7.11.10 EP Examination and Fraud Referral Procedures

Manual Transmittal

November 30, 2018

Purpose

(1) This transmits revised IRM 7.11.10, Employee Plans Determination Letter Program, EP Examination and Fraud Referral Procedures.

Material Changes

(1) Updated IRM 7.11.10.1.3, Acronyms, to delete the acronym EPFC, EP Fraud Coordinator, and to add the acronym EP SME, EP Fraud Subject Matter Expert.

(2) Updated IRM 7.11.10.3.1, Fraud Referral Overview, to replace the acronym EPFC with the acronym EP SME, to delete the reference to Special Review and to add a reference to the TE/GE Fraud Specialist.

(3) Updated IRM 7.11.10.3.1.1, Criminal Fraud Procedures, to replace the acronym EPFC with the acronym EP SME and to add a reference to the TE/GE Fraud Specialist.

(4) Updated IRM 7.11.10.3.1.2, Administrative Procedures, to replace the acronym EPFC with the acronym EP SME and to add a reference to the TE/GE Fraud Specialist.

Effect on Other Documents

This supersedes IRM 7.11.10 dated August 14, 2017.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(11-30-2018)

Catherine L. Jones
Acting Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This IRM describes guidelines and procedures to make referrals to Employee Plans Examination (EP Exam) and criminal fraud referrals to Criminal Investigation Division (CID).

  2. Audience: EP Determinations and Quality Assurance (QA) staff

  3. Policy Owner: Director, EP

  4. Program Owner: EP

  5. Program Goals: The goal of EP Determinations is to ensure that plans are in compliance with the tax laws by reviewing applications for determination letters, opinion letters, and advisory letters, and to protect the public interest by applying the tax law with integrity and fairness to all.

Background

  1. A plan is qualified if it meets the requirements of IRC 401(a) in form and operation. A qualified plan is entitled to favorable tax treatment.

  2. To help taxpayers ensure that their plans are in compliance with the tax law, EP reviews applications for determination letters, opinion letters, and advisory letters on whether the form of the plan meets the qualification requirements. See IRM 7.11.1.

Authority

  1. Delegation Order 7-1a, delegates the authority to issue determination letters on the qualified status of pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans to the Director, EP. IRM 1.2.46.2.1.

  2. A complete list of delegation orders governing EP Rulings and Agreements can be found at http://www.irs.gov/uac/Delegation-Orders-by-Process1

  3. See IRM 7.1.1, Exhibit 7.1.1-1 for a complete list the major EP revenue procedures currently in effect.

Acronyms

  1. These acronyms are used in this IRM:

    Acronym Term
    CID Criminal Investigation Division
    EPDFR EP Determinations Fraud Reviewer
    EP Employee Plans
    EP Exam EP Examinations
    EP SME EP Fraud Subject Matter Expert
    EDS Employee Plans and Exempt Organization Determination System
    FTA Fraud Technical Advisor
    QA Quality Assurance
    SB/SE Small Business/Self-Employed Operating Division
    TEDS Tax Exempt Determination System
    WebETS Web-based Employee Technical time System

EP Examinations Referral Overview

  1. If, during the review of a determination letter application, you find a potential Qualification Failure as defined in Rev. Proc. 2016-51, section 5.01(2), and your manager agrees that a Qualification Failure exists, the plan sponsor must correct the failure.

  2. If the potential Qualification Failure is limited to a Plan Document Failure (defect in the plan language), don't refer the plan for examination. Discuss the issue with your manager. If they agree there is an issue, contact the Closing Agreement Coordinator to discuss a possible closing agreement to fix the defects and avoid plan disqualification. See IRM 7.11.8, EP Determinations Closing Agreement Program.

