- 9.5.3 Criminal Investigation Strategies
- 22.214.171.124 OVERVIEW
- 126.96.36.199 Compliance Strategy
- 188.8.131.52.1 LEGAL SOURCE INCOME PROGRAM
- 184.108.40.206.1.1 Income Tax Investigations
- 220.127.116.11.1.2 Employment Taxes
- 18.104.22.168.1.2.1 Employment Tax Schemes
- 22.214.171.124.1.2.2 Employment Tax Investigations
- 126.96.36.199.1.2.3 Balancing the Criminal and Civil Aspects of Employment Tax Investigations
- 188.8.131.52.1.2.4 Employment Tax Investigations
- 184.108.40.206.1.3 Excise Tax
- 220.127.116.11.1.4 Abusive Tax Schemes
- 18.104.22.168.1.5 Gaming
- 22.214.171.124.1.5.1 Gaming Investigations
- 126.96.36.199.1.5.2 Information Available From State Regulatory Agencies on Gaming
- 188.8.131.52.2 Refund Fraud Investigations
- 184.108.40.206.2.1 Fraud Detection Center
- 220.127.116.11.2.2 Sources of Refund Fraud Investigations
- 18.104.22.168.3 Potential Forfeiture Provision
- 22.214.171.124.3.1 Title 18 Forfeitures in Tax or Tax-Related Investigations
- 126.96.36.199.3.2 Indicators of Refund Fraud
- 188.8.131.52.3.2.1 Characteristics of Taxpayer Identification Numbers
- 184.108.40.206.3.2.2 Characteristics of Schedule C Schemes
- 220.127.116.11.4 Refund Fraud Investigations
- 18.104.22.168.4.1 Investigative Techniques for Refund Fraud Investigations
- 22.214.171.124.4.1.1 Identification of Handwriting and Typewriting
- 126.96.36.199.4.1.2 Decoy Refund Check Procedures
- 188.8.131.52.4.2 Investigations Involving Refund Checks
- 184.108.40.206.4.3 Investigations Involving Direct Deposit Refunds
- 220.127.116.11.4.4 Investigation Involving Electronic Returns
- 18.104.22.168.4.5 Multiple Refund Identification by Electronic Fraud Detection System(EFDS)
- 22.214.171.124.4.5.1 Assistance of the United States Postal Service in Multiple RefundSchemes
- 126.96.36.199.4.5.2 Prisoner Multiple Refund Schemes
- 188.8.131.52.4.5.3 Electronic On-Line Filing Fraud
- 184.108.40.206.5 Questionable Refund Program
- 220.127.116.11.5.1 Procedures for Fraud Detection Center Identified Questionable RefundProgram Schemes
- 18.104.22.168.6 Return Preparer Program
- 22.214.171.124.6.1 Procedures for IRS Campus Identified Return Preparer Program Schemes
- 126.96.36.199.6.1.1 Field Office Procedures for Return Preparer Program Scheme Referrals
- 188.8.131.52.6.2 Controls for Return Preparer Investigations
- 184.108.40.206.6.3 Return Preparer Program Investigative Techniques
- 220.127.116.11.6.3.1 Investigation of Multiple Fraudulent Returns
- 18.104.22.168.6.4 Developing the Return Preparer Investigation
- 22.214.171.124.6.5 Embezzlement of the Client's Tax Payment
- 126.96.36.199.6.6 Coordination of Criminal Investigations Requiring Compliance Support
- 188.8.131.52.6.7 Protection of Civil Statutes
- 184.108.40.206.7 Notification of the Office of Professional Responsibility
- 220.127.116.11.8 Notification of the Office of the Treasury Inspector General forTax Administration (TIGTA)
- 18.104.22.168.9 Frivolous Filer/Non-Filer Initiative
- 22.214.171.124.9.1 Ogden Compliance Campus
- 126.96.36.199 ILLEGAL SOURCE INCOME PROGRAM
- 188.8.131.52.1 Bankruptcy
- 184.108.40.206.1.1 Bankruptcy Investigation Selection
- 220.127.116.11.2 Financial Institution Fraud
- 18.104.22.168.3 Entitlement Fraud
- 22.214.171.124.4 Health Care Fraud
- 126.96.36.199.5 Issues in Health Care Fraud
- 188.8.131.52.5.1 Types of Health Care and Insurance Programs
- 184.108.40.206.5.2 Health Care Entitlement Programs
- 220.127.116.11.5.3 Fee-For-Service and Capitated Plans
- 18.104.22.168.6 Insurance Fraud
- 22.214.171.124.7 Pension and Exempt Organization Fraud
- 126.96.36.199.7.1 Pension and Exempt Organization Criminal Investigation Selection
- 188.8.131.52.7.2 Pension or Exempt Organization Allegations
- 184.108.40.206.7.3 Pension Fraud Schemes
- 220.127.116.11.7.4 Pension Fraud Investigation
- 18.104.22.168.8 Public Corruption
- 22.214.171.124.9 Telemarketing Fraud
- 126.96.36.199.10 Organized Crime
- 188.8.131.52.11 Identity Fraud
- 184.108.40.206.11.1 Tax Investigations Involving Identity Theft
- 220.127.116.11.11.2 Money Laundering Investigations Involving Identity Theft
- 18.104.22.168.12 Fictitious Obligations
- 22.214.171.124 NARCOTICS PROGRAM
- Exhibit 9.5.3-1 Pattern Letter 2527(P)
- Exhibit 9.5.3-2 Voluntary Disclosure Transmittal Memorandum to PSP
Part 9. Criminal Investigation
Chapter 5. Investigative Process
Section 3. Criminal Investigation Strategies
Tax crimes are those which are in violation of the criminal statutes of Title 26, Title 18 and/or Title 31 of the Code of Federal Regulations as applicable to Title 26. Although violations of narcotics, money laundering or currency statutes usually have tax ramifications, those types of violations, will be discussed in separate sections.
