5.20.12 Initial Contact and Research Actions Related to Abusive Tax Avoidance Transactions cases

Manual Transmittal

March 05, 2015

Purpose

(1) This transmits revised IRM 5.20.12, Abusive Tax Avoidance Transactions, Initial Contact and Research Actions Related to Abusive Tax Avoidance Transactions cases.

Material Changes

(1) IRM 5.20.12.1(6) added to include guidance on awareness of taxpayer rights.

(2) IRM 5.20.12.2(2) added guidance for using ICS pick list when initial contact is by ATAT appointment letter.

(3) IRM 5.20.12.2(4) added guidance on verifying taxpayer has been advised of potential third party contacts.

(4) IRM 5.20.12.6(2) updated to clarify guidance on issuance of L 3175 and IRM 5.20.12.6(3) added to provide guidance on L 3176.

(5) IRM 5.20.12.7(3) updated to provide link to yK-1 web application.

(6) IRM 5.20.12.8 changed title of section from "Currency and Banking Retrieval System (CBRS)" to "Financial Crimes Enforcement Network Query (FCQ) System" and added guidance on how to access and use FCQ.

(7) IRM 5.20.12.8.1 added to provide guidance to managers on conducting online reviews of the FinCEN audit trails.

(8) IRM 5.20.12.9 updated references from "WebCBRS" to "FCQ" and added guidance on how to access and handle SARs.

(9) IRM 5.20.12.10 updated references from "CBRS" to "FCQ" .

(10) IRM 5.20.12.10(1) updated to reflect that FinCEN Report 114 is now filed electronically through the FinCEN e-filing system rather than with the Enterprise Computing Center in Detroit.

(11) IRM 5.20.12.11 added to provide guidance on Foreign Account Tax Compliance Act (FATCA).

(12) IRM 5.20.12.12, Electronic Research, renumbered from IRM 5.20.12.10.

(13) Editorial corrections made throughout IRM 5.20.12.

Effect on Other Documents

This material supersedes IRM 5.20.12, dated 4-16-2013. Incorporated Interim Guidance Memorandum titled, Transition from Web-based Currency and Banking Retrieval System (CBRS) to Financial Crimes Enforcement Network Query (FCQ) System, control number SBSE-05-0714-0055, dated July 24, 2014.

Audience

The target audience is SB/SE.

Effective Date

(03-05-2015)

Dretha Barham
Director, Collection Policy
Small Business/Self-Employed

Overview

  1. Some Abusive Tax Avoidance Transactions (ATAT) encountered by revenue officers are designed to appear, and often are, quite complex and involve various transactions as well as numerous entities including trusts, partnerships, corporations, limited liability companies and offshore entities. These transactions and multiple or layered entities are often used by a taxpayer to make it difficult to track and follow title to assets or locate income sources.

  2. Research and investigation of ATAT cases does not entail techniques or tools unique to ATAT casework; however, some techniques are more commonly applied, such as use of the collection summons to follow income flow or to determine nominees, and nominee/alter ego/transferee relationships regarding title to assets.

  3. Potential fraud indicators may be present in ATAT cases. Contact your local Fraud Technical Advisor, when appropriate.

  4. Research to identify the nature of the promotion or transaction used by a taxpayer is important in developing an effective case strategy for resolution of ATAT cases.

  5. Research prior to contact is essential in ATAT cases. Guidance on conducting an initial analysis is located in IRM 5.1.30, Resolution-directed Approach to Casework. Additional research may be necessary due to the complexity of an ATAT case. The focus of the investigation in an ATAT case is often to locate assets or create an accurate financial picture of a taxpayer that is participating in an abusive scheme. It is important to have a full understanding of the scheme and the transactions the taxpayer was involved with in order to maximize the effectiveness of any contacts.

  6. Awareness of taxpayer rights is vitally important even in ATAT case work. Taxpayer rights, as identified in Pub 1, Your Rights as a Taxpayer, are addressed in IRM 5.1.9, Collection Appeal Rights, and throughout IRM Part 5.

