5.20.8 Promoter/Preparer Investigations

Manual Transmittal

September 10, 2014

Purpose

(1) This transmits revised IRM 5.20.8, Abusive Tax Avoidance Transactions, Promoter/Preparer Investigations.

Material Changes

(1) IRM 5.20.8.1 added Introduction.

(2) IRM 5.20.8.2(3) updated with link to Form 14242 and corrected link.

(3) IRM 5.20.8.4(1) updated IRM cite and link.

(4) IRM 5.20.8.4(2) updated IRM cite.

(5) IRM 5.20.8.4(3) added to provide additional guidance on actions revenue officers can take during promoter/preparer investigation.

(6) IRM 5.20.8.4(4) added to provide guidance on when to close CIP.

(7) IRM 5.20.8.4(5) updated from LMSB to Large Business and International.

(8) IRM 5.20.8.5(2) added IRM cite.

(9) IRM 5.20.8.5.1(3) updated IRM cite from IRM 4.32.2.6.3.4.4 to IRM 4.32.2.6.3.3.3.

(10) IRM 5.20.8.5.2(1) updated IRM cite from IRM 4.32.3.3 to IRM 4.32.3.4.

(11) IRM 5.20.8.6(1) updated IRM cite from IRM 4.32.3.3 to IRM 4.32.3.4 and updated link.

(12) IRM 5.20.8.6.1 renumbered from IRM 5.20.8.6.

(13) IRM 5.20.8.6.2 added new section to provide guidance on case actions on IRC 6700 and IRC 6701 penalty assessments.

(14) IRM 5.20.8.7(1) added IRM cite.

(15) IRM 5.20.8.8(1) updated IRM cite from IRM 20.1.6.1.4 to IRM 4.32.2.11.7.1.

(16) IRM 5.20.8.8(4) added to provide guidance on collection due process hearings.

(17) IRM 5.20.8.9(1) updated to correct terminology to special condition NFTL and included IRM cite.

(18) Exhibit 5.20.8-1 updated with additional questions.

(19) This revision will make minor grammatical corrections, update organization terms and/or titles, and correct cross references.

Effect on Other Documents

This material supersedes IRM 5.20.8, Promoter/Preparer Penalties, dated 7-1-2010.

Audience

The target audience is SB/SE Collection employees.

Effective Date

(09-10-2014)

Rocco A. Steco
Acting Director, Collection Policy
Small Business/Self-Employed

Introduction

  1. Promoter/preparer investigations are some of the highest priority cases for Collection Abusive Tax Avoidance Transactions (ATAT). Revenue officers may be involved in one or all stages of a promoter/preparer investigation.

    1. A revenue officer may be assigned at the start or anytime during the promoter/preparer investigation. The revenue officer will work cooperatively with the revenue agent on the investigation. Any existing balances due or delinquent returns will be assigned to the revenue officer or if there are none, the case will be assigned as a Compliance Initiative Project (CIP).

    2. At the close of the promoter/preparer investigation by the revenue agent, the revenue officer may be assigned collection of the IRC 6700 or IRC 6701 penalty assessment and/or will monitor for compliance with the injunction.

  2. While working a case, a revenue officer may identify a previously unknown promoter of an abusive scheme or abusive preparer. See IRM 5.20.8.2 for guidance on making a referral to the SB/SE Lead Development Center (LDC).

Making a Referral to the SB/SE Lead Development Center (LDC)

  1. SB/SE Delegation Order 4.60, Functions Related to Potential Promoter/Tax Shelter Cases, delegates authority to approve and refer all SB/SE ATAT promoter/preparer investigations to the SB/SE LDC Program Manager, in consultation with the Director, Abusive Transactions and Technical Issues, Counsel and Criminal Investigation (CI).

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

  3. Leads to the SB/SE LDC are submitted using Form 14242, Report Suspected Abusive Tax Promotions or Preparers. Additional information on making a referral to the SB/SE LDC as well as an electronic copy of Form 14242 can be found on the Abusive Transactions and Technical Issues website at http://mysbse.web.irs.gov/AboutSBSE/Exam/at/ldc/default.aspx.

  4. A referral to the SB/SE LDC should be made once the revenue officer has gathered sufficient information to identify the possibility that the promotion of an abusive transaction or frivolous argument may exist. If the name of the promoter/preparer is known, it should be provided in the referral. However, that information is not always available and is not required when making a referral. If the referral is based on informant information or information secured from a participant who was affiliated with the promotion, the revenue officer should try to gather as much information as possible during the interview. Secure information such as links to the promoter/preparer's web site and copies of promotional information. IRM Exhibit 5.20.8-1 lists questions that can be used as a guide when conducting informant or participant interviews.