Criminal Investigation strategies consist of Compliance, Money Laundering, International and Terrorism. The Annual Business Plan (ABP) issued each fiscal year by the Chief, Criminal Investigation (CI), provides specific direction relative to the major strategies and operational priorities. The ABP also attempts to identify emerging areas of non-compliance, so that resources can be redirected, if required. Timely identification and intervention often prevents "emerging areas" from becoming more serious compliance problems. This section addresses the various programs and initiatives and selectively describes some of the fraud schemes routinely encountered.
Also introduced in this section are the Money Laundering and Terrorism strategies.
Criminal Investigation’s strategies are classified in terms of:
priorities within the program areas
initiatives in which CI participates
schemes encountered in the program areas
other situations to which the special agent should be sensitive when conducting an investigation
Criminal Investigation’s Compliance strategy is comprised of the following programs:
Legal Source Income
Illegal Source Income
The prosecution of legal source income program investigations is essential to promoting voluntary compliance with the tax laws. Criminal Investigation's primary resource commitment is to develop and investigate legal source income investigations. Legal source income investigations involve legal industries and legal occupations, and more specifically, legally earned income. The primary motive or purpose of the illegal activity is the violation of tax statutes. Criminal Investigation is solely responsible for investigating these violations. The legal source income program includes those investigations that threaten the tax system, such as the Questionable Refund Program (QRP), unscrupulous return preparers (RPP) and frivolous filers/nonfilers investigations. Excise tax and employment tax investigations are also important components of the legal source income program. The legal source income program addresses tax investigations involving:
legal occupations and industries
Title 26 violations
Title 18 United States Code (USC) §286, 18 USC §287, and 18 USC §371 (Klein conspiracy) violations
CI is the sole investigating agency
Within the legal source income program are the following initiatives, which are all part of the overall IRS Strategic and Program Plan or an ongoing commitment by the IRS:
Income Tax — investigations relating to income from businesses, investments, or other legal activities and industries
Employment Tax — investigations relating to unreported, underreported, unpaid, or underpaid employment tax obligations
Excise Tax – investigations involving violations of the excise tax laws
Abusive Tax Schemes – investigations involving abusive and/or fraudulent schemes to evade taxes which encompass violations of the Title 26 and related statutes where multiple flow-through entities are used as an integral part of the schemes. Such schemes are characterized by the use of trusts, Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards, and other similar instruments.
Gaming — investigations relating to the income generated from the legal gaming industry
Questionable Refunds (QRP) — investigations involving fraudulent tax refund schemes
Unscrupulous Return Preparers (RPP) — investigations involving preparers of false and/or fraudulent tax returns
Frivolous Filer/Non-filers — investigations involving the most egregious non-filers
The CI Annual memorandum determines the investigatory emphasis on these priorities.
Legal source tax crimes encompass many types of investigations. The majority of these investigations involve individuals who earn income from legal industries. General tax fraud investigations are the main component of CI's effort to foster voluntary compliance. These investigations encompass the broadest base of taxpayers and involve individuals from all facets of our economy.
Employment tax investigations seek to identify those individuals who evade or fail to report and pay employment taxes.
The emergence of employee leasing companies that fail to pay over taxes withheld from employees is an area of growing concern. Employee leasing is an industry where companies contract with a business to handle administrative duties, hire all the company's employees, and lease the employees back to the original company.
Another concern in the employment tax area is businesses that "pyramid" employment taxes. This situation occurs when companies retain the taxes withheld from employees, then liquidate the company whenever they encounter any financial difficulties. Criminal Investigation is also actively pursuing bankruptcy investigations where companies are " pyramid" employment taxes and then file bankruptcy in an effort to evade the payment of these liabilities.
Indications of employment tax fraud are typically discovered by the other operating divisions and then referred to CI. See IRM 25.1, Fraud.
Title 26 USC §7512 and 26 USC §7215 are criminal provisions that may be useful in the employment tax area, especially in bankruptcy related tax crimes. See IRM 9.1.3, Criminal Statutory Provisions and Common Law.
The penalty provided by 26 USC §7215 is not limited to the "willful" failure investigations, to which these other penalties are applicable. Title 26 USC §7215 (b) of the new code provides that the penalty provided by 26 USC §7215 (a), is not applicable in two types of situations:
The penalty is not applicable if the person in question shows that there is reasonable doubt as to whether the law required the collection of the tax or that he/she was the one who was required by law to collect the tax. For example, in an investigation involving employment taxes, the target may show that there was reasonable doubt as to whether he/she was an employer or was simply engaged in a contract with an independent contractor. Another example where the penalty would not be applicable is when the individual in question can show that there is reasonable doubt as to who is the proper collection agent.
