for each spouse as required by IRC 6663(c). The fraud of one spouse cannot be used to impute fraud by the other spouse. Thus, the civil fraud penalty may be asserted only on one spouse, unless there is sufficient evidence that both spouses participated in the fraudulent act(s) resulting in the underpayment reported in their joint return.

    Note:

    When considering the civil fraud penalty, the fact that a taxpayer has not filed and has tax due is not sufficient to assert the civil penalty. An affirmative act of fraud, as stated in IRM 4.75.35.2.3.1, Indicators of Fraud vs Affirmative Acts of Fraud, must also be present.

  4. Specific guidance on fraud indicators and the development of fraud may be found in IRM 4.75.35.2, Background and Definitions, and IRM 4.75.35.5, Fraud Development Procedures.

  5. IRM 20.1, Penalty Handbook, provides specific procedures for assertion of the civil fraud penalty.

  6. Refer to IRM 25.1.9.5.2, Civil Fraud.

Procedures

  1. Upon concurrence of the EO group manager and Fraud Technical Advisor (FTA), update civil fraud development cases on AIMS to Status Code 17, Fraud Development, via Form 11661, Fraud Development Recommendation - Examination.

    Note:

    Where the FTA and EO group manager do not agree on whether a case should be developed for civil fraud, the EO Examination group manager may update the case to AIMS Status Code 17 without the FTA’s concurrence. However, the EO compliance group manager will contact the FTA group manager to discuss the situation prior to updating the status code. Regardless, Form 11661 is required in order to document the decision for fraud development and to ensure consistent treatment of all fraud cases. Where consensus with the FTA was not reached, Form 11661 will clearly document that pursuing the civil fraud penalty is the EO compliance group manager’s decision. Ultimately, the final decision on an audit rests with the EO group manager.

  2. Determination of the civil fraud penalty is the shared responsibility of the agent, his/her group manager and the FTA.

  3. Work with the FTA to ensure the fraud penalty narrative does, in fact, substantiate the assertion of the civil fraud or fraudulent failure to file penalties. The FTA will recommend enhancements to the fraud narrative, as needed, to clearly explain the indicators of fraud. Describe the affirmative acts for each case in enough detail so as to leave no doubt as to why assertion of the civil fraud penalty or fraudulent failure to file penalty is justified.

  4. If the FTA concurs with your fraud narrative and no additional information is required, the FTA will indicate his/her concurrence with the assertion of the civil fraud penalty or fraudulent failure to file penalty on Form 11661. The FTA will forward a copy of the Form 11661 to the FTA group manager and forward the original to you for inclusion in the administrative case file.

  5. If the FTA recommends that you develop the case further, the FTA will document the reason(s) why and note the required additional steps in the Plan of Action. If the FTA does not agree that the civil fraud penalty should be asserted, this will also be documented and discussed with you and your group manager. If your group manager disagrees with the FTA recommendation that the civil fraud penalty should not be asserted, keep the AIMS Status Code in status 17. Ultimately, the final decision on such a case rests with the EO Examination group manager.

  6. For civil disposition of a prosecution case, contact CI to ascertain the criminal statutes under which the taxpayer was convicted before attempting to resolve the related civil fraud penalty. See IRM 25.1.6.4 for additional information. The civil fraud case must be fully developed prior to recommending its assertion, including the amount of the liability and the underpayment upon which the civil fraud penalty is based. Consult the local FTA and Area Counsel for assistance in developing the case. Obtain a copy of the plea agreement or judgement and supporting documentation such as the allocution and sentencing documents, notating the applicable criminal statutes and years. See IRM 4.75.35.11, Federal Grand Juries, for procedures in securing information for use in the civil settlement of cases investigated through grand jury procedures.

  7. In cases where fraud was considered and the civil fraud penalty is not recommended, explain fully in the workpapers your consideration of the penalty and why it was not asserted.

  8. You must assert the civil fraud penalty and/or the fraudulent failure to file penalty if a taxpayer was successfully prosecuted by the Department of Justice under Title 26 (i.e.,IRC 7201, IRC 7203, and IRC 7206(1)) and the prosecution involved additional tax assessment(s) as opposed to payment of existing assessment(s). Area Counsel must approve any exceptions to this rule. In unsuccessful prosecution cases, non-assertion of the civil fraud penalty or the fraudulent failure to file penalty is at the discretion of the EO Examination group manager. Group managers are encouraged to consult with their local FTA for assistance. This rule also applies in the case of any related taxpayer involved in the same transaction and to any other year or period of the same taxpayer which is related to, or affects, the year or period for which criminal prosecution was successful.

    Note:

    Refer to IRM 25.1.6.4, Collateral Estoppel.

  9. Consider assertion of the civil fraud penalty or fraudulent failure to file penalty when a taxpayer is successfully prosecuted by the Department of Justice under Title 18 and the facts underlying the criminal case directly relate to additional assessments. The nature and scope of the civil action in such cases is at the discretion of the EO Examination group manager. Group managers are encouraged to consult with their local FTA for assistance, and consult with Area Counsel as appropriate.

  10. Cases returned to the field from Fraud or grand jury suspense for civil disposition are returned in AIMS Status Code 17. Based on the facts and circumstances of the case, if and when a joint determination by the agent, his/her group manager and the FTA is made to not develop and/or assert the civil fraud penalty, the case will be updated to AIMS Status Code 12. The case must clearly document the reason(s) for such determination. See Exhibit 4.75.35-2 on how the status code changes in each fraud development situation.