  3. IRM 4.71.6, Employee Plans Referrals, shows how EP Examinations (EP Exam) processes referrals.

Issues that Do Not Affect Plan Qualification

  1. You may find potential issues that require a plan examination but don't affect plan qualification. These are issues that don’t cause the plan to fail to meet IRC 401(a) but could result in excise taxes or other issues. Some examples include:

    1. Prohibited transactions, generally plan loans

    2. Unrelated business income

    3. Deemed distributions

    4. Reversion of excess assets upon termination

    5. Minimum funding deficiency

      Note:

      If a sponsor of a terminated plan filed a Form 5310, Application for Determination for Terminating Plans, and the plan has a minimum funding deficiency, request a copy of their Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and attach a copy of it and the Form 5310 to the Form 5666, TE/GE Referral Information Report (mentioned below). If the plan sponsor hasn't filed a Form 5330, note it on the Form 5666

  2. Prepare a Form 5666 per IRM 7.11.10.2.3, Examination Referral Procedures, for the types of issues listed in IRM 7.11.10.2.1 (1).

  3. Work the determination case under normal procedures after you refer the plan for examination for an issue unrelated to plan qualification. Do not hold the case pending the examination after the determination case is otherwise ready to close.

Issues that Affect Plan Qualification

  1. Some examples of examination referral issues that affect plan qualification include:

    1. Any IRC 401(a) provision

    2. IRC 411(d)(6) cutbacks

    3. Cases with potential Operational Failures (defined in Rev. Proc. 2016-51, section 5.01(2)(b))

  2. If the potential issue affects plan qualification, prepare a Form 5666 per IRM 7.11.10.2.3. For referrals due to only Operational Failures, close the case after you send the Form 5666 if there are no other issues. For all other referrals that involve plan qualification issues, hold the determination case in group suspense (status 37) until one of the following occur:

    If: Then:
    EP Exam accepts the referral and examines the plan The EP Exam agent will contact you. Contact the agent monthly to stay informed of the case status. If, after 6 months, EP Exam:
    1. Hasn’t started their review, take the case out of suspense. Inform the EP Area Manager who will notify EP Exam that you are closing the determination case.

    2. Has started but not finished their review, and haven’t discovered issues that affect the determination case, take the case out of suspense. Inform the EP Area Manager who notifies EP Exam that you are closing the determination.

    3. Has started but not finished their review, but has discovered issues that would affect the determination case, leave case in suspense until audit conclusion.

    EP Classification doesn't assign your referral to EP Exam, or the EP Exam manager declines to examine the plan
    • Consult your Closing Agreement Coordinator about possibly offering a closing agreement.

    • See IRM 7.11.8, EP Determinations Closing Agreement Program.

Examination Referral Procedures

  1. Complete the following boxes on the electronic Form 5666, TE/GE Referral Information Report, for all examination referrals. You can find Form 5666 in the Forms/Pubs/Products Repository.

    1. A - F

    2. J (if applicable)

    3. L - Add your electronic signature

    4. P1 - P12

    5. P40 - P42

    6. O

  2. Complete Form 5666 Box O, Information Obtained with these details:

    1. The full plan name.

    2. Your name and phone number

    3. Clearly describe the defect in detail; for IRC 401(a) violations, list the specific Code section. Explain your reasoning for referring the plan for examination (for example, "the potential for a prohibited transaction exists because..." or, "the plan has violated Code section _because...."

    4. Add in the following paragraph for a response to let you know how to dispose of the case: "Depending on the disposition of the referral, please have one of the following contact me: 1) EP Classification if the referral is not accepted, 2) the EP Examination group manager if the plan will not be examined or 3) the EP Exam agent at the time he or she is assigned the referral."

  3. Attach a copy of all relevant documentation from the case file for the potential issue to Form 5666.

  4. Place Form 5666 in the case file and send to your manager for review and approval. Your manager signs line M.

  5. Notify the plan sponsor of a potential examination before you send an exam referral to the EP Classification Unit.

  6. Keep a copy of Form 5666 in the case file's non-disclosable section.

    Exception:

    You don’t need to keep a copy of Form 5666 for referrals that involve taxability of distributions to beneficiaries upon termination.