The penalty in 26 USC §7215 (a) is not applicable when the target of the investigation can show that his/her failure to collect, deposit and/or keep the taxes in the separate account was due to circumstances beyond his/her control. For this purpose, however, a lack of funds immediately after the payment of wages (whether or not resulting from the payment of the wages) is not to be considered circumstances beyond the individual’s control. This can be illustrated by an employer subject to the requirement of 26 USC §7512, who has gross payroll requirements of $1,000, with respect to which he/she is required to withhold $100 of income taxes. If the employer had on hand only $900 and used this entire amount to pay his/her employees' salaries, withholding nothing, he/she would not be relieved of the penalty imposed by 26 USC §7215(a). A lack of funds occurring after the payment of wages (so long as it was not immediately after) would, however, qualify under this exception if it were due to circumstances beyond the person's control. Examples of such circumstances are theft, embezzlement, destruction of the business as the result of fire, flood, or other casualty, or the failure of a bank in which the person had deposited the funds prior to transferring them to the trust account for the government. However, lack of funds arising after payment of wages, resulting, for example, from the payment of creditors will not be considered circumstances beyond the person's control.
An appropriate investigation will be made in each situation to determine whether the statutory exceptions set forth above are applicable, and the final report will set forth the results of such investigation.
Once a criminal investigation is initiated, the other operating divisions will not contact the subject, his/her representative, or employees about the collection of the amounts due under the notice, or take any other action to enforce collection of those amounts, without the prior concurrence of the Special Agent in Charge (SAC). No part payment or installment agreement covering prior delinquencies will be entered into with the subject after the referral to CI. Voluntary payments by the subject after the referral will be reported to the SAC. This does not preclude issuance of collection first notices, acceptance of voluntary payments, or the filing of notices of lien, if required to adequately protect the government's interests.
Enforced collection action may be taken on delinquencies for periods prior to the time the subject received the notice. In some instances, such action will include the filing of proof of claim in a pending insolvency proceeding because the subject's assets, or at least some portion thereof, will be under the jurisdiction of a court and will not be subject to levy. However, the SAC will be informed of any proposed enforcement action to ensure that it does not jeopardize a potential criminal investigation.
The SAC may concur with the proposed enforced collection action relating to the amounts due under a referred notice, when it appears that such action will result in substantially full payment of the liability covered by such notice.
Concurrence will not be given if the proposed action will result in only a small partial payment.
The probable effect of a proposed action that will likely result in obtaining more than a small partial payment, but less than full payment of the liability, will be determined based on its likelihood of jeopardizing successful prosecution. Proposed enforced collection action involving participation in an insolvency proceeding will be considered to likely result in obtaining more than a small partial payment of the liability but less than full payment.
Trust fund penalty investigations are referred directly to the US Attorney's Office (USAO) by the SAC. Criminal Tax (CT) Counsel should be consulted early in the investigation for advice on potential strengths and weaknesses.
Concurrence of a proposed enforced collection action which is related to the liability due under the notice, will not be given by the SAC in those instances when the investigation was transmitted to the local USAO without the approval of said USAO.
Concurrence requests may be oral or written from the other operating divisions in a proposed enforced collection action which relates to liabilities due under a referred notice. The SAC may also reply orally; however, his/her response should be confirmed in writing as soon as practicable.
Reporting procedures will be followed for "Discontinued Investigations" returned to the Collection function (See IRM 9.5.14, Investigation Closing Procedures).
Information concerning payments made by a subject after the criminal investigation was referred to the attorney for the government, or for any enforced collection action related to prior delinquencies, will be transmitted to the attorney for the government.
Trust fund penalty investigations will be processed in accordance with established procedures. The SAC will notify the other operating divisions promptly of the disposition of the criminal aspects of an investigation (See IRM 9.5.14, Investigation Closing Procedures). The SAC may furnish suggestions to the other operating divisions for future collection action in:
any referral which was declined by CI
an investigation in which CI declined prosecution but where the taxpayer's actions might result in more favorable circumstances for a prosecution recommendation at a later date
An excise tax is a duty levied upon the manufacture or sale of goods and services, upon certain occupations, and upon certain activities of non-profit organizations. While income taxes are based on net income or net profits and are graduated, excise taxes are not. Excise taxes can be based upon any of the following factors:
selling price of merchandise or facilities
services sold or used
number of units manufactured, etc.
volume of units sold
nature of occupation
Civil excise tax investigations cannot be appealed to the US Tax Court. All appeals by excise tax litigants must be made to either the US Court of Claims or to the US District Court, and then only upon prepayment of the taxes.
Certain excise tax returns are required to be filed on either a fiscal-year or calendar-year basis. In general, excise tax returns are filed on a calendar quarter-year basis.
The excise tax categories of most frequent interest to CI include:
Manufacturers’ excise taxes: automotive and related items (gasoline, gasohol sales, gasoline sales used for gasohol, and tires); coal from underground mines and from surface mines; recreational equipment such as firearms (pistols, revolvers, other firearms, shells and cartridges); and sporting goods (fishing equipment, hunting, and related equipment)
Occupational taxes: wagering; brewers; retail liquor dealers; retail dealers in beer; wholesale liquor dealers; wholesale dealers in beer; and other limited retail dealers
Facilities and services: communications (local and toll telephone service and teletypewriter service) and transportation (transportation of persons by air, inland waterway users) fuel and transportation of property
Heavy trucks and trailers retailers taxes: truck parts and accessory installations; truck chassis or body; truck trailer or semi-trailer chassis or body
Miscellaneous excise taxes: seabed mining; environmental taxes; highway motor vehicle use tax; foreign insurance policies; wagering taxes; liquor taxes; and tobacco taxes
Information concerning the investigation of these types of excise taxes can be found in IRM 9.5.11, Other Specialized Investigations.