  11. Area Counsel must approve the civil fraud penalty prior to issuance of a statutory notice of deficiency (SNOD).

Evidence of Fraud

  1. Since direct proof of fraudulent intent is rarely available, fraud must be proven by circumstantial evidence and reasonable inferences. Fraud generally involves one or more of the following elements:

    • Deception

    • Misrepresentation of material facts

    • False or altered documents

    • Evasion (i.e., diversion or omission)

  2. The courts focus on key badges of fraud in determining whether there was an "intent to evade" tax. A determination of fraud is based on the taxpayer’s entire course of conduct, with each badge of fraud given the weight appropriate to a particular case. An evaluation of fraud is based on the weight of the evidence rather than the quantity of the factors. Some of the common "first indicators (or badges) of fraud" include:

    • Understatement of income (e.g., omissions of specific items or entire sources of income, failure to report substantial amounts of income received)

    • Accounting irregularities (e.g., two sets of books, false entries on documents)

    • Obstructive actions of the taxpayer (e.g., false statements, destruction of records, transfer of assets, failure to cooperate with the agent, concealment of assets)

    • A consistent pattern over several years of underreporting taxable income

    • Implausible or inconsistent explanations of behavior

    • Engaging in illegal activities (e.g., drug dealing), or attempting to conceal illegal activities

    • Inadequate records

    • Dealing in cash

    • Failure to file returns, and

    • Education and experience

  3. Include in the Facts section of the penalty narrative a detailed description of all applicable badges of fraud. Also include other items of deception or instances where the taxpayer may have misled or misrepresented facts to the government.

Case Closing

  1. For information return penalty case file closing procedures, refer to Interim Guidance Memorandum TEGE-04-0315-0008 dated March 24, 2015 until it is incorporated in IRM 4.75.22, EO Delinquent, Amended and Substitute for Return Procedures.

Cooperating Examiner and Summary Witness Request Procedures

  1. For procedures concerning cooperating examiner and summary witness requests, refer to IRM 25.1.9.5.3.

Administrative Joint Investigations

  1. This subsection focuses on the procedures that apply to administrative joint investigations.

Duties and Responsibilities
  1. The agent is concerned primarily with the determination of the civil tax liability and/or applicable penalties. In general, the following tasks are performed by the agent:

    • Reconciling taxpayer’s books and records to the return

    • Examining (auditing) books and records to determine adjustments

    • Analyzing bank accounts

    • Analyzing whether EO activities qualify for exemption

    • Verifying inventories

    • Compiling depreciation schedules

    • Ascertaining basis of assets

    • Participating in interviews of the taxpayer and witnesses

    • Computing civil tax liability for a pre-prosecution report

    • Assisting with the computation of criminal tax liability for the Special Agent’s Report (SAR)

    • Providing original tax returns to the special agent (SA) within 30 days of the joint investigation initiation or when received

    Note:

    See IRM 4.11.17.4, Requesting Returns Filed Electronically, for guidance on requesting returns filed electronically.

    • Reviewing prior and subsequent period returns, and related returns for audit potential (see IRM 4.75.35.9.1. for procedures.)

    • Protecting the statute of limitation (SOL), see IRM 4.75.35.9.2, Statute Protection, for procedures

    • Maintaining a chronological record of time charged to the case

    • Preparing administrative file prior to placing case in fraud suspense

Required Communications
  1. CI-Initiated Investigations:

    1. When CI initiates an administrative criminal investigation, CI will send a Form 14584, Check for and Suspend Civil Activity Notification to the FIU mailbox at *TE/GE-EO-FIU.

    2. If FIU staff identifies an open civil audit, the controlling TE/GE Examination group will be notified that CI has initiated a criminal investigation and to immediately cease all civil activity on the case.

    3. The EO Examination group manager must immediately contact the assigned SA or supervisory special agent (SSA), if known, to schedule a meeting to discuss the case.

    4. The conference should include the EO compliance employee, his/her group manager, the SA, and the SSA. The FTA and TFS may also attend when necessary.

    5. During this conference, a decision, based on the facts and circumstances, must be reached based on whether EO Examination will participate in the criminal investigation as a joint investigation, conduct a parallel investigation, or suspend all civil activity and not participate in the criminal investigation. No further civil actions will be taken until the meeting occurs and a decision is made.

    6. Regardless of the decision reached, the EO Examination case must be placed into AIMS status code 18 and retained in the group. At a minimum, quarterly (four-way) conferences must occur.

  2. Quarterly (Four-Way) Conferences:

    1. All criminal administrative joint investigations involving cooperating compliance employees are subject to mandatory quarterly (four-way) conferences. See IRM 4.75.35.6.3, Accepted Criminal Referrals, for conference activities, and participants’ roles and responsibilities for ensuring that productive and informative exchanges occur within the prescribed frequency.

    2. All accepted administrative criminal referrals that are not joint investigations (no cooperating compliance employee) also require mandatory quarterly four-way conferences. See IRM 4.75.35.6.3(4) for conference activities in this scenario.

    Note:

    It is mandatory that a copy of the completed Form 6084 is issued to all attendees. A copy must also be sent to both the FTA and TFS in TEGE.

Parallel Investigations

  1. The purpose of a parallel investigation is to balance both the civil and criminal aspects of a case under criminal investigation. Consider continuing the civil activity of any related taxpayer and/or tax that doesn’t adversely impact the criminal proceedings.

