4.90.15 FSLG Fraud Procedures

Manual Transmittal

April 10, 2017

Purpose

(1) This transmits revised IRM 4.90.15, Federal, State and Local Governments, FSLG Fraud Procedures.

Material Changes

(1) Inserted "non-filed return or secured" IRM 4.90.15.7 (1).

(2) Deleted references to Subject Matter Expert (SME) because the position has been eliminated.

(3) Amended IRM 4.90.15.8 (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.

Effect on Other Documents


This supersedes IRM 4.90.15, Federal, State and Local Governments, FSLG Fraud Procedures, dated December 1, 2015.

Audience

Tax Exempt and Government Entities
Government Entities/Shared Services
Federal, State and Local Governments (FSLG)

Effective Date

(04-10-2017)

Paul Marmolejo
Director, Federal, State and Local Governments
Government Entities/Shared Services
Tax Exempt and Government Entities

Program Scope

  1. 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:

    • Employees

    • Officers

    • Appointed/Elected Officials

    • Vendors

  2. Audience. These procedures apply to FSLG employees who are responsible for identifying and developing potential fraud referrals including:

    • Specialists

    • Field Managers (Mangers)

    • FSLG Compliance and Program Management (CPM) Staff

  3. Policy Owner. The Servicewide Fraud Office is responsible for fraud policy. Small Business/Self Employed (SB/SE) is responsible for overseeing fraud.

  4. Program Owner. FSLG is responsible for overseeing the fraud program for FSLG entities.

  5. Contact Information. To recommend changes or make any other suggestions to this IRM section, contact the CPM office.

  6. 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.

Background

  1. 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.

Authority

  1. 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 1.2.20.1.1, Policy Statement 20-1 (Formerly P-1-8), and any other guidance relating to IRS penalties.

  2. 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.

  3. 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.

Responsibilities

  1. Specialists are responsible for:

    1. Identifying and developing potential fraud when fraud indicators exist.

    2. Discussing the indicators with Manager.

    3. Contacting the FSLG Fraud Functional Coordinator (FC) if Field Manager (Manager) agrees that fraud indicators are present.

  2. The Manager is responsible for discussing the indicators of fraud with Specialist.

  3. 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.

  4. For additional guidance on responsibilities, see IRM Exhibit 25.1.9-4.

Terms/Definitions/Acronyms

  1. 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

Identification and Development of Fraud

  1. In audits, the Specialist must be aware of the indicators of fraudulent activities of parties associated with the government entity.

    Example:

    Employees, vendors, etc.

  2. 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 25.1.2.3, Indicators of Fraud.

  3. 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:

    • Pre-audit techniques

    • Initial Interview

    • Evaluation of internal controls

  4. Submit forms listed in this IRM section electronically with digital signatures.

  5. See the following IRMs for guidance:

    • IRM 4.90.9, Procedures, Workpapers and Report Writing

    • IRM 4.23.9.1, Employment Tax Penalty and Fraud Procedures

    • IRM 25.1, Fraud Handbook

Procedures for Addressing Potential Fraud in Government Entities

  1. Parties involved:

    1. The FSLG Fraud Coordinator (FC) serves as the main contact person concerning fraud related issues in FSLG.

    2. The TE/GE Fraud Specialist (FS) serves as a resource and helps to develop cases.

    3. 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.

  2. When indicators of fraud are discovered during the audit of a government entity and/or a related party:

    1. The Specialist will discuss with the Manager.

    2. If the Manager agrees, the Specialist will contact the FC to discuss the indicators of fraud.

    3. If the Specialist, Manager and FC agree that indicators of fraud are present, the FC will contact a FTA to discuss the case.

    4. 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:

      • Specialist

      • Manager

      • FC

      • Local FTA

  3. The Specialist and FC should conduct the necessary research:

    1. For questions about related taxpayer transactions with the government entity.

    2. To support the indicators of fraud on a government entity and/or related party.

  4. Research external and internal databases including, but not limited to the following:

    • Google

    • IDRS

    • FinCEN

    • Federal Audit Clearing House

    • Taxpayer website

Procedures for Fraud Development Leads (FDLs) of Related Parties During Audits of Government Entities

  1. If the FTA agrees that indicators of fraud exist for a related party, the Specialist will prepare an FDL. The FDL consists of:

    1. Form 5666, TEGE Referral Information Report.

    2. Any information and/or documentation on the related party in question discovered during the audit of the government entity.

      Example:

      IDRS research, FinCEN, cancelled checks, invoices, etc.