The preceding excise taxes on alcohol, tobacco, and firearms are not under the jurisdiction of CI. Those items are taxed under Subtitle E of Title 26. Responsibility for the enforcement of excise taxes on alcohol, tobacco, machine guns and certain other firearms is vested exclusively with the Department of Justice (DOJ), Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).
Since the mid-1980s, organized criminal elements have devised elaborate schemes to steal Federal and state motor fuel excise tax revenue. The impact of these evasion schemes went far beyond the substantial revenue loss. These criminal enterprises adversely affected the fuel industry, as well as, eroding the market share of legitimate dealers and forcing some out of business. Since 1991, CI has made a concerted effort to disrupt those organized criminal elements responsible for perpetrating motor fuel evasion schemes across the country. These enforcement efforts provided the impetus for the enactment of important legislative changes to reduce evasion, and materially contributed to dramatic and sustained increases in Federal and state motor fuel tax revenue.
A wagering excise tax is imposed on wagers and is a percentage of the wager. The tax is assessed on the individual who accepts wagers. A special wagering tax also exists and is a flat fee to be paid by each person who is engaged in receiving wagers or employed by such person. Wagering tax investigations are often joint efforts with other agencies. These joint investigations would then become part of the illegal source income program area. For additional information concerning CI’s involvement in the enforcement of the wagering taxes see IRM 9.5.11, Other Specialized Investigations.
There are special disclosure restrictions regarding wagering investigations (See IRM 9.3.1, Disclosure).
Abusive tax promotions have increased in recent years, creating a significant threat to the nation's revenue. Promoters and return preparers have grown increasingly bold and sophisticated. The internet gives promoters instantaneous and relatively inexpensive access to a wide audience. This has allowed tax schemes and scams to grow at phenomenal rates, often faster than the IRS is able to investigate and stop them. Effective early action against promoters and preparers is needed to reverse this disturbing trend. Criminal Investigation plays an active role in combating abusive tax schemes by targeting the promoters and egregious clients of these schemes. Criminal Investigation and Small Business/Self Employed (SB/SE) are cooperating in an effort to utilize all of the civil and criminal remedies available to stop the proliferation of abusive tax schemes.
Abusive tax scheme investigations encompass violations of Title 26 and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes. These schemes are characterized by the use of trusts, Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex, involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
Abusive tax scheme investigations will often involve the use of parallel proceedings to effectively stop an abusive promotion and protect the revenue of the Treasury (See IRM 9.5.13, Civil Considerations). Parallel proceedings are not joint proceedings; rather, they are distinct separate civil and criminal investigations. Criminal Investigation, SB/SE, and DOJ have developed the methods and means to implement both the civil and criminal statutes available in a coordinated strategy. The benefits of using parallel proceedings against promoters of abusive tax schemes are:
An injunction usually stops the promotion much earlier than possible through criminal enforcement alone.
Filing an injunction, accompanied by a press release, quickly publicizes the government's position on a promoter or promotion.
Parallel investigations enable civil and criminal agents and attorneys for the government to share information where appropriate, thus enhancing efficient use of government resources.
During recent years, there has been unprecedented growth in the legalized gaming industry. Criminal Investigation has increased its attention to this industry as it relates to the enforcement of tax, money laundering, currency and other criminal statutes within CI’s jurisdiction. Criminal Investigation also recognizes that traditional gaming investigations involving illegal bookmaking and numbers operations remain areas of concern.
The gaming initiative consists of two primary activities:
traditional investigative efforts directed at persons suspected of violating laws within CI’s jurisdiction
important liaison activity in cooperation with Federal and state gaming boards, commissions, and other regulators (includes participation in writing state gaming regulations, assisting in licensing activities, and developing investigations)
To address concerns regarding the rapid expansion of domestic gaming, Congress passed the National Gaming Impact Study Commission Act, Public Law 104–169, which requires a comprehensive legal and factual study of the social and economic impacts of gambling in the United States upon:
Federal, state, local, and Native American tribal governments
communities and social institutions
Regulations implementing the Bank Secrecy Act (BSA) Title 31 were amended to include casinos operated by or on behalf of Native American tribes within the definition of a financial institution as set forth in those regulations. The amendments extend the reporting and record-keeping requirements and anti-money laundering safeguards of the BSA to tribal casinos.
Gaming investigations differ from wagering excise tax investigations. In a gaming investigation, a subject is typically under investigation for income tax, money laundering, or currency violations. Similar to wagering tax investigations, gaming investigations can be joint efforts with other agencies. These joint investigations would then become part of the illegal source income program.
Title 18 USC §1955 (Prohibition of Illegal Gambling Businesses) is no longer one of the charges for which CI can recommend prosecution; however, it is one of the specified unlawful activities set forth in 18 USC §1956, money laundering.
A number of states gather and maintain substantial information relating to individuals and/or entities associated with the gaming industry. Much of the information is readily available to law enforcement and may be helpful when conducting an investigation. As an example of the type of information available from local or state regulatory agencies, the State of New Jersey, Department of Law and Public Safety, Division of Gaming Enforcement, completes a financial investigation on all individuals associated with casino operations, See 9.4.4, Request for Information.