  2. Follow the procedures prescribed in IRM 4.32.2.6, Parallel Investigations.

  3. Policy Statement 4-26 (formerly P-4-84), Criminal and Civil Aspects in Enforcement, under IRM 1.2.13.1.11, indicates civil enforcement actions, including collection activity with respect to taxable periods of the same and other types of tax not included in the criminal investigation, generally do not imperil a criminal investigation or subsequent prosecution. The Policy Statement concludes that civil enforcement actions in these cases should proceed concurrently, unless there is agreement among the responsible functions to withhold civil action, in whole or part, during the duration of the criminal investigation.

  4. During required discussions involving the SSA, SA, EO compliance group manager and EO compliance employee, the EO compliance group manager may propose concurrent civil enforcement action consistent with Policy Statement 4-26 and Policy Statement 5-133, Delinquent Returns - Enforcement of Filing Requirements, under IRM 1.2.14.1.18. If the proposal is unresolved among CI and the civil function, the decision to proceed will be elevated to the next management level.

Prior and Subsequent Years and Related Returns

  1. During the joint investigation, the agent will secure all prior and subsequent period returns, and returns related to those included in the joint investigation, and will review the return(s) for audit potential.

  2. Agents must ensure administrative actions on prior or subsequent years or related returns do not imperil a prosecution. Agents must notify CI of any proposed action such as auditing returns, soliciting consents or issuing a notice of deficiency. Use Form 10498-A, Intent to Commence Civil Action - Expansion of Examination, to notify CI of your intent to audit prior and subsequent years, or related returns. Notification of the proposed action to solicit a consent and/or issue a notice of deficiency is covered below in IRM 4.75.35.9.2., Statute Protection.

  3. The area manager will forward via Microsoft Outlook Secure Messaging, a completed Form 10498-A to the SAC indicating his/her request to audit the prior, subsequent or related tax returns. The form is used to document CI’s concurrence or non-concurrence with the proposed action.

  4. If an agreement to proceed cannot be reached between EO Compliance and CI; the EO Director equivalent and the CI Director of Field Operations will make the decision, consistent with Policy Statement P-4–26. If an agreement is not reached at this level, the case is elevated to the Operating Division Commissioner and Chief, CI for resolution.

  5. If civil action is suspended, the suspended years will be periodically reviewed as EO Compliance deems appropriate, to protect the Government’s interest.

Statute Protection

  1. EO Compliance employees are responsible for monitoring all civil statute of limitations (SOLs) during joint investigations, including prior and subsequent years, and related tax returns under audit or collection activity.

  2. Check AIMS periodically to determine if the taxpayer filed tax returns. Protect the SOL(s) of any subsequent tax return filings in failure to file cases.

  3. You must protect the earliest SOL of each tax return. When multiple periods are involved, protect the most imminent SOL among the tax returns. The IRC 6501(a) statute (Three-year statute) expires three years after the date the tax return was due or filed, whichever is later. If the three-year SOL has expired or the taxpayer refuses to extend the period for assessment, consider the six-year SOL (omission of income in excess of 25 percent of reported gross income), under IRC 6501(e). See IRM 25.1.4.3.7.1 and IRM 25.6.22.6.17.2, More Than 25% Omission of Gross Income. All efforts should be made to secure the taxpayer’s consent to extend the period for assessment before either SOL expires. 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 limitations period to assess may be beyond three years.

  4. When fewer than 210 days remain on the SOL for assessment, complete Form 10498-B, Joint Investigations Intent to Solicit Consent to Extend Statute, to request CI’s permission to solicit the taxpayer’s consent to extend the statutory period for assessment or issue a notice of deficiency. Send Form 10498-B via Microsoft Outlook Secure Messaging to the area manager for signature. The area manager forwards the signed Form 10498-B via Microsoft Outlook Secure Messaging to the SAC to request a decision on soliciting the taxpayer’s consent to extend the period for assessment or on the agent’s intent to issue a notice of deficiency. CI must accept or decline the request within 10 workdays, after receipt of the Form 10498-B.

  5. If CI approves the request to solicit the taxpayer’s consent to extend the period for assessment, solicit the statute extension via Letter 907, Request to Extend Assessment Statute, along with Pub 1035, Extending theTax Assessment Period. Maintain a copy of Letter 907 in the case file.

    1. If you solicit the consent in person and in the presence of an SA, present both Letter 907 and Pub 1035 to the taxpayer.

    2. If you solicit the consent by mail, send Letter 907 and Pub 1035 to the last known address of the taxpayer.

  6. Document solicitation of the consent and the required notification of taxpayer’s rights on Form 5464, Case Chronology Record, and Form 895, Notice of Statute Expiration.

  7. Inform CI of the results of the solicitation of the taxpayer’s consent. Document this action in the case history. Refer any subsequent inquiries from the taxpayer to the SA assigned to the case.

  8. If CI approves the decision to issue a notice of deficiency, forward the case to Mandatory Review (MR) for notice preparation. MR will obtain Area/Division Counsel’s concurrence prior to issuing the notice of deficiency.

  9. If you cannot secure a consent to extend the period for assessment, 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, IRC 6501(c)(1), and allow the three and six-year periods for assessment to expire. This decision must be approved by the area manager and documented in the case file on Form 5464 and on Form 895. Refer to IRM 25.6.23.6.6.2, Reliance on IRC Provisions Which Extend Normal Assessment Statute.

  10. Document the decision to allow the three-year and/or the six-year periods for assessment to expire on Form 10498-B with signatures of the area manager, the SSA and the SAC. Attach the properly-executed Form 10498-B to page two of the applicable return. Immediately update the SOL on AIMS using the appropriate alpha code. Also update Form 895 to reflect the correct expiration date using the procedures in IRM 25.6.23.6.2, Completion of Form 895 by Area Office Examiner or Specialist.