  5. Once the SB/SE LDC has received a referral and after completing the research and case development, each promoter/preparer lead is evaluated for promoter/preparer investigation potential. Multiple factors are considered when determining whether the SB/SE LDC authorizes an IRC 6700 or IRC 6701 investigation and issues the lead to the field. Some of the factors that are considered are:

    • Type of scheme being promoted,

    • Past activity of the promoter,

    • The size of the promotion,

    • Tax impact of the promotion,

    • Possible tax law violations,

    • Favorable public impact or compliance impact.

Authorized IRC 6700 and 6701 Investigations, Revenue Officer Assignment

  1. Authorized investigations will be issued to the Field Collection or Field Examination Area Director.

  2. A copy of the approval memorandum will be emailed to the Field Collection or Field Examination Area Director and to the Area's Planning & Special Program office for assignment to a revenue officer or examiner. If the memorandum is issued to Field Examination, the memorandum will include a request for the examiner to contact the local Collection ATAT Coordinator and provide a link to the website with a current list of coordinator names.

  3. Once an investigation referral is authorized, the administrative investigation case file is sent to the field for investigation and suit development for potential ATAT promoter penalties and/or injunctions. The promoter/preparer investigation is generally initiated by the examination function to determine whether an individual aided in the promotion of an abusive tax avoidance transaction. See IRC 6700, Promoting Abusive Tax Shelters, etc. and IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability. The investigation is not an income tax examination. The investigation is carried out to decide if the promoter/preparer is subject to penalties and injunctive action as a result of his involvement in an illegal promotion. The case file includes:

    • Investigation Authorization Memorandum;

    • Recommendation Memorandum describing the promoter/preparer's background and history, description of the promotion, potential First Amendment concerns, summary of products or services, any criminal investigation information, the scope of the promotion and recommendation for investigation;

    • Any background information and documentation obtained that may assist in the investigation.

Coordination with the Examination Function

  1. IRM 4.32.3.4, Collection, requires examiners conducting promoter/preparer investigations to contact the Area Collection ATAT Coordinator through their group manager once the lead is approved for an IRC 6700 /IRC 6701 investigation. A list of Collection ATAT Coordinators can be found on the SB/SE Collection ATAT website at http://mysbse.web.irs.gov/Collection/toolsprocesses/CollATAT/contacts/default.aspx.

  2. Area Collection ATAT Coordinators will in turn determine if an ATAT revenue officer should be assigned to assist in the investigation. If the ATAT revenue officer needing to be assigned the investigation is not under the direct supervisory authority of the Area Collection ATAT Coordinator, the Area Collection ATAT Coordinator will coordinate with the revenue officer's direct supervisor to ensure inventory guideline concerns, etc. are addressed. See IRM 5.20.2, ATAT Time Reporting, for revenue officer time charging to an unassigned case.

    Factors to consider when determining if a revenue officer should be assigned to assist in the investigation can include:

    • The promoter/preparer has existing balance due liabilities.

    • The examiner is having difficulty locating the promoter/preparer and is requesting assistance.

    • The examiner has knowledge the promoter/preparer is liquidating assets or otherwise attempting to put them beyond the reach of the government.

    Note:

    All IRC 6700/IRC 6701 promoter investigation and penalty cases have been prioritized as risk level 100 cases and will be considered top priority case work for revenue officers. See IRM 5.20.1.10, Prioritization of ATAT Work.

  3. A cooperative investigation conducted jointly by Examination and Collection can save time and provide both functions valuable leads. Actions the revenue officer can take during the promoter/preparer investigation include, but are not limited, to:

    1. participating in initial conference at commencement of promoter/preparer investigation,

    2. interviewing promoters/participants,

    3. sharing leads on income and assets identified,

    4. assisting in possible jeopardy situation,

    5. researching of ongoing or prior collection activities that could provide important context to the investigation.

  4. If there is no further action that the revenue officer can take, the CIP will be closed.

  5. The Office of Tax Shelter Analysis (OTSA) oversees promoter investigations for Large Business and International (LB&I). Area Collection ATAT Coordinators may be contacted by OTSA, or an LB&I or Tax Exempt and Government Entities (TE/GE) examiner, prior to the assessment of an IRC 6700 or IRC 6701 penalty.

Parallel Investigations

  1. The IRC contains both civil and criminal provisions to address ATAT promotions. Examiners may conduct civil investigations before, during, or after criminal investigations of a promoter/preparer.

  2. Parallel investigations are simultaneous civil and criminal investigations of a common individual or entity. See IRM 5.1.5, Balancing Civil and Criminal Cases.

  3. Parallel investigations are not joint investigations. Each Operating Division conducts a separate investigation. Significant coordination is required throughout the investigation and litigation processes. While regularly scheduled coordination meetings are required, CI must not direct the examiner's actions in the civil investigation.