Initial Contact

  1. The initial contact time frames outlined in IRM 5.1.10.3.1, Initial Contact Time Frames, apply to all Field Collection cases, including ATAT cases. However, the use of an appointment letter to initiate contact is common in ATAT work due to the complexity and other factors found more often in ATAT inventories. Issuing an appointment letter requesting the taxpayer provide the needed information may provide for a more effective initial contact and allow the revenue officer to determine the level of cooperation to expect from the taxpayer.

    Note:

    If a contact letter is used to initiate contact, a field call to observe assets and the lifestyle of the taxpayer is recommended.

  2. In situations where the revenue officer determines the use of an appointment letter as the appropriate method for initiating contact with the taxpayer, the revenue officer will document the case history outlining the circumstances for the determination. When creating the Integrated Collection System (ICS) history entry for the appointment letter contact, the revenue officer will select "Create History" , use Contact Type of "Correspondence" , select "Taxpayer Contact" and then "ATAT Appointment Letter."

  3. When an appointment letter is used, the revenue officer will include Form 9297, Summary of Taxpayer Contact, listing the information and documents the taxpayer should bring to the scheduled appointment so that a complete financial statement can be secured. Revenue officers should refrain from summons action until after it is determined that the taxpayer will not voluntarily provide the information being sought.

    Note:

    In ATAT cases, the use of an appointment letter, along with the case history documenting why that approach is being used, within the time frames outlined in IRM 5.1.10.3.1, Initial Contact Time Frames, will meet the requirement for timely contact.

  4. Prior to making contact, the revenue officer will need to

    1. verify that the taxpayer has been advised of potential third party contacts as stated in IRM 5.1.10.2(3), Pre-Contact, and IRM 5.20.3, Third Party Contacts. Advance notification of potential third party contact is included in Pub 1, Your Rights as a Taxpayer.

    2. identify the proper person to contact. Because ATAT cases often include multiple entities and whipsaw assessments, care must be given to properly identify the contact person for each entity. Each whipsaw entity should be treated as an individual entity unless the key taxpayer (usually the Individual Master File (IMF) taxpayer) has now reported all income on their tax return.

  5. When the entity is a trust, the initial contact letter can be used to also request a copy of Form 56, Notice Concerning Fiduciary Relationship. This information is necessary to determine who has the authority to act for the trust.

TXMODA Research

  1. Integrated Data Retrieval System (IDRS) research using command code TXMOD with definer A can provide valuable information regarding ATAT cases in areas such as Whipsaw Assessments, Examination Project Codes and Frivolous filer Indicators, in addition to specific account transactions and control bases.

Use of TC 971 AC 266 and TC 971 AC 267 on Unagreed Whipsaw Assessments

  1. An abusive trust situation occurs when a taxpayer has attempted to reduce or eliminate the tax liability through the use of one or more layers of trust entities. When the subjects of the examination refuse to cooperate and the Service is unable to accurately determine the correct and agreed tax owed by each entity, the Service will issue whipsaw notices of deficiency (for example, one to the individual, one to the business trust, and one to the family trust), taxing the same income for each entity.

  2. When the abusive trust case has defaulted after issuance of the whipsaw statutory notice of deficiency due to no agreement received or petition sent to the court, a whipsaw assessment will be made. This means that the tax may be assessed multiple times; for example, assessment is made against the individual and each separate trust entity, but the liability will only be collected once. See IRM 5.20.6, Whipsaw Assessments, for additional information.

  3. Since the tax is only collected once in whipsaw assessment situations, each entity must be cross-referenced. The use of transaction code (TC) 971 action code (AC) 266/267 provides for identification and linking of the key and related cases. In most instances, the individual Form 1040 taxpayer will be identified as the key case. The key case will have a separate TC 971 AC 266 on each module that references each related entity involved in the whipsaw assessment. Each related case will have a TC 971 AC 267 to cross-reference the key case. TXMODA research for TC 971 AC 266/267 will identify cross references related to whipsaw assessments. Payments are not systemically cross-referenced and should be monitored to prevent over-collection of the liability.

Project Codes

  1. When TC 424 (Examination Request Indicator) is present on TXMODA, research of the Exam project code will provide information regarding the nature of the abusive tax avoidance transaction identified by Examination. The project code can be located on TXMODA as the four digit numerical code following the literal SPCL-PROJ<. Once the project code has been identified, research can be done using the list available on the Abusive Transactions and Technical Issues website at http://mysbse.web.irs.gov/examination/examorg/hq/at/examinationaids/default.aspx.