  11. If agreement cannot be reached, the EO Director and the CI Director of Field Operations will decide. If an agreement is still not reached, the issue will be elevated to the Operating Division Commissioner and Chief, CI for resolution.

IRC 6501(e), 6-Year Statute
  1. IRC 6501(e) replaces the three-year period for assessment with a six-year period for assessment under certain circumstances.

  2. It is possible that the six-year statute may apply to the tax-exempt organization as well as related entities. This is especially true when excise taxes apply. Contact counsel to review potential application of IRC 6501(e).

    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 percent 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). However, all efforts should be made to protect the three-year period for assessment before relying on the six-year period for assessment.

    3. IRC 6501(e)(3) replaces the three-year period for assessment with a six-year period for assessment of Chapter 41 or 42 excise tax on an organization or other person, with respect to an act or failure to act occurring during an organization’s tax year, and the organization fails to disclose on its filed annual information return (e.g., Form 990) for such year the facts sufficient to apprise the Service of the potential existence and nature of the acts, etc. giving rise to such excise tax.

    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 burden of proof for the omission of gross income is on the Government. Only reportable income, omitted from the return, is included in the computation. Omitted or overstated deductions and expenses are not considered in the computation.

  4. Gross income for the IRC 6501(e) computation includes, but is not limited to:

    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.

    3. In the case of a partner in a partnership, gross income for this computation includes his/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/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 portion of pensions and annuities 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. 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. Do not include additional language or reference to IRC 6501(e) on the consent.

  8. If the Service proves a 25 percent 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. See Colestock v. Commissioner, 102 T.C. 380 (1994).

Discontinued Investigation

  1. If Cl withdraws from a joint investigation, the SA will prepare a discontinued investigation report stating the reason(s) for the withdrawal. A copy of the report and the original tax returns will be forwarded to the FIU mailbox at *TE/GE-EO-FIU.

  2. If the EO compliance employee’s group manager objects to the proposed withdrawal, the TFS will discuss the objection with the SAC. If agreement cannot be reached, the EO Director and the CI Director of Field Operations will make the decision.

    Note:

    The EO compliance employee’s group manager and the TFS can discuss the proposed withdrawal with the FTA group manager prior to elevating it to the area manager.

Preparation of the Pre-Prosecution Report
  1. Upon the completion of a joint investigation, prepare a Form 4549-A, Income Tax Examination Changes, and Form 886-A, Explanation of Items, for each adjustment (unagreed report) explaining all civil and criminal adjustments and penalties in detail.

  2. Assert the civil fraud penalty and/or the fraudulent failure to file penalty for all applicable years. Propose accuracy-related and/or delinquency penalties as an alternative position.

  3. Follow innocent spouse report writing procedures when applicable. See IRM 4.75.28.4.2, Relief from Joint and Several Liability.

    Note:

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


EO Exam Administrative Fraud Suspense Procedures

  1. Civil exams are placed into suspense once a joint investigation is completed and CI recommends criminal prosecution and the case is sent to the Assistant United States Attorney (AUSA).

    1. When a joint investigation is completed and CI recommends criminal prosecution, CI will send a memorandum to the TE/GE mailbox, *TE/GE-EO-FIU, to check for and cease all civil activity. The EO fraud suspense coordinator (FSC) will prepare a memorandum instructing the group manager to route the case to the FSC and cease all civil activity.

    2. EO Examination will update the AIMS Status Code to 32, Administrative Suspense - General Fraud Status, and route the case to EO Fraud Suspense. The case will remain in fraud suspense until the criminal aspects of the case have been completed.

    3. The EO group manager will transfer the electronic case on Reporting Compliance Case Management System (RCCMS) to the EO FSC, and mail the physical case files. The EO group manager will notify the FSC of the RCCMS transfer, and the mailing of the file via secured e-mail. The FSC’s mailing address can be located on the IRS intranet at the TE/GE Connect Fraud Coordinators page, or by contacting the FSC directly.

    4. The FSC will leave the AIMS Status Code of 32, or update the Status Code to 36, Suspense - Grand Jury.

    5. The group manager will ensure the case is forwarded to the FSC to be placed into fraud suspense as expeditiously as possible.

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

  3. A period of at least one year must remain on the SOLs of the returns being transferred to administrative fraud suspense.

    1. If there is not at least one year remaining on the statute of limitation (SOL), there must be joint approval (CI and EO) 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 IRM 4.75.35.9.2 for detailed instructions.

    2. Advise the FSC if there is less than a one-year statute, or if a Form 10498-B needs to be submitted, or if TE/GE Area Counsel is contacted regarding reliance on IRC 6501(c)(1) and IRC 6501(c)(2).

  4. The EO group manager will transfer the electronic case on RCCMS and mail the physical case files to the TFS. The EO group manager will notify the FSC of the RCCMS transfer, the mailing of the file and the expected date of arrival via secure E-mail. The FSC’s mailing address can be located on the IRS intranet at the TE/GE Connect, Fraud Coordinators page or by contacting the FSC directly.

    1. The FSC will review the case for statute considerations within three business days,

    2. The FSC will review the file for readiness to be placed into fraud suspense.

    3. If the case is ready to be placed into fraud suspense, the FSC will update the AIMS Status Code to 32, Administrative Suspense - General Fraud Status, or Status Code 36, Suspense - Grand Jury.

  5. The audit case file should contain:

    1. Sufficient documentation to support the adjustments and penalties in the Revenue Agent Report (RAR). See "Preparation of the Pre-Prosecution Report" in IRM 25.1.4.3.9.

    2. Original tax returns or documented requests for the tax returns, if they are not in the possession of CI or Compliance Area/Division Counsel.