Policy Statement

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

  2. Most parallel investigations will not result in a penalty assertion recommendation from the investigating examiner or revenue officer assigned the case until after the cessation of the criminal case.

  3. If criminal and civil Operating Divisions cannot agree on an approach, P-4-26 describes the procedures for resolving the matter. Refer to IRM 4.32.2.6.3.3.3, Resolving Conflicts and IRM 5.1.5.3, Resolving Conflicts Regarding Parallel Investigations.

Collection Involvement During a Parallel Investigation

  1. IRM 4.32.2.6, Parallel Investigations, addresses Examination procedures for conducting a promoter/preparer investigation during a pending criminal investigation. IRM 4.32.3.4, Collection, requires examiners to notify Collection when a promoter/preparer investigation is assigned. If the promoter/preparer investigation is a parallel investigation, the Collection ATAT Coordinator should determine if there are existing balance due liabilities or other issues associated with the investigation that require Collection involvement. If so, a revenue officer should be assigned.

IRC 6700 and IRC 6701 Penalty Assessment

  1. When the examiner has completed the promoter/preparer investigation and is considering assertion of penalties under IRC 6700 or IRC 6701, IRM 4.32.3.4, Collection, requires the examiner to notify the local Collection ATAT Coordinator, who will assign a revenue officer if one has not already been assigned. A list of Collection ATAT Coordinators can be found by accessing the Abusive Transactions website at http://mysbse.web.irs.gov/Collection/toolsprocesses/CollATAT/contacts/default.aspx.

Nonassertion of Penalties under IRC 6700 and IRC 6701 Based on Collectibility

  1. The examiner may indicate that it appears the promoter/preparer case does not have immediate collection potential and the revenue officer analysis may determine that there is little current collection potential based on known assets. However, experience has shown that promoters/preparers frequently conceal assets and cloud their financial picture, often making it difficult to determine the true collection potential of these accounts. Assets currently concealed or placed beyond reach may well surface during subsequent investigations.

  2. Therefore current collectibility should not be a consideration when determining whether to assert a penalty under IRC 6700 or IRC 6701. There may be rare situations when it is appropriate to consider collectibility, such as when the promoter/preparer is deceased and there are no assets in the promoter's/preparer's estate. Unless such a rare situation exists, when Collection is contacted in accordance with IRM 4.32.3.4, Collection, the examiner should be advised that the penalty should be assessed regardless of current collectibility.

  3. All recommendations for nonassertion of the penalty must be approved by the Examination group manager. Once the manager has approved the nonassertion, the examiner will forward a written notification to the LDC of their decision to not assert prior to closing the lead. The notification will include a brief explanation of the basis for not asserting the penalty. The LDC will forward a copy of the notification to Collection Policy.

Case Actions on IRC 6700 and IRC 6701 Penalty Assessments

  1. The revenue officer will document the type of promotion in the case history at the time of assignment.

  2. The revenue officer will request and review the Examination file and/or contact the revenue agent who pursued the penalty assessment upon case assignment. The file may include information that will eliminate the need for the revenue officer to issue a summons at an additional cost to the government.

  3. The revenue officer will determine if the promoter/preparer has been enjoined. The revenue officer should secure a copy of the injunction and monitor for compliance with the injunction. See IRM 5.20.7.3, Working an Enjoined Promoter/Preparer Case, for additional guidance.

  4. If the revenue officer has taken all collection actions and is closing the penalty balances due as currently not collectible, the revenue officer will input a mandatory two-year follow-up in certain cases. Follow the procedures for mandatory follow-up in IRM 5.16.1.6, Mandatory Follow-Up. The follow-up will provide an opportunity to determine if there is any change in collection potential or if the promoter/preparer is in violation of the injunction order. A mandatory follow up will be input in the following cases:

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Jeopardy Assessments

  1. In cases where a promoter/preparer investigation is being conducted by an examiner and collection of the assessment could be jeopardized if delayed, the examiner will contact the Collection ATAT coordinator and a revenue officer will be immediately assigned to assist in the jeopardy assessment. The Area Director and the local Area Counsel will approve all jeopardy assessments. Follow jeopardy assessment procedures outlined in IRM 5.1.4, Jeopardy, Termination, Quick and Prompt Assessments, and IRM 5.17.15, Termination and Jeopardy Assessments and Jeopardy Collection. If the jeopardy situation is not discovered until after the assessment, see IRM 5.11.3 , Jeopardy Levy without a Jeopardy Assessment.

Appealing IRC 6700 and IRC 6701 Penalty Assessments

  1. There are no pre-assessment appeal rights for IRC 6700 and IRC 6701 penalties. IRC 6700 and IRC 6701 penalties may be challenged by following the special claim for refund procedures of IRC 6703, Rules Applicable to Penalties under Sections 6700, 6701, and 6702. When an IRC 6700/6701 penalty is assessed, the promoter/preparer is billed for the amount(s) due. The billing notice advises the promoter/preparer that if 15% of the penalty is paid within 30 days, a claim for refund may be filed on Form 6118, Claim for Refund of Tax Return Preparer and Promoter Penalties, or Form 843, Claim for Refund and Request for Abatement. Under IRC 6703(c), collection action and the running of the statute of limitations on collection are suspended until the claim is resolved. Refer to IRC 6703, as well as IRM 4.32.2.11.7.1, Promoter Rights for IRC 6700 and IRC 6701, for a full explanation of appeal rights for promoter/preparer penalties.

  2. The SB/SE LDC will verify that the Campus has input transaction code (TC) 470 closing code (CC) 95 on the applicable modules. If a TC 470 CC 95 has not been input on an applicable module, SB/SE LDC will request input.

  3. When a promoter/preparer indicates that a claim has been filed appealing assessment of a penalty, the revenue officer should notify the SB/SE LDC of the filing.

  4. A taxpayer may challenge the existence or amount of an IRC 6700 or IRC 6701 penalty in Collection Due Process (CDP) but only if the taxpayer did not receive a "prior opportunity" to contest the assessment. See IRC 6330(c)(2)(B). The taxpayer's receipt of notice and demand, providing specific procedures for requesting an abatement and obtaining judicial review under IRC 6703(c), constitutes a "prior opportunity" and would preclude the taxpayer from raising an issue challenging the liability in CDP. If a taxpayer requests a CDP hearing, forward any available documents establishing the taxpayer received notice and demand to Appeals. The taxpayer may raise other relevant issues in CDP when a challenge to the liability is precluded.

Collection Action Considerations During a Special Claim for Refund Appeal

  1. A Notice of Federal Tax Lien (NFTL) may be filed in accordance with IRM 5.12, Federal Tax Liens. Even when the taxpayer has paid 15% of the penalty and submitted a timely claim for refund, IRC 6703 does not prohibit filing an NFTL. The revenue officer can also proceed with a special condition (i.e. nominee/alter ego/transferee) NFTL investigation but other collection actions should be suspended during the course of the appeal. This includes levying on property of the promoter/preparer or a nominee. The Service can not bring any type of collection suit until after the final resolution of the claim for refund in district court. (See IRM 5.12.7.6 , Special Condition NFTLs (Nominee, Alter Ego, Transferee),

Collecting the Promoter/Preparer Penalty Assessment

  1. A promoter or preparer penalty may be assessed for the same conduct against more than one entity or individual. The collection of the penalty amounts against all entities or individuals assessed should be collected in full. Unlike the trust fund recovery penalty, it is not necessary to coordinate the funds collected from one entity and reduce the penalty amount of the corresponding entity or individual.

  2. Although it is not necessary to coordinate the collection of the funds from the separate, yet somewhat related entities, it is important to coordinate with examination to ensure all promoter/preparer penalties that were assessed on an investigation are addressed as a whole when assigned for collection.

List of questions that can be used as a guide when interviewing an informant or participant in an abusive promotion.

Questions for Collection Taxpayers:

Taxpayer Name:

Taxpayer Address:

Taxpayer Telephone Number:

  1. When and how did you first become aware that you were not required to pay or file taxes?

  2. From whom did you receive the information?

    1. Were you at a meeting or was it by telephone?

    2. If you attended a meeting, how many others were there?

    3. When and where did the meeting occur?

    4. Do you have any literature from these meetings or that was mailed to you?

    5. How did you learn of the meeting? (radio, book, magazine, another person, etc.)

  3. What did they tell you about paying and/or filing taxes?

  4. Were you ever told that your tax liability could be reduced or eliminated?

  5. How much did the information cost you? What was the method of payment - cash, check, wire, money order, or some other method? Can you provide a copy of the method of payment?

  6. Did the person(s) only provide you with the information or did they have other clients? Do you know how many? Do you believe they work with others nationwide or only locally?

  7. Are you still in contact with the individual(s) or organization that provided the information to you? Was it by telephone or meeting? If no, why not?

  8. If you are still in contact with them, are they providing any additional advice or information to help you? Do you have their current address, telephone number, email address and/or website address?

  9. How has the information helped you take care of the tax liability?

  10. Did you seek legal opinions from tax attorney's or CPAs regarding the issues in the materials provided?

  11. Have you ever been involved in promotions of any other tax shelter or tax related activity?

  12. Have you ever been charged criminally for any illegal conduct? If yes, what was the nature of those charges.