Frivolous Filer Indicators

  1. The Frivolous Return Program (FRP), located at the Ogden Campus, or a Service employee such as a revenue agent or revenue officer may have identified frivolous filings by a taxpayer during original return processing, amended return or claim processing, examinations, or contact with a taxpayer or their representative. In response to frivolous filing, Letter 3175 or Letter 3176, Response to Frivolous Documents/Returns Received from Taxpayers, may have been issued by the Service.

  2. Issuance of Letter 3175 is reflected on ENMOD. If Letter 3175 is issued by the revenue officer, use command code ACTON to annotate ENMOD with a history entry reflecting that the letter was issued and the date of issuance. If FRP issues the Letter 3175, a correspondex letter is sent and IDRS is systemically updated.

  3. Issuance of Letter 3176 is limited to FRP. Documentation of issuance can be located on TXMODA History section.

  4. A frivolous tax penalty is typically reflected as a TC 240 with penalty reference number 666 on TXMODA.

  5. See IRM 5.20.10, Identification and Processing of Frivolous Documents, for guidelines for the appropriate processing of frivolous returns and other specified submissions.

yK-1 Research

  1. yK-1 is an interactive software tool and database developed and maintained by Headquarters Research. yK-1 uses K-1 data from corporations, flow-through returns, Form 851, Schedule K-1, and high income individual returns to visually depict relationships and income/loss flow between payers and payees. yK-1 draws graphs of nodes and links to help visualize complex corporate and flow-through structures.

  2. Visualization presented by yK-1 provides a graphic representation of the taxpayer and their investment relationship to other entities. It is not limited to direct investments and can display multiple levels of investment tiering. Where K-1 data is present, yK-1 research may provide a number of benefits on ATAT cases because it does the following:

    1. Expands knowledge of related entities, including shareholders and partners of entities which may not initially be apparent from other collection activity or research.

    2. Provides an analysis of relationships which may be useful in planning the scope of the taxpayer's cross compliance.

    3. Provides useful information in conducting a risk analysis, identifying significant returns of interest and helping to bypass tiers that are not of interest.

    4. Provides "footprints" which may indicate shelter activity.

    5. For promoter investigations, yK-1 may identify unknown investors and help in organizing data from other sources.

  3. Revenue officers can request access to yK-1 by submitting an electronic Form 5081. After approval, users will receive instructions and a password to the yK-1 web application accessible at https://arl.enterprise.irs.gov/yk1/. More information on how to gain access and to use yK-1 can be found on the yK-1 Link Analysis Tool website at http://k1.soi.irs.gov.

    Note:

    yK-1 Disclosure: The output from the yK-1 Link Analysis Tool (electronic or hardcopy) contains tax return information of multiple taxpayers. Pursuant to IRC 6103, 7213, 7213A, and 7431 this information cannot be disclosed to the taxpayer or his representative.

Financial Crimes Enforcement Network Query (FCQ) System

  1. Financial Crimes Enforcement Network Query (FCQ) is a web-based application which is owned by the Financial Crimes Enforcement Network (FinCEN), a Bureau within the Department of the Treasury. FCQ is a powerful and versatile tool to query and analyze Bank Secrecy Act (BSA) data, which is accessible through the FinCEN Portal. FCQ stores information reported by financial institutions.

  2. The FCQ system provides authorized users with access to currency and other BSA reports, such as:

    • Currency Transaction Report

    • Report of Foreign Bank and Financial Accounts (FBAR)

    • Designation of Exempt Person

    • Registration of Money Services Businesses

    • Report of International Transportation of Currency or Monetary Instruments

    • Report of Cash Payments Over $10,000 Received in a Trade or Business (Form 8300)

    • Suspicious Activity Report (SAR)

  3. FCQ information is useful in identifying cash activity that may not be accurately reported on the income tax return or disclosed on financial statements. FCQ information is a "window" on the underground economy, with invaluable information not obtainable elsewhere.

  4. ATAT, International and GS 13 field collection revenue officers are authorized online access to FCQ. Access must be in connection with active and assigned cases.