    3. Signed Form 2797 reflecting "Accepted for Investigation" by CI.

    4. A current transcript reflecting TC 914 for each tax period in the case file. If TC 914 is not present, contact the SA and request the required action.

    5. Form 3198-A, TE/GE Special Handling Notice. Check the "Suspense (Cycle Time)" box under the Special Features section of Form 3198-A, and enter "Fraud Suspense" in the adjacent field. Update AIMS to Status Code 32, Administrative Suspense - General Fraud Status.

    Caution:

    Copies of sensitive documents must not be included in the workpapers. The workpapers should make no mention of an informant or specific agencies.

EO Fraud Suspense Coordinator Responsibilities

  1. EO Fraud Suspense Coordinator responsibilities include the following:

    1. Maintain Form 5464, Case Chronology Report, and a fraud suspense activity log to document all administrative work.

    2. Coordinate communications with CI, TE/GE Counsel, EO group managers, EO agents, TE/GE Fraud Specialist, and the Great Lakes/FIU Area Manager.

    3. Prepare Form 10498-B, Joint Investigations Intent to Solicit Consent to Extend Statute, if the statute is within 210 days of expiring.

    4. Prepare a Letter 907, Request to Extend Assessment Statute, and the consent if directed to do so on Form 10498-B.

    5. Mail the Letter 907, consent, and Pub 1035, Extending the Tax Assessment Period, to the taxpayer and power of attorney, if applicable, and copies will be maintained in the case file. Refer to IRM 25.6.22, Extension of Assessment Statute of Limitations By Consent, where CI grants permission to either solicit by mail or in person. If no response is received to the first solicitation by mail, a follow-up request on Letter 928, Request to Extend Statute - Follow Up Letter, is sent.

    6. Monitor statutes on both the IMART and RCCMS.

    7. Maintain statute controls including the Form 895 Log.

    8. Make AIMS and RCCMS updates for status and alpha codes.

    9. Update statutes on AIMS and RCCMS.

    10. Contact EO group managers to secure and document quarterly meeting dates.

    11. Provide guidance to group managers, agents, and other employees regarding fraud suspense procedures.

    12. Make periodic evaluations of suspense cases to determine whether circumstances have changed and ensure the Government’s interests are adequately protected.

    13. Conduct research on Public Access to Electronic Court Records (PACER).

    14. Returning cases to the field as appropriate.

Civil Settlement of Prosecution Cases

  1. CI will send a copy of Form 13308, Criminal Investigation Closing Report, to the *TE/GE-EO-FIU mailbox, which was established for such purposes and is monitored by the TE/GE Fraud Specialist. The Form 13308 will then be forwarded to the FSC for processing.

  2. The FSC will prepare a memorandum instructing the EO group manager that the case has been sent back to the originating EO group for civil resolution.

  3. If the civil fraud penalty and/or the fraudulent failure to file penalty is being pursued, the tax years/periods under penalty consideration will return to AIMS status code 17 (Fraud Development). This will be documented by the FTA on Form 11661.

Special Conditions of Probation

  1. CI, EO and Collection would need to closely coordinate their case actions if probation is ordered. See IRM 5.1.5.15, Advisory Actions - Probation Cases, for procedures to be followed by Collection Advisory and field collection in probation cases.

  2. 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. CI will send a copy of Form 13308 to the *TE/GE-EO-FIU mailbox. The Form 13308 will then be forwarded to the FSC for processing.

    3. The FSC will prepare a memorandum to the appropriate EO 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 EO 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.

  3. 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 EO return modules then the FSC will follow up with CI to ensure this occurs.

  4. The EO Area Manager will 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.

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

  6. 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, and

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

  7. 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.

Federal Grand Juries

  1. Federal grand juries are convened for the purpose of inquiring into alleged criminal violations of Federal statutes. In the context of Federal tax investigations, a Grand Jury Request may be made where the administrative process (the IRS investigation) cannot develop the relevant facts within a reasonable period of time.

  2. The Internal Revenue Service, a United States Attorney, or a Strike Force Attorney may request to initiate a grand jury. The Service cannot initiate a grand jury investigation on its own. The Criminal Section of the Justice Department’s Tax Division approves grand jury investigations of suspected tax violations.

  3. An attorney for the government, such as an Assistant United States Attorney, may request the Service’s assistance in an ongoing or proposed grand jury investigation whenever information available to the attorney indicates possible commission of crimes. Within the Service, Criminal Investigation (CI) has jurisdiction over grand jury cases. Consequently, all such requests for Service assistance are made through CI.

Request for Assistance in Grand Jury Investigations

  1. CI and the Department of Justice attorney or the Assistant United States Attorney have complete jurisdiction over grand jury cases. CI completes a Form 6544, Request for Cooperating Examiner, to request the assistance of an agent(s) in a grand jury investigation. CI forwards the completed Form 6544 to the Great Lakes/FIU Area Manager.

  2. Item 1b of Form 6544 lists entities identified as being related to the taxpayer under grand jury or other criminal investigation.

  3. Great Lakes/FIU Area Manager: Review the Form 6544. Note the taxpayer which is the subject of the request, and entities identified as related entities. CI and Area Counsel are later consulted regarding whether to suspend audits of such related entities. Area Manager, FIU: within five business days of receipt, forward Form 6544 to the FIU group manager for the geographic area in which the taxpayer is located.

    Note:

    Ideally, the cooperating agent is not from the group that has responsibility for the civil audit of the taxpayer. However, it is recognized, due to the fact that in most geographic locations there is only one group from which agents can reasonably be drawn, the cooperating agent and the agent assigned the civil aspects of the case are often in the same group. Take extreme care to ensure that no information is exchanged between the two agents that would create problems for the ensuing civil case.