Fraudulent refund schemes fall within two categories:
Questionable Refund Program (QRP) - These investigations generally consist of one or more tax returns that are determined to be false and involve violations of 18 USC §286 and 18 USC §287. The returns appear to be prepared by the same individual or group of individuals based on similar return characteristics or the same "modus operandi."
Return Preparer Program (RPP) - These investigations are generally perpetrated by unscrupulous return preparers who knowingly add false expenses, deductions, credits, or exemptions to a client’s tax returns to decrease that client’s tax liability, resulting in a larger refund or significantly less tax, due and owing. The investigations generally involve violations of 26 USC §7206(1) and 26 USC §7206(2).
The Fraud Detection Centers (FDC) are responsible for detecting, developing and referring information involving questionable refunds (QRP) and unscrupulous return preparers (RPP) to the appropriate field office. Therefore, all information relative to QRP and RPP schemes is to be sent to the FDC. Fraud Detection Centers will work with field offices to select, evaluate, develop and number as primary investigations (PIs), QRP and RPP investigations. Fraud Detection Centers will assign a fraud scheme code to each QRP/RPP investigation (See IRM 9.9.4, Criminal Investgation Management Information System).
Refund fraud investigations can originate from a variety of sources, including:
information forwarded to the FDC by the IRS Campus regarding multiple returns filed by the same taxpayer
fraud referrals from the other operating divisions that were secured during collection activity or involve a nonexistent address, taxpayer, employer, or excessive deductions
information provided by the US Postal Service regarding delivery of numerous government checks to an address or a person showing unusual interest in the mail
information regarding an excessive number of mail-forwarding requests
information provided by an informant regarding an individual boasting about the amount of refunds received or a suspicious return preparer
information provided by a private-sector return preparer who suspects return information submitted is false
information provided by financial institutions relative to unusual deposit amounts either from electronic transfers or paper checks
information provided by internet providers relative to numerous returns from the same IP address
returns identified by the FDC that are linked by similar characteristics to returns identified as false as to a material item(s) and/or profiled based on similar schemes and then proven to be false as to a material item(s)
information provided by prison officials regarding the delivery of numerous government checks, correspondence and/or suspicious activity involving inmates
information provided by state and local authorities or other Federal agencies
When conducting refund fraud investigations, the following violations may be applicable (See IRM 9.1.3, Criminal Statutory Provisions and Common Law):
18 USC §287
18 USC §286
26 USC §7206(1)
26 USC §7206(2)
18 USC §371
18 USC §1028
18 USC §2
If there are any indications of substantive tax violations, i.e., the preparation, filing, or assisting in the preparation or filing of false documents or returns by an IRS employee, the Office of the Treasury Inspector General for Tax Administration (TIGTA) is to be notified immediately and the investigation will be conducted jointly by CI and TIGTA.
Investigations involving counterfeiting and forgery statutes are the jurisdiction of the US Secret Service (see IRM 9.3.1, Disclosure).
Investigations involving the use of the mail to defraud the Federal government are within the jurisdiction of the US Postal Service (see 9.3.1, Disclosure).
Early detection of refund fraud enables the IRS to stop the issuance and delivery of refund checks to fraudulent claimants.
A violation of 18 USC §287 occurs upon the filing of a fabricated Federal income tax return wherein a false representation is made that the tax has been overpaid and there is a claim made for a refund of the overpayment.
Special agents should understand the provisions of 18 USC §287 and 18 USC §286 and be prepared to coordinate their investigative activities with investigations conducted by the US Secret Service, the US Postal Service and/or another government agency. It is not unusual for individuals involved in refund fraud investigations to be involved in violations of other Federal statutes.
There are circumstances when grand jury authorization for violations of 18 USC §287 and 18 USC §286 can be directly referred to the attorney for the government. See Department of Justice, Tax Division Directive No 96. Criminal Tax Counsel should be consulted.
False claim investigations are considered tax related investigations and are subject to 26 USC § 6103 disclosure restrictions and the Department of Justice (DOJ), Tax Division, must approve prosecution recommendations.
In the context of tax violations, 18 USC §1028 could be applicable where a subject steals another person's identity for the purpose of falsely representing his/her identity to the IRS. In such investigation(s), the individuals who steal the identities may be different from the individual(s) who actually file the tax return and ultimately obtain the false refund.
Identity fraud must have a direct link to the substantive tax or conspiracy violation which is the focus of the criminal investigation.
These are tax-related investigations and must be referred to DOJ, Tax Division, for authorization.
26 USC §7302
18 USC §981
18 USC §982
The use of Title 18 seizure/forfeiture authority in tax or tax-related investigations will be limited to egregious situations where no reasonable alternative is available. Forfeitures in tax and tax-related investigations must be reviewed by Criminal Tax (CT) Counsel, have the concurrence of the Director of Field Operations and be approved by the Chief, Criminal Investigation. If approved, the Chief, CI, will then refer the matter to DOJ, Tax Division for authorization to pursue the forfeiture action pursuant to Directive 99 (see IRM 9.7.13, Title 26 Seizures and Forfeitures).
Refund fraud investigations may be confined to a single field office or may extend to multiple field offices. The following are indicators of refund fraud:
The name used on a fraudulent return(s) may be an alias, a fictitious name, a deceased person, a stolen identity or a variation of a preparer or filer's name.