  7. Secure email the electronic Form 5666 to the EP Classification Unit at *TE/GE-EP-Classification.

  8. EP Classification reviews the Form 5666 within 30 days of receipt. If they agree an exam is necessary, they contact the appropriate EP Exam manager. The manager may accept or decline the referral. If you haven't heard from EP Classification within 30 days of sending the referral, follow-up with them.

Fraud Referral Overview

  1. 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 owed. Tax fraud requires both:

    1. A tax due and owing.

    2. A fraudulent intent.

  2. Taxpayers who knowingly understate their tax liability often leave evidence in the form of indicators. Fraud indicators are divided into two categories:

    1. Indications of Fraud are a sign or symptom, or signify that actions may have been done for the purpose of deceit, concealment or to make things seem other than what they are.

    2. Affirmative Acts (Firm Indications) of Fraud are those actions that establish that a particular process 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.

  3. You can’t pursue fraud unless affirmative acts are present. For examples, see IRM 25.1.1.3, Fraud Handbook, Indicators of Fraud vs. Affirmative Acts of Fraud.

Fraud Referral Procedures

  1. Follow these procedures for potential fraud referrals.

    If: Then:
    1. You discover potential fraud during a determination letter review Discuss any possible issues with your manager.
    2. Your manager agrees that potential fraud exists Contact the EPDFR at: TE/GE Connect - Fraud, to discuss the case.
    3. The EPDFR agrees that potential fraud exists They contact the EP SME in EP Exam.
    4. The EP SME agrees that potential fraud exists They contact a FTA.
    5. If the FTA agrees The EP SME arranges a conference call to discuss the case with the:
    • EP Determinations specialist

    • EP Determinations manager

    • EPDFR

    • FTA

    • EP SME

    Note:

    Even if you don’t refer or pursue fraud in a case, contact the TE/GE Fraud Specialist about possible referrals to other areas such as EP Exam, the Office of Professional Responsibility, or Small Business/Self-Employed (SB/SE) Lead Development Center, for possibly abusive transactions or emerging issues (see IRM 7.11.1.27, Abusive Transactions / Listed Transactions).

  2. If all parties agree that the case should be developed for fraud, follow these steps:

    1. Determination specialist: Complete a Form 11661 and secure email it to your manager for review and signature. The EPDFR and EP SME can help you prepare it. After your manager approves Form 11661, secure email it to the EP SME and the TE/GE Fraud Specialist.

    2. EP SME: If you agree with the items on the Form 11661, secure email it to the FTA for review, approval and signature.

    3. FTA: Get the EP Determinations specialist’s, EPDFR’s and EP SME’s input and prepare an action plan to develop the potential fraud issue using the Form 11661, Form 11660, Fraud Development Checksheet, or a memo. Secure email a copy of the signed Form 11661 and action plan (if separate) to the EP Determinations manager, EP Determinations specialist, EPDFR, TE/GE Fraud Specialist and EP SME.

      Note:

      The EP Determinations specialist or the EP Determinations manager should NOT contact CID at this stage.

    4. Determination specialist: When you receive the signed Form 11661, ensure that the FTA sent a copy to the EPDFR, EP SME and TE/GE Fraud Specialist. If not, secure email a copy to them because the TE/GE Fraud Specialist and QA both keep a log of all signed Forms 11661. Place the case in group suspense (status 37) and proceed with any additional actions required by the action plan.

  3. Develop the potential fraud issues according to the action plan. Timely and appropriate actions are very important if the potential for fraud exists. Update the EPDFR at least monthly with the case progress. Follow these procedures depending on your analysis of the case facts:

    If: Then:
    You identify an affirmative act of fraud and notify your manager. If your manager agrees, contact the EPDFR.
    1. The EPDFR arranges a conference call with the EP SME, FTA, EPDFR, EP Determinations specialist and EP Determinations manager to discuss the case.

    2. The FTA may recommend that you refer the plan to CID for pursuit of criminal fraud, refer to EP Exam for further development, or that you continue developing the potential fraud issue. Discuss any EP Exam referral recommendation with the EP SME prior to sending it. To refer the case to CID, see IRM 7.11.10.3.1.1, Criminal Fraud Procedures.