  4. FIU Group Manager: Within five business days of receipt of the request from the Great Lakes/FIU Area Manager:

    1. Review the Form 6544. Note the organization which is the subject of the criminal investigation, and any identified related entities. Do not start civil actions on related entities. If started, suspend until such time as it is determined, through consultation with CI and Area Counsel, that civil action would not compromise the criminal case.

    2. Assign an agent to assist in the grand jury investigation.

    3. Complete Item 13 of Form 6544 reflecting the assignment of that agent.

    4. Forward the completed Form 6544 to CI.

    5. Forward a copy of the completed Form 6544 to the Great Lakes/FIU Area Manager.

  5. Great Lakes/FIU Area Manager: Place a copy of the completed Form 6544 in the Grand Jury Suspense file.

  6. Upon return of the completed Form 6544, CI completes Form 9510, Grand Jury Access List, to add the assigned agent(s) to the list of those authorized to have access to grand jury information.

  7. The Assistant United States Attorney will be consulted if there is any question whether a document contains grand jury information.

Federal Grand Jury Suspense Procedures

  1. When an investigation has been accepted by CI based on a referral from the field or through its own case development and a grand jury investigation has been authorized, CI will send a memorandum to the *TE/GE-EO-FIU mailbox to cease all civil actions and terminate compliance activity.

  2. The EO Fraud Suspense Coordinator (FSC) will prepare a memorandum instructing the EO group manager to immediately suspend all civil actions, terminate compliance activity, and transfer the case to the EO FSC to be held in grand jury fraud suspense. The case will be held in AIMS Status Code 36, Suspense - Grand Jury, until the criminal aspects of the case have been completed. The EO FSC will then return the case to the EO group for civil resolution.

    Note:

    The EO agent who handles the civil audit may also be the agent who is assigned to the Grand Jury as a cooperating agent. When the case is concluded and the civil aspects of the case can be resolved, the agent who was the Cooperating Grand Jury EO Agent cannot be assigned to the civil aspects of the case.

  3. When an agent is notified that the civil audit is now a grand jury investigation, the agent, and group manager must:

    a. Suspend all civil actions and terminate audit activity unless a parallel investigation is authorized.
    b. Expeditiously prepare the case for suspense, including taking the following actions:
    1. Prepare an unagreed Revenue Agent Report (RAR), identifying all known adjustments and applicable penalties.

    2. Ensure workpapers reflect the results of the audit to date and support all proposed adjustments and penalties.

    3. Identify issues that have not been fully developed.

    4. Identify workpapers and documentation received prior to the grand jury.

    c. See EO Fraud Suspense Job Aid, which can be obtained from the EO FSC, for further guidance.
    d. Transfer the case to the EO FSC.
    e. If additional documents are gathered by EO between the date of the grand jury’s commencement and the date when EO was notified about the grand jury proceedings, those documents should be included in the file, but separately marked.
    f. A statement about the existence of additional documents and when they were collected should be included on the transmittal memorandum.
  4. The Field EO agent will also prepare Form 4665, Report Transmittal, as explained in IRM 4.5.35.8.3.1, Preparation of the Pre-Prosecution Report, except the transmittal should be labeled "Pre-Prosecution Report."

    Note:

    The Form 4665 must not include statements or comments intended to influence Appeals’ decision-making process.

  5. The Field EO agent must prepare a dated status memorandum (IRM 25.1.5.3(3)a), establishing a demarcation between the facts existing prior to the grand jury investigation and the facts developed as a result of the grand jury investigation, and include it in the EO work papers. Otherwise, the Field EO agent risks the facts existing prior to the grand jury investigation being deemed tainted and not admissible for subsequent civil purposes.

  6. After notification of the grand jury investigation, the Field EO agent should not establish AIMS controls for prior or subsequent periods.

  7. Prior to transferring the case to grand jury suspense, the Field EO agent must ensure all open statutes of limitation are protected and a minimum of one year remains on the statute for each open return. The EO FSC must be notified if there is less than one year on the statute.

  8. If the subject of a grand jury investigation is not currently under EO exam activity, AIMS controls should not be established and statute protection is not the responsibility of the Cooperating Grand Jury EO Agent.

  9. When the EO group manager transfers the electronic case on RCCMS and mails the physical case files to the EO FSC; the EO group manager, concurrently, will notify the EO FSC of the RCCMS transfer, and the mailing of the file. The EO FSC’s mailing address can be located on the IRS intranet at the TE/GE Connect, Fraud Coordinators page or by contacting the EO FSC directly. If the case is ready to be placed into suspense, the EO FSC will update the AIMS Status Code to 36 to place the case in grand jury fraud suspense.

Cooperating Grand Jury EO Agent Procedures

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

    1. The Cooperating Grand Jury EO Agent must be aware of the civil information received or developed during the grand jury investigation.

    2. Civil information can be used when the case is sent/returned to the field for civil case resolution.

    3. The Field EO Agent is allowed to use civil information, provided the information is a matter of public record, or was obtained prior to the convening of the grand jury or independent of the grand jury.

    4. One of the Cooperating Grand Jury EO Agent’s most important responsibilities is to ensure this information is made available for the successful resolution of the civil side of the case.

  2. The quarterly (four-way) conference requirement exists:

    1. All grand jury investigations in which an EO agent is asked to participate as a cooperating Grand Jury EO Agent, are subject to the mandatory four-way conference requirements prescribed in IRM 4.75.35.8.1.2(2), Required Communications.