The address is usually the address of a hotel, a motel, a rooming-house, a post office box number, a non-existent address or general delivery. However, residential street numbers have been used on occasion. It is rare for the address used to be a legitimate address for the individual whose name is shown on the return.
Form(s) W-2 (sometimes handwritten) are fabricated and false showing fictitious employer(s), false or inflated salary, and/or false or inflated tax withheld.
The name of the employer shown on the Form(s) W-2 may or may not be an existing firm or person.
Returns filed with false Schedule C(s) (see subsection 126.96.36.199.188.8.131.52.2).
A substantial refund is claimed solely on the basis of the number of exemptions listed.
An unrealistic amount is shown as tax withheld.
Absence of or unrealistic social security information reflected on the Form(s) W-2. Unless an exempt occupation, such as state government employment is involved, the percent and maximum amounts of Social Security taxes withheld should agree with the law for the year involved.
Absence of or unrealistic Employer's Identification Number shown on Form(s) W-2.
Unusual delivery instructions such as different addresses being shown on Form(s) W-2 and the tax return, a boulevard address in small towns, a taxpayer's use of a post office box, general delivery, and/or mail forwarding service.
Similarity of information, format, or writing on several returns. Frequently, investigations involving numerous false returns being filed by one person or group of persons can be detected by his/her continued use of similar names as to taxpayers, employers, exemptions, and types of deductions claimed; or similarity in the arrangement of the information and the printing, handwriting or typewriting appearing on the returns.
Undeliverable refund checks resulting from the taxpayer's miscalculations.
In instances where the taxpayer plans to receive the refund check at an address other than the one listed on the return, the scheme may be to file a change of address with the US Postal Service prior to delivery of the check. The scheme may also be to recover the check after it has been returned to the IRS by later providing forwarding instructions.
Undeliverable refund checks frequently include the refund checks the perpetrator failed to intercept. Refund checks retrieved by the perpetrator after they have been returned to the IRS leave a trail of forwarding instructions.
Multiple refunds are going to the same bank account as direct deposits and/or refund transfers. These accounts may or may not be associated with a return preparer.
Characteristics of Social Security numbers (SSN) are:
Social Security numbers should appear 000-00-0000.
The SSN always begin with a number 0 to 7; never begin with an 8 or a 9.
Prior to January 1966, the middle two digits had to be odd if the number was under ten (01, 03, 05, 07 or 09) and even for higher numbers (10, 12, 14, etc.). Presently, as each area exhausts their sequence of numbers in the odd and even categories, they will start using the even numbers under ten then the odd numbers above ten.
The first three digits of the Social Security number identify the area of issuance. A list of numbers and their assigned areas of issuance are shown in Exhibit 9.5.4-1.
Employer's Identification Number (EIN) shown on Form(s) W-2 should always appear 00-0000000 with the first two digits being the code number of the IRS field office. For example, a Tennessee Employer's Identification Number should ordinarily begin 62- and the following 7 digits should be within the limits of the numbers assigned thus far.
An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the IRS. It is a nine-digit number that always begins with the number 9 and has a 7 or 8 in the fourth digit, example 9XX-7X-XXXX.
IRS issues ITINs to individuals who are required to have a US taxpayer identification number, but who do not have and are not eligible to obtain a SSN from the Social Security Administration (SSA).
Individual Taxpayer Identification Numbers are issued regardless of immigration status because both resident and nonresident aliens may have US tax return and payment responsibilities under the Internal Revenue Code (IRC).
Individuals must have a filing requirement and file a valid Federal income tax return to receive an ITIN, unless they meet an exception.
Individual Taxpayer Identification Numbers are for Federal tax reporting only, and are not intended to serve any other purpose. An ITIN does not authorize the individual to work in the United States or provide eligibility for Social Security benefits or the Earned Income Tax Credit (EITC). Individual Taxpayer Identification Numbers are not valid identification outside the tax system.
IRS issues ITINs to help individuals comply with the US tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for SSNs.
The following are characteristics of questionable Schedule Cs:
Returns with zero or minimal/similar expense deductions on Schedule C claiming 90% or more of maximum earned income credit (EITC); and
One or more of the following items:
• Multiple returns at the same addresses some of which may be non-existent • Multiple years filed at the same time • Multiple returns with the same direct deposit bank account • First time filer • Filers under the age of 15 or over the age of 45
In refund fraud investigations, the investigation is directed towards ascertaining:
the authenticity of return(s) and supporting document(s)
the responsibility of the return preparer(s) and filer
Criminal Investigation may make limited third party contacts at the general investigation (GI) and PI stage of QRP/RPP investigations under the exception provided in 26 USC §7602(c)(3) (see IRM 9.4.1, Investigation Initiation). Title 26 USC §7602(c)(3) exempts contacts made with respect to a pending criminal investigation from the notice requirement. These inquiries may only be made for the purpose of determining the criminal potential of the investigation and to identify persons responsible for the scheme. Once these determinations are made, third party contacts must immediately cease until a Subject Criminal Investigation (SCI) is initiated.
General investigation authorized information gathering techniques are listed in IRM 9.4.1, Investigation Initiation.
Primary investigation authorized information gathering techniques are listed in IRM 9.4.1, Investigation Initiation.
Additional investigative responsibilities for refund fraud investigations may include the following:
Special agents must analyze false documents to determine if a specific scheme or technique is being used and if there are any additional false returns. Computer generated extracts of refund information are available to help special agents identify additional returns having similar characteristics to those already discovered. These extracts (routines) are described in the LEM 9.14.1, Criminal Investigation Official Use Only Procedures, LEM 9. Coordination with the Fraud Detection Centers (FDC) is necessary for the development of schemes and the identification of the full scope of returns involved. It is also a vital step in CI’s responsibility to reduce the loss to the government by blocking refunds and identifying similar and/or related schemes in a timely manner.
Special agents must be familiar with surveillance techniques (see IRM 9.4.6, Surveillance) to identify and locate perpetrators.
Special agents must understand the meaning of Probable Cause and be acquainted with IRM 9.4.12, Arrest; IRM 9.4.9, Search Warrant, Evidence and Chain of Custody; and 9.6.4, Pre-Trial Procedures. Search warrants, arrest warrants and complaints are obtained through the US Attorney's Office. A complaint should be used only in extraordinary circumstances.
Special agents may ask the postmaster or US Postal Inspector for a description of the renter of each postal box and, with the postmaster's cooperation, arrange a surveillance of the postal box. The US Postal Inspection Service will make equipment available that gives a signal when the postal box is opened. Special agents should discuss with their Supervisory Special Agent (SSA) and CT Counsel whether they should arrest the person opening the box and picking up the check, or delay the arrest until an arrest warrant can be obtained.
Special agents should utilize the services of the Office of Forensic Science and Support for handwriting and typewriting comparisons. Special agents should be acquainted with the procedures prescribed in IRM 9.4.11, Investigative Services.
Special agents must determine if employers' names correspond with those on Form(s) W-2 and tax returns filed. These employers should be contacted to determine if the persons listed on the returns were on their payroll.
Special agents should contact the State Unemployment Compensation office to verify information on the Form(s) W-2. The State Unemployment Compensation office maintains records pertaining to Federal Unemployment Taxes Act (FUTA) tax information on employers and their insured employees. This office can determine if an employer, employee, or social security number listed on a tax return exists in that state. This state office can also supply, by telephone, all information shown on the application for the social security number.
To identify and compare the subject's handwriting and typewriting to the returns filed, special agents should:
Obtain copies of refund checks which may have been cashed; have handwriting analyses made of the endorsements; and follow through with inquiries. Such inquiries may lead to the identification of the negotiator of the checks by disclosing the name of the person or firm that cashed or deposited the checks. The Payment, Claims, and Enhanced Reconciliation (PACER) program will produce a copy of the front and back of a cancelled IRS refund check. This will provide the special agent with information regarding who signed the check, where the check was cashed, the account the check was deposited into, and whether the check cashing institution has imaged the driver’s license of the person cashing the check onto the back of the refund check. A PACER request must be submitted through the SSA to the FDC. Original refund checks must be requested from the US Secret Service (see IRM 9.4.4, Requests for Information).
Examine all post office records where the boxes are rented in order to obtain a specimen of the renter's handwriting.
Identify references given by the renter applying for a box and determine, in the investigation of fake references, how the renter arranged to intercept and reply to the postal authorities' inquiry.
Obtain printed, typewritten, and handwritten examples in order to have an expert compare these specimens with the handwriting, printing, and typewriting on tax returns, check endorsements, and forwarding instructions.
Obtain prior and subsequent years' returns, if any.
A decoy refund check is a check made in the name of an individual identified in a refund fraud scheme. The check is used to gather evidence regarding an individual’s participation in a false refund scheme.
A request for decoy refund checks is initiated and processed as follows:
a memorandum from the SAC or RAC will be forwarded to Director, Administrative Service Center, PO Box E, M:CFO:F:B, Beckley, WV 25802, and will include the following information:
• name, address and SSN to be placed on the check • amount of the refund • accounting string • FY, Appr, OFP, Office, Activity and subobject code • any special instructions
Decoy refund checks will be forwarded to Beckley for cancellation within 30-days of issuance. If circumstances warrant, and an extension of the 30-day period is granted, the SAC or RAC will advise Beckley of the check’s status at the end of each subsequent 30-day period, until the check, along with cancellation memorandum, is forwarded to Beckley for cancellation. A decoy check will not be retained beyond 90-days from the date of issue.
When a decoy check is recovered and is to be held as evidence, the SAC or RAC will forward a memorandum to Beckley reflecting the payee’s name, address, check amount, check number and date. The memorandum will also specify the need for the check to be used as evidence and request that a stop payment be placed on the check. There is no need to return the check.
When Beckley issues a decoy refund check, the check is prepared and the amount is charged against the funds of the requesting field office, Sub Object Code (SOC) 2505. When the check is returned or when a stop payment request is forwarded to Beckley, the amount of the check is returned to the field office's funds. If the check remains outstanding more than one year without a stop payment request being forwarded, it is cancelled by Treasury and the funds are returned to Beckley. Funds which remain outstanding for over one year may be lost to the field office because of the difference in appropriated funds between fiscal years.
Once a check is deposited into a filer's mailbox, CI cannot retrieve the check without a search warrant.
Copies of the refund check can be obtained from the PACER program. Original checks must be obtained from the US Secret Service (see IRM 9.4.4, Requests For Information).
A Refund Anticipation Loan (RAL) is a separate business transaction between the filer and a lending institution. If the RAL has not been issued, in most instances, the bank will return the refund to the IRS electronically. The full amount is refunded to the IRS, as the lending institution is not entitled to deduct any fees from the refund. If the RAL has been issued, the refund will generally not be returned to the IRS.
If a RAL is not involved, the filer is in control of the refund once the direct deposit is made and financial institutions will generally not return the refund to the IRS. However, some financial institutions will return the funds if IRS provides a letter requesting the return of the refund.
IRS is not legally authorized to seize RAL checks unless they are part of a search warrant related to an open SCI.
Neither the FDC nor field office personnel should provide instruction to an Electronic Return Originator (ERO) regarding transmission or non-transmission of a return (valid or false).
The FDC management personnel should be the designated contact points for EROs who have information concerning false electronically filed returns. However, the information can be furnished to the field office QRP Coordinator or other special agent. Issues regarding the actual return cannot be discussed with the ERO due to disclosure restrictions (26 USC §6103).
If the false information involves false Form(s) W-2, a request for copies of the Form(s) W-2 can only be made by a special agent or the designated FDC manager.
One ability of EFDS is to assist in identifying returns filed by individuals filing multiple false claims for refund and returns prepared by unscrupulous tax practitioners (refund mills).
To request an EFDS run, contact the field office QRP or RPP coordinator who will coordinate with the FDC.
The following indicates information that can be obtained from EFDS:
Tax year to be checked.
Which of the routines is to be used (1), (2), (3) or (4) (See LEM 9.14.2, The Questionable Refund Program).
Lowest zip code number (five digits) or the geographic area to be checked.
Highest zip code number (five digits) of the geographic area to be checked. (High zip code need not be furnished for Routine (3). Only one zip code is used for Routine (4).
Part 232.3d of the US Postal Service Manual instructs postal employees to report to their Inspection Service suspicious activities engaged in by the holders of post office boxes. Should an employee note such suspicious activity, i.e., a quantity of Federal tax refund checks directed to a post office box in the normal course of his/her duties and volunteer this information to a US Postal Inspector, the information would be made available to the IRS, if apparently indicative of criminal activity.
The situation in (1) above is to be distinguished from the process of systematically scanning or watching incoming mail for the purpose of identifying alleged violators of the Internal Revenue Code and notifying the IRS of the names of the alleged violators. This was determined to sufficiently satisfy the definition of a mail cover and, therefore, local US Postal officials should not be requested to have employees institute such a watch on the mail without an official mail cover. See IRM 9.4.10, Miscellanous Investigative Techniques regarding mail cover request.
The special agent will make a request to the local US Postal Inspector for delivery of a refund check to a specific address. The US Postal Inspector will arrange to have an employee of the US Postal Service put the refund check in the post office box or deliver the check to a residence address in a regular delivery. The US Postal Inspector will notify CI of the approximate time the check will be delivered to the desired address.
It has been determined by the Legal Liaison Officer, Chief Inspector's Office, US Postal Service, that a prison mailroom is not part of the US Postal system. Consequently, prison officials can make additions to addresses without violating postal regulations. In this regard, it is possible to request from prison officials that all of a prisoner's mail going to the IRS be directed to the RAC at the FDC of the appropriate IRS Campus. The SAC makes the request to the prison executive. As appropriate, CI should coordinate with the RAC and the local prison officials concerning assistance in redirecting any mail leaving the prison.
Electronic on-line filing fraud can be either a QRP or a RPP Investigation. It is necessary for the special agent to work these on-line investigations expeditiously. It is crucial to timely coordinate with the field office and the FDC. Upon identification of an on-line fraud scheme, it is the RAC's responsibility to initiate a preservation letter for the internet service provider (ISP) to maintain ISP address records. The initial request allows the records to be maintained for 90-days. One extension can be granted for an additional 90-day period. Careful attention must be paid to the expiration date of the preservation letter and a summons or subpoena should be issued prior to the expiration date or the information may be lost. The extension letter can be authorized by either the RAC or special agent. Internet service providers are not considered third party record keepers and, therefore, do not require notice.
The purpose of the QRP is to detect and stop fraudulent and fictitious claims for refunds on income tax returns. These investigations often involve returns filed with fictitious or stolen identities.
The goal of the QRP is to investigate and prosecute promoters and conspirators to foster confidence in the tax system and enhance voluntary compliance. Investigative priorities are the responsibility of the SAC based upon the local prosecution standards. Emphasis should be given to investigations with the greatest potential for preventing continued loss.
Special agents, working in conjunction with FDC personnel at the appropriate IRS Campus, should take reasonable steps to ascertain the magnitude of the scheme and the number of participants involved.
Investigative steps should include the following:
contacting the preparer or transmitter
identifying the person controlling the refund address
determining the existence of mail forwarding instructions
contacting lending institutions and establishing the falsity of wage and income documents
All QRP schemes referred to a field office will be inputted as PIs into the CIMIS database by personnel in the FDC at the IRS Campuses.
The Form 4930 will be prepared at the IRS Campus and entries will be made in items 1-10, 12-18, 23, 24, 27, 29, and 71. The original Form 4930 will accompany the referral to the field office. A copy of the Form 4930 will be retained in the scheme file maintained at each FDC.
The investigation number for each of these investigations will contain a specific identifier for each FDC.
The first two digits, normally the field office number, will identify the IRS Campus where the investigation was initiated.
After the PI is initiated, the investigation will be placed in the field office’s QRP group investigation pool. Each field office is assigned a group pool