  5. Getting online access to FCQ:

    1. Prior to being authorized access to FCQ, revenue officers and their managers must complete required security briefings. Revenue officers must complete the following briefing on Enterprise Learning Management System (ELMS) before submitting an online 5081 request.
      - ELMS 41166, Safeguarding Online Access and Using SAR Information
      Group managers must complete this same briefing (ELMS 41166) as well as
      - ELMS 41167, Manager Online SAR Audit Trail Reviews.

    2. Once the revenue officer and group manager have completed the briefings, the revenue officer will prepare an online 5081 request.
      - If the revenue officer does not have an active FCQ account, the revenue officer will prepare an online 5081 request and will click the "add" button for the application titled: SYS USER FINCEN QUERY SYSTEM -IRS COLLECTION FUNCTIONS (FINCEN QUERY -CURRENCY AND BANKING RETRIEVAL SYSTEM).
      - Include the following statement in the Special Instruction box: "SBSE ATAT, International or Grade 13 revenue officer authorized online access. Required briefing(s) have been completed."

  6. Authorized Users have the ability to select from one of four search options and use enhancements, such as filters, wildcards, operators and import lists, to facilitate search efforts. Revenue officers can refer to the FCQ User Manual for guidance in interpreting FCQ extracts at: http://lmsb.irs.gov/international/dir_compliance/campus_compliance_unit/downloads_FBAR/FinCEN_Query_Desk_Guide_%20Final_%202014-0101_v2.pdf.

  7. For more information on authorized user training, access and review procedures refer to the Collection SAR webpage on MySBSE at: http://mysbse.web.irs.gov/Collection/toolsprocesses/sar/default.aspx

Bank Secrecy Act (BSA) Review Procedures

  1. Collection managers of employees with electronic access to BSA information must conduct online reviews of the FinCEN audit trails at least annually. The audits must include all FCQ searches within a selected 30 day period within the past year. BSA will provide an audit trail report, which is a history of the query parameters used by the FCQ user. The system will maintain 13 months of user query information.

  2. BSA has established a FinCEN Query audit report mailbox to use when requesting audit trail information on specific FCQ system users. The mailbox address is: *SBSE FCQ AUDIT TRAIL.

  3. To obtain an audit trail report for a FCQ user, managers will send the full employee email address and the period of the audit trail request to the above mailbox address. Multiple FCQ user audit trails can be included in each email request.

  4. BSA will send the requested audit trail information directly to the requestor through secure email.

Suspicious Activity Reports (SAR)

  1. SARs are reports made by a financial institution to FinCEN regarding suspicious or potentially suspicious activity. SARs include detailed information about transactions that are or appear to be suspicious which is stored on FCQ.

  2. Access to BSA information through FCQ for tax purposes is governed by the Memorandum of Understanding (MOU) between FinCEN and IRS dated September 24, 2010.

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  5. Revenue officers not authorized online access to FCQ can request a search for SARs through their Area SAR Gatekeeper. The link to the Area SAR Gatekeepers can be found on the Collection SAR webpage at http://mysbse.web.irs.gov/Collection/toolsprocesses/sar/default.aspx.

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  7. For more guidance refer to the Collection SAR webpage on MySBSE at: http://mysbse.web.irs.gov/Collection/toolsprocesses/sar/default.aspx.

Foreign Bank and Financial Accounts

  1. Foreign banking information can be valuable in working ATAT cases and can be utilized as a source to trace a taxpayer's assets and income. One resource available to obtain foreign financial information is the Treasury Department's Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114. FBAR reports are filed electronically through the FinCEN e-filing system at http://www.fincen.gov/.

  2. FBAR reports must be filed by any United States person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts that has an aggregate value greater than $10,000 at any time during a calendar year. Failure to file FBAR reports when required to do so may result in civil and criminal penalties. United States persons include a U.S. citizen or resident, a domestic partnership, a domestic corporation, and a domestic estate or trust. A "financial account" includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).

  3. Information required on FBAR reports includes:

    • Number of accounts.

    • Type of accounts.

    • Names of financial institutions.

    • Last name or organization name of account holder(s).