    2. The names of all participants, including the EO 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 Federal Rules of Criminal Procedure 6(e).

    Note:

    The four-way conference may include the fraud technical advisor (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 FSC will not be added to the "6(e) list" because of his or her involvement with the civil audit.

  3. There are generally four critical stages of the Cooperating Grand Jury EO 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 EO 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 EO Agent must take action to preserve all non-grand jury information for the subsequent civil settlement of the case.

  4. The first stage of the Cooperating Grand Jury EO Agent’s involvement is the Pre-Investigation Stage.

    1. Immediately after assignment, the Cooperating Grand Jury EO Agent must identify the records, evidence and other documents secured to date.

    2. Information secured prior to the grand jury should be identified and dated.

    3. 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.

  5. 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 EO Agent should segregate all documents in the case file prepared by the Field EO Agent assigned to the case prior to it being identified as a grand jury case. This information should be forwarded through the EO Area Manager back to the FSC for inclusion in the grand jury suspense file.

  6. The second stage of the Cooperating Grand Jury EO 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 (unless sealed).

    1. The Cooperating Grand Jury EO Agent, in cooperation with the Assistant U.S. Attorney (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 EO Agent to ensure that civil assessment information is preserved is during the plea agreement stage.

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

    1. Even though the Cooperating Grand Jury EO Agent usually does not participate in this stage, it is important that the Cooperating Grand Jury EO 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 EO Agent not having enough non-grand jury information to propose adjustments, make assessments or provide information needed for the collection of taxes.

    4. Thus, the defendant may receive a criminal sentence but 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.

  8. The fourth stage of the Cooperating Grand Jury EO 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 EO 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.″ 860 F.2d at 513. 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).

  9. The Cooperating Grand Jury EO 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, Criminal Investigation Closing Report (Tax and Tax related Only).

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

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

    2. If the investigation was entirely conducted using grand jury procedures and as a result there are no pre-grand jury documents, the Cooperating Grand Jury EO Agent will assist the SA in preparing a memorandum to the field stating there are no pre-grand jury documents.

    3. Segregate and assemble non-grand jury documents that will be used in the civil settlement.

    4. Immediately following sentencing of the defendant, the Cooperating Grand Jury EO Agent, if one was assigned, must prepare Form 5666, TE/GE Referral Information Report, addressing the civil aspects of the case.

  11. Form 5346, Examination Information Report, 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 documents, (e.g., jury books, evidence admitted during trial, transcripts of the trial proceedings), if available;

    4. Cooperating Grand Jury EO Agent work papers and schedules admitted or referenced, and specifically discussed in open court;

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

    6. Tax computations; and

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

  12. CI will notify TS of the formal closing of the criminal case by use of Form 13308 and advise that civil actions on the case should resume.

    1. CI will concurrently send a copy of the Form 13308 to the *TE/GE-EO-FIU mailbox, which will be monitored by the TE/GE Fraud Specialist.

    2. The Form 13308 will then be forwarded to the FSC for processing.

  13. The completed Form 5666 information item package prepared by the Cooperating Grand Jury EO Agent must be associated with Form 13308 so that it can be forwarded through the Supervisory Special Agent (SSA), to the TE/GE Fraud Specialist, and to the FSC. The FSC will identify the EO group to which the EO package needs to be forwarded for civil disposition and will send the case to the originating EO group with a memorandum explaining the required procedures for civil resolution.

  14. Upon completion of a grand jury investigation, all EO agents who had access to grand jury information are "tainted" for civil case resolution and cannot be assigned to the case.

    1. Likewise, if the EO group manager had direct or indirect access to grand jury information, the case must be assigned to another manager for civil settlement.

    2. In other words, the case must be assigned to an EO agent whose name was not on the 6(e) list or who was not privy to grand jury information; and to another group, if the name of the EO group manager was on the 6(e) list or the group manager was privy to grand jury information.

    3. In such instance, the FSC will consult with EO Classification and/or the EO Area Manager to determine which EO group will receive the case for civil disposition. Cases that are not in suspense or are not under EO exam activity prior to placement in grand jury suspense will be routed through EO Classification for group assignment. Also see IRM 25.1.5.3(5)for additional information.

Unique Features

  1. IRS relinquishes control of a grand jury case to the Assistant US Attorney (AUSA).

  2. The field EO agent who handles the civil audit cannot handle the grand jury aspects of the case.

    1. There must be a separate Cooperating Grand Jury EO Agent and group manager who handle the grand jury aspects of the case.

    2. The Cooperating Grand Jury EO Agent assists the AUSA with the consideration, resolution and review of technical issues related to the criminal charges being investigated.

  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 EO Agent cannot disclose any information obtained by the grand jury, unless that grand jury information has been made a matter of public record. See IRM 4.75.35.12, Time Tracking – Fraud/Fraud Related Activities.

  4. The Cooperating Grand Jury EO Agent assigned to a grand jury investigation is "tainted" for any subsequent civil EO exam activity. This also applies to an EO group manager that has access to grand jury information.

  5. The Cooperating Grand Jury EO Agent’s time should be charged to Activity Code 155, Fraud/Fraud Related Activities, and Project Code 1554, CI Assistance, Grand Jury.

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

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

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

    1. The files will not be available for the civil EO 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.

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 FSC for the EO Exam cases.

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

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

    3. Likewise, if the EO group manager had direct or indirect access to grand jury information, the case must be assigned to another manager for civil settlement.

    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."