    You identify issues that can be best addressed, or only addressed, by EP Exam and notify your manager. If your manager agrees, contact the EPDFR.
    1. The EPDFR contacts the EP SME to discuss the need to refer the plan to EP Exam.

    2. If the EP SME agrees that the referral is appropriate, they’ll notify the FTA and the FTA updates the action plan.

    3. EP Exam and/or SB/SE generally work issues that may result in asserting civil fraud or fraudulent failure to file penalties.

    You determine that no fraud potential exists and notify your manager. If your manager agrees, contact the EPDFR.
    1. The EPDFR arranges a conference call with you, your manager, the EP SME, FTA, and EPDFR to discuss the case.

    2. If you determine that fraud is no longer an issue, work the case as a routine case and return it to status 52.

Criminal Fraud Procedures
  1. If you identify an affirmative act of fraud:

    1. Immediately suspend all case activity.

    2. Notify your manager.

  2. If your manager agrees, contact the EPDFR. The EPDFR arranges a conference call with the EP SME, FTA, EPDFR, EP Determinations specialist and EP Determinations manager to discuss the case. If the FTA agrees that an affirmative act has been identified, make a criminal fraud referral to CID using Form 2797, Referral Report of Potential Criminal Fraud Cases. The EPDFR and EP SME can help you prepare this form.

  3. Secure email the Form 2797 to the following individuals for their review and approval:

    1. Your manager

    2. FTA

    3. FTA manager

  4. You, your manager or the FTA must secure email a complete copy of the approved Form 2797 to the EPDFR, TE/GE Fraud Specialist and EP SME.

  5. If the criminal fraud referral is approved, the FTA manager secure emails the Form 2797 to the appropriate CID Field Office for consideration.

  6. A CID supervisory special agent is assigned to evaluate the criminal fraud referral and arranges two disposition conferences. The first conference is held within 10 days of receiving the criminal fraud referral to discuss the merits of the case and the second within 30 days to discuss whether the criminal fraud referral is accepted or declined. The following individuals are invited to the conferences:

    • EP Determinations specialist

    • EP Determinations manager

    • FTA

    • Supervisory special agent

    • Special agent

    Note:

    The EP Determinations specialist and manager should invite the EPDFR and the EP SME to attend these conferences.

  7. If CID accepts the criminal fraud referral, they may request help from an SB/SE cooperating agent and/or EP using Form 2797 or Form 6544, Request for Cooperating Examiner. Depending on the type of help needed, either an EP Determinations or Examination specialist is assigned. See IRM 4.71.25.7, Administrative Joint Investigations, and IRM 25.1.4, Fraud Handbook - Administrative Joint Investigations for further information.

  8. At this point in the determination, any further instructions will be given by CID, the FTA, the EP SME, TE/GE Fraud Specialist or the EPDFR.

  9. See IRM 4.71.25.4, Criminal Fraud, and IRM 25.1.3, Fraud Handbook, Criminal Referrals, for additional information.

Administrative Procedures
  1. Update TEDS and/or EDS status code to 37 if the FTA approves Form 11661 or you refer the plan to EP Exam or CID. Keep the case in status 37 until the EPDFR advises you to change it.

  2. Place a copy of the Form 11661 and Form 11660, or action plan memo (if separate), and any other document completed during the potential fraud investigation in the case file's non-disclosable side. The EP SME, TE/GE Fraud Specialist, and the EPDFR keep records of all submitted forms for potential fraud cases.

  3. The following codes should be used for completing WebETS:

    1. EP Determinations specialist: continue to use the same Activity Code (AC 301) and Project Code (PC) to charge time to the case until otherwise instructed by the EPDFR. The EPDFR consults the EP SME for correct activity and project codes.

    2. EPDFR: use AC 155, PC 1550 for all time charged to case-related potential fraud activities and AC 155, PC 1551, for non-case related potential fraud activities.