- 4.90.15 FSLG Fraud Procedures
- 18.104.22.168 Program Scope
- 22.214.171.124.1 Background
- 126.96.36.199.2 Authority
- 188.8.131.52.3 Responsibilities
- 184.108.40.206.4 Terms/Definitions/Acronyms
- 220.127.116.11 Identification and Development of Fraud
- 18.104.22.168 Procedures for Addressing Potential Fraud in Government Entities
- 22.214.171.124 Procedures for Fraud Development Leads (FDLs) of Related Parties During Audits of Government Entities
- 126.96.36.199 Procedures For Developing Fraud on a Government Entity
- 188.8.131.52 Criminal Fraud
- 184.108.40.206 Civil Fraud
- 220.127.116.11 Reporting Fraud without Established Audit
- 18.104.22.168 Fraud Database
Part 4. Examining Process
Chapter 90. Federal, State and Local Governments (FSLG)
Section 15. FSLG Fraud Procedures
April 10, 2017
(1) This transmits revised IRM 4.90.15, Federal, State and Local Governments, FSLG Fraud Procedures.
(1) Inserted "non-filed return or secured" IRM 22.214.171.124 (1).
(2) Deleted references to Subject Matter Expert (SME) because the position has been eliminated.
(3) Amended IRM 126.96.36.199 (1) to include IRM 25.2, Information and Whistleblower Awards, for award/no award procedures.
(4) Deleted references to TEGE Connect.
(5) Updated to meet the requirements of P.L. 111-274 (H.R. 946), the Plain Writing Act of 2010. The Act provides that writing must be clear, concise, well-organized, and follow other best practices appropriate to the subject or field and intended audience.
This supersedes IRM 4.90.15, Federal, State and Local Governments, FSLG Fraud Procedures, dated December 1, 2015.
Government Entities/Shared Services
Federal, State and Local Governments (FSLG)
Director, Federal, State and Local Governments
Government Entities/Shared Services
Tax Exempt and Government Entities
Purpose. This section provides detailed information on the fraud process and procedures that FSLG Specialists (Specialists) should follow when developing fraud referrals on government entities and/or Fraud Development Leads (FDLs) on related parties such as:
Audience. These procedures apply to FSLG employees who are responsible for identifying and developing potential fraud referrals including:
Field Managers (Mangers)
FSLG Compliance and Program Management (CPM) Staff
Policy Owner. The Servicewide Fraud Office is responsible for fraud policy. Small Business/Self Employed (SB/SE) is responsible for overseeing fraud.
Program Owner. FSLG is responsible for overseeing the fraud program for FSLG entities.
Contact Information. To recommend changes or make any other suggestions to this IRM section, contact the CPM office.
Employees play a key role in identifying and developing fraud. They must view their responsibility from a global perspective to ensure we identify indicators of fraud and develop them as necessary. While government entities may not commit fraud or reflect it on their filed returns, we must remain alert to potentially fraudulent activities that affect returns outside our tax jurisdiction. Not being aware of fraud limits the organization’s effectiveness in carrying out its compliance mission.
Small Business/Self Employed is the program owner for employment tax issues. Upon stand-up of Tax Exempt and Government Entities (TE/GE) in 2000, Federal, State and Local Governments assumed responsibility for handling employment tax issues of federal, state and local government entities.
IRM 20.1, Penalty Handbook, is the primary source of authority for the administration of penalties by the IRS. IRS functions may develop additional guidance or reference material for their specific functional administrative needs. However, such reference material must receive approval from the Office Servicewide Penalties (OSP) prior to distribution and must remain consistent with the policies and general procedural requirements set forth in IRM 188.8.131.52.1, Policy Statement 20-1 (Formerly P-1-8), and any other guidance relating to IRS penalties.
To ensure consistency, IRS prescribes and uses a single set of guidelines set out within IRM 20.1, Penalty Handbook, which will be followed by all operational and processing functions.