  2. The Specialist will prepare the Form 5666 and attachments.

  3. The FC may help the Specialist prepare the FDL.

  4. The Specialist submits the FDL to the FC.

  5. The FC forwards the FDL to the appropriate SB/SE Planning and Special Programs (PSP) and gives the FTA Group Manager a copy.

  6. 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:

    1. The Specialist prepares Form 6229, Collateral Examination.

    2. The Manager gives Form 6229 to the accepting business unit and a copy to the FC.

    3. The other business unit obtains the information needed to develop its fraud case.

Procedures For Developing Fraud on a Government Entity

  1. See IRM 25.1.2.2 , Fraud Development Procedures, for detailed guidance.

  2. 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 25.1.2.2(2).

  3. After the Manager reviews and approves Form 11661, the Specialist will send it to the FTA and copy the FC.

  4. After the FTA approves and signs Form 11661, the Specialist will send the signed form to the FC. See IRM 25.1.2.2(3).

  5. 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.

  6. The Specialist will update the case to status code 17 on RCCMS and AIMS. See IRM 25.1.2.2(6) .

  7. The Specialist and FTA will prepare a plan of action to develop and document the fraud. The plan must:

    1. Outline the steps required to establish affirmative acts (proof) of fraud.

    2. Be the joint effort of the Specialist, Manager and FTA.

    3. Timely move the case to its appropriate conclusion.

    4. Specify any direct help from the FTA, whose role is advisory in nature.

  8. 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 25.1.2.2(8)and IRM 25.1.2.2(9).

    Note:

    Under no circumstance should the Specialist or Manager contact CI at this stage.

  9. The FTA will:

    1. Follow-up on the plan within 60 days of:

      • The initial plan of action.

      • All subsequent actions.

    2. Document on either:

      • A memorandum.

      • Form 11660, Potential Fraud Development Plan of Action.

      • Other document intended for this purpose.

  10. The case stays in status code 17 as long as fraud development is being pursued or the FTA recommends (see IRM 25.1.2.2(9) ):

    1. Returning the case to status code 12 when it is determined that the potential for fraud does not exist as documented on Form 11661.

    2. Asserting the civil fraud penalty under IRC 6663 and/or the fraudulent failure to file penalty under IRC 6651(f) .

  11. The Specialist must request the original tax returns. See IRM 25.1.2.2(7) .

  12. If it determined that the potential for fraud does not exist (see IRM 25.1.2.2(9)):

    1. 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.

    2. The FTA will document the decision and send the Form 11661 to the Specialist, with a copy to FC.

Criminal Fraud

  1. When the Specialist establishes that affirmative act(s) of fraud exist, he or she should:

    1. Suspend the audit.

    2. Suspend all contact with the taxpayer and/or representative.

    3. Discuss the audit with the Manager, FC and FTA.

      Note:

      See IRM 25.1.1.3(1) and IRM 25.1.1.3(2), Indicators of Fraud vs. Affirmative Acts of Fraud.

  2. If the FTA agrees the case meets criminal criteria, the Specialist will:

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

    2. The FTA and FC will help prepare Form 2797, if needed.

    3. Suspend the audit, including all contact with the taxpayer and/or representative.

      Note:

      See IRM 25.1.3.2, Preparation of Form 2797 - Referral Report of Potential Criminal Fraud Cases.

  3. The Specialist will send the form by secure email for review and concurrence, through the:

    1. Manager

    2. FTA

    3. FTA Manager

  4. When the FTA Manager approves the Form 2797, he/she forwards it to the appropriate CI field office for consideration.

  5. The Specialist will secure email a copy of the accepted or declined Form 2797 to the FC.

  6. If CI declines the referral, consider the civil fraud penalty and/or fraudulent failure to file penalty. See IRM 4.90.15.7. Also, for a description of the CI evaluation process, see IRM 25.1.3.3, Referral Evaluation, through IRM 25.1.3.5, Declined Criminal Referrals.

  7. 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.

  8. 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.

Civil Fraud

  1. 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.

  2. If the FTA recommends civil fraud penalty:

    1. The FTA will send the completed Form 11661 to the Specialist, Manager and a copy to the FC.

    2. The Specialist will develop the case and write up the penalty.

    3. The case stays in status code 17 during this process.

Reporting Fraud without Established Audit

  1. 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.

  2. If the information is about a government entity:

    1. Document the information.

    2. Don’t ask probing questions, make third-party contacts or request any documentation which may be construed as an audit.

    3. Complete Form 5666.

    4. Send Form 5666 to the CPM Referral Coordinator.

Fraud Database

  1. CPM maintains a fraud database that will be maintained to track fraud referrals.

  2. Make sure all copies of all Forms 5666, 6229,11661 and 2797 are sent to the FC.