      Note:

      The FSC, as the EO Fraud Suspense Coordinator, will release the EO exam case from grand jury fraud suspense after the Form 13308 package is received from CI. If the investigation is ongoing, CI requests release of the case, via memorandum, from the FSC for civil action prior to the case going to the Department of Justice (DOJ). Once the memorandum from CI is received, the case will be released as prescribed in IRM 25.1.5.3(5).

  2. The Field EO 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, the Cooperating Grand Jury EO 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 EO for association with the suspended EO exam civil case file.

  3. Since the taxpayer may not be convicted for all years in the indictment, information available may not be complete.

    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" , in that the information cannot be obtained from some other source.

    3. An IRS civil audit 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 EO 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 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. Further, the court may decide to dismiss the case, due to government misconduct. If the court determines that the IRS intentionally used grand jury material, attorney and legal fees can be awarded to the taxpayer.

Time Tracking – Fraud and Fraud-Related Activities

  1. For procedures concerning Web-Based Employee Technical Time System (WebETS) tracking of fraud cases and fraud-related activities, refer to IRM 25.1.9.3.

General Information

  1. For general information concerning activity codes, project codes and naming conventions, refer to IRM 25.1.9.3.1, as well as Exhibit 4.75.35-3.

Agent Responsibilities

  1. For procedures concerning agent responsibilities including the securing of tracking numbers, applying case time and and apprising audit results, refer to IRM 25.1.9.3.2.

Group Manager Responsibilities

  1. For procedures concerning keeping the TFS updated, proper recording of time, contacting the EO Fraud Suspense Coordinator, etc., refer to IRM 25.1.9.3.3.

Financial Investigations Unit (FIU) - Case Selection Criteria for Referrals

(1) Organizations on the Terrorist Watch List Include the Following:

a. Related entities to individual on the Terrorist Watch List
b. All referrals/cases that involve the Joint Terrorism Task Force (JTTF)
c. Grants and Allocations being made to questionable organizations or individuals, either foreign or domestic
d. Prohibited transactions involving OFAC-sanctioned countries or individuals
e. Resources:

(2) Other Case Selection Criteria are as Follows:

  1. All referrals/cases that involve "classified" and/or confidential information

  2. Cases involving potential terrorism financing including unallowable activities related to providing a centralized location for information sharing and strategic planning of illegal activities

  3. Referrals from the Office of Foreign Asset Control

  4. Issues related to public corruption

  5. Issues related money laundering

  6. Issues related to potential fraud through the use of complex schemes and/or a mixture of for-profit and non-profit entities

  7. Issues related to fictitious entities being used to facilitate potentially fraudulent transactions and/or promotion of abusive transactions. These cases could be field or FIU. In order to be FIU they must meet at least one other criteria list in 1, 2, 3, 4, 5, 6, 7, or 14.

    Note:

    Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction, or Form 8886, Reportable Transaction Disclosure Statement, received from LB&I Office of Tax Shelter Analysis (OTSA) that involve potentially prohibited and/or fraudulent transactions. These cases could be field or FIU. In order to be FIU they must meet at least one other criteria list in 1, 2, 3, 4, 5, 6, 7, or 14. While Form 8886-T is filed by tax-exempt organizations, Form 8886 is filed by IRC 4947(a)(1) non-exempt charitable trusts, and IRC 4947(a)(2) split-interest trusts.

  8. Referrals via Form 6229, Collateral Examinations, that involve potentially fraudulent activities. These cases could be field or FIU. In order to be FIU they must meet at least one other criteria list in 1, 2, 3, 4, 5, 6, 7, or 14.

  9. Requests for cooperating agent/summary or expert witnesses from CI via Form 6544 are to be forwarded to the Great Lakes/FIU Area Manager for review and assignment per IRM 25.1.9.4.3.

  10. Issues identified through the classification process as indicators of fraud (IRM 25.1.2.3) will initially be sent to the FIU to be worked as resources allow.

Fraud Identification and Development Chart

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ATAT & Fraud-Related Project Codes Compatible with Activity Code 155

Project Code Title Description
0428 ATAT Case Related ATAT specific case development
1550 Fraud Coordination, Case Specific Fraud Coordinators, Subject Matter Experts (SMEs), Case Specific
1551 Fraud Coordination, Non-Case Specific Fraud Coordinators, SMEs, Fraud Program, Non-Case Specific
1552 Fraud Development - TE/GE Revenue Agents/Tax Law Specialists - Fraud Development, AIMS status 17/18 - Approved Form 11661 (fraud development) and/or Form 2797 (CI accepted pre CA assigned)
1553 Fraud Development, Non TE/GE Revenue Agents/Tax Law Specialists, Fraud Coordinators, SMEs - Fraud development, Non-TE/GE Taxpayer
1554 CI Assistance, Grand Jury Cooperating Agent Assistance to CI - Grand Jury
1555 CI Assistance, Administrative Cases Cooperating Agent Assistance to CI – Administrative Case
1556 Trial Assistance, Witness – Fraud Non-Cooperating Agent, Witness assistance - Fraud Case
1557 Trial Assistance, Witness – Non-Fraud Non-Cooperating Agent, Witness assistance - Non-fraud Case
1558 International – Fraud Fraud Coordinators & Agent - Case specific
1559 International Fraud – Trial Assistance – Witness Witness Assistance Related – International
1560 International Non-Fraud Trial Assistance - Witness Witness Assistance Non-Fraud – International
1561 JTTF Cooperating Agent Assistance - Joint Terrorism Task Force
1562 Manager – Fraud-Related Activities – Case Specific Managers – Case-specific
1563 Managers – Fraud-related activities – non-case specific Managers – Non-case specific time
1564 Reserved Reserved