Specific guidance on fraud indicators and the development of fraud may be found in IRM 25.1.1, Fraud Handbook - Overview/Definitions, and IRM 25.1.2, Fraud Handbook - Recognizing and Developing Fraud.
Specialists are responsible for:
Identifying and developing potential fraud when fraud indicators exist.
Discussing the indicators with Manager.
Contacting the FSLG Fraud Functional Coordinator (FC) if Field Manager (Manager) agrees that fraud indicators are present.
The Manager is responsible for discussing the indicators of fraud with Specialist.
The FC will assist the Specialist in coordinating with Small Business and Self Employed Fraud Technical Advisor (FTA) and with any other actions, as necessary.
For additional guidance on responsibilities, see IRM Exhibit 25.1.9-4.
The following acronyms are used in this IRM:
Acronym Explanation FDL Fraud Development Leads CPM FSLG Compliance and Program Management SB/SE Small Business/Self Employed FC FSLG Fraud Coordinator FS TE/GE Fraud Specialist FTA SB/SE Fraud Technical Advisor FinCen Financial Crimes Enforcement Network IDRS Integrated Data Retrieval System RCCMS Reporting Compliance Case Management AIMS Audit Information Management System CI Criminal Investigation
In audits, the Specialist must be aware of the indicators of fraudulent activities of parties associated with the government entity.
Discuss indicators with the Field Manager (Manager). Not considering and referring potential issues, such as embezzlement schemes, may result in unreported income that is never taxed. For a list of indicators, see IRM 184.108.40.206, Indicators of Fraud.
Begin identifying and developing fraud at the government entity or related party level in the planning stage and continue throughout the audit. During an audit, focus on three basic areas to identify indicators of fraud:
Evaluation of internal controls
Submit forms listed in this IRM section electronically with digital signatures.
See the following IRMs for guidance:
IRM 4.90.9, Procedures, Workpapers and Report Writing
IRM 220.127.116.11, Employment Tax Penalty and Fraud Procedures
IRM 25.1, Fraud Handbook
The FSLG Fraud Coordinator (FC) serves as the main contact person concerning fraud related issues in FSLG.
The TE/GE Fraud Specialist (FS) serves as a resource and helps to develop cases.
The Small Business/Self Employed Fraud Technical Advisor (FTA) serves as a resource person to guide in the assessment of potential fraud and in case development.
When indicators of fraud are discovered during the audit of a government entity and/or a related party:
The Specialist will discuss with the Manager.
If the Manager agrees, the Specialist will contact the FC to discuss the indicators of fraud.
If the Specialist, Manager and FC agree that indicators of fraud are present, the FC will contact a FTA to discuss the case.
If all agree that the potential for fraud exists in a government entity and/or a related party, the FC will arrange a four-way conference with the:
The Specialist and FC should conduct the necessary research:
For questions about related taxpayer transactions with the government entity.
To support the indicators of fraud on a government entity and/or related party.
Research external and internal databases including, but not limited to the following:
Federal Audit Clearing House
If the FTA agrees that indicators of fraud exist for a related party, the Specialist will prepare an FDL. The FDL consists of:
The Specialist will prepare the Form 5666 and attachments.
The FC may help the Specialist prepare the FDL.
The Specialist submits the FDL to the FC.
The FC forwards the FDL to the appropriate SB/SE Planning and Special Programs (PSP) and gives the FTA Group Manager a copy.
If the FC and Manager agree to have another business unit examiner assigned to work with the Specialist on the open audit of the government entity:
The Specialist prepares Form 6229, Collateral Examination.
The Manager gives Form 6229 to the accepting business unit and a copy to the FC.
The other business unit obtains the information needed to develop its fraud case.
See IRM 18.104.22.168 , Fraud Development Procedures, for detailed guidance.
If the FTA agrees that indicators of fraud exist on a government entity, the Specialist will prepare Form 11661, Fraud Development Recommendation – Examination. See IRM 22.214.171.124(2).
After the Manager reviews and approves Form 11661, the Specialist will send it to the FTA and copy the FC.
After the FTA approves and signs Form 11661, the Specialist will send the signed form to the FC. See IRM 126.96.36.199(3).
If the FTA recommends fraud development, he or she will complete Form 11661 Section 9a and return it to the Specialist and send a copy to the FC.
The Specialist will update the case to status code 17 on RCCMS and AIMS. See IRM 188.8.131.52(6) .
The Specialist and FTA will prepare a plan of action to develop and document the fraud. The plan must:
Outline the steps required to establish affirmative acts (proof) of fraud.
Be the joint effort of the Specialist, Manager and FTA.
Timely move the case to its appropriate conclusion.
Specify any direct help from the FTA, whose role is advisory in nature.
The Specialist will proceed with the plan until affirmative acts of fraud are established or a determination is made that the potential for fraud does not exist. See IRM 184.108.40.206(8)and IRM 220.127.116.11(9).
The FTA will:
Follow-up on the plan within 60 days of:
The initial plan of action.
All subsequent actions.
Document on either:
Form 11660, Potential Fraud Development Plan of Action.
Other document intended for this purpose.
The case stays in status code 17 as long as fraud development is being pursued or the FTA recommends (see IRM 18.104.22.168(9) ):
Returning the case to status code 12 when it is determined that the potential for fraud does not exist as documented on Form 11661.
Asserting the civil fraud penalty under IRC 6663 and/or the fraudulent failure to file penalty under IRC 6651(f) .
The Specialist must request the original tax returns. See IRM 22.214.171.124(7) .
If it determined that the potential for fraud does not exist (see IRM 126.96.36.199(9)):
The Specialist will contact the FC and FTA and give the reason(s) and the recommendation to discontinue fraud development and update the case to status code 12.
The FTA will document the decision and send the Form 11661 to the Specialist, with a copy to FC.
When the Specialist establishes that affirmative act(s) of fraud exist, he or she should:
If the FTA agrees the case meets criminal criteria, the Specialist will:
Prepare Form 2797, Referral Report of Potential Criminal Fraud Cases.
The FTA and FC will help prepare Form 2797, if needed.
Suspend the audit, including all contact with the taxpayer and/or representative.
The Specialist will send the form by secure email for review and concurrence, through the:
When the FTA Manager approves the Form 2797, he/she forwards it to the appropriate CI field office for consideration.
The Specialist will secure email a copy of the accepted or declined Form 2797 to the FC.
If CI declines the referral, consider the civil fraud penalty and/or fraudulent failure to file penalty. See IRM 188.8.131.52. Also, for a description of the CI evaluation process, see IRM 184.108.40.206, Referral Evaluation, through IRM 220.127.116.11, Declined Criminal Referrals.
If the criminal referral is declined or if the criminal investigation is subsequently discontinued and the FTA and Specialist determine that no further actions related to criminal or civil fraud development are anticipated, the FTA will resubmit Form 11661 to the Specialist recommending to return the case to status code 12.
If the referral is accepted by CI, the Specialist will update the case to status code 18 (Accepted by CI) and secure email a copy of the Form 2797 to the FC.
When affirmative acts of fraud have been established and it is determined that criminal criteria are not met or the criminal proceeding has been completed, the FTA may recommend assertion of the civil fraud penalty (filed return) per IRC 6663 and/or assertion of the fraudulent failure to file (FFTF) penalty (non-filed return or secured delinquent return) per IRC 6651(f) via Form 11661.
If the FTA recommends civil fraud penalty:
The FTA will send the completed Form 11661 to the Specialist, Manager and a copy to the FC.
The Specialist will develop the case and write up the penalty.
The case stays in status code 17 during this process.
If the Specialist is contacted by an individual or given information asserting allegations of a non-government entity’s or individual’s potential wrong doing, refer to IRM 25.2, Information and Whistleblower Awards. There are different procedures depending on whether an award is requested.
If the information is about a government entity:
Document the information.
Don’t ask probing questions, make third-party contacts or request any documentation which may be construed as an audit.
Complete Form 5666.
Send Form 5666 to the CPM Referral Coordinator.