    • Taxpayer Identification Number.

  4. FBAR information may be valuable in working ATAT cases and may be secured through research of IDRS command code IRPTR, and FCQ research. IRPTR research will indicate whether a taxpayer has filed an FBAR report. Once FBAR activity has been noted through command code IRPTR, a revenue officer can access or request FCQ research to obtain transcript data from FBAR filings.

  5. FBAR filings can provide indicators of offshore activity by a taxpayer. Foreign banking information can be utilized to "follow the money" to trace a taxpayer's assets and income. FBAR information can also be used to determine if a taxpayer has been forthcoming with financial information.

    Note:

    Administrative collection action cannot be taken against funds held offshore unless the funds are on deposit in countries with which the U.S. has a collection tax treaty, funds are on deposit in an offshore account of a U.S. bank, or the funds are on deposit with an offshore financial institution that has a branch in the U.S. or a U.S. territory. See IRM 5.11.1.4.4, Property Outside the United States, for additional information.

Foreign Account Tax Compliance Act (FATCA)

  1. Foreign Account Tax Compliance Act (FATCA) became law on March 18, 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act and is intended to improve tax compliance by U.S. taxpayers holding accounts with foreign financial institutions or other foreign assets. FATCA increases transparency of offshore accounts through information reporting by foreign financial institutions and by certain U.S. taxpayers holding assets outside the United States. Certain U.S. taxpayers holding financial assets, including accounts, outside the United States are required to report those assets to the IRS. Foreign financial institutions will report to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

  2. FATCA is a statute written subsequent to the FBAR statute. Under FATCA some taxpayers who file FBAR reports have a further requirement to file Form 8938, Statement of Specified Foreign Financial Assets, if they have specified foreign financial assets with an aggregate value exceeding $50,000 on the last day of the tax year or $75,000 at any time during the tax year, with higher thresholds for married individuals filing jointly and individuals living abroad.

  3. The Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR report. Individuals must file each form for which they meet the relevant reporting threshold. See IRM Exhibit 5.21.6-1, Comparison of Form 8938 and FBAR Requirements, for a comparison of these two foreign account reporting requirements.

  4. IDRS command code RTVUE will indicate that a taxpayer has filed Form 8938. The "CC CD" indicator (or Computer Condition Code) will include an "H " to indicate that Form 8938 was filed. If Form 8938 has been filed, ESTAB the return to view the return information. This may lead to identification of a foreign account or asset.

Electronic Research

  1. Electronic research can lead to useful information on ATAT cases. The SB/SE Collection ATAT and IRS Abusive Transactions and Technical Issues websites contain a number of resources for conducting electronic research.

  2. Information on specific promotions and transactions encountered in ATAT cases can be found on the Issues and Procedures website at http://mysbse.web.irs.gov/exam/tip/default.aspx.

  3. The Offshore Compliance Initiatives (OCI) Information Database is a web based application that contains financial information on taxpayers that have accounts offshore. It includes data from John Doe summonses issued to offshore credit card companies, third party processor and merchant accounts. Information has also been received from Exchange of Information and through other government agencies such as the Security Exchange Commission. The database is maintained by the Large Business & International OCI group and is a potential source for financial information.

    • Revenue officers can request access to the OCI Application through the online 5081 process. The application is titled, ASTARS - OCI Users (ASTARS). The link to the database is http://vci.enterprise.irs.gov/OCI_PROD/.

    • Request OCI research by sending an email to "*SBSE Area # OCI Research" with the search criteria, e.g. names, addresses, account numbers, telephone numbers, email addresses, and bank information, such as a bank name, or its country. Data is not searchable by taxpayer identification number.

  4. The International Collection website contains contact names and useful information on international issues and can be found at: http://mysbse.web.irs.gov/Collection/international/default.aspx.

  5. The Investigative Techniques home page located at the MySB/SE Collection website contains links to internet resources and other valuable information. The Investigative Techniques home page can be found at:http://mysbse.web.irs.gov/collection/toolsprocesses/InvestTech/default.aspx.

  6. Additional information and links can be accessed through the Collection E-Business Corner website at: http://mysbse.web.irs.gov/collection/toolsprocesses/EBusiness/default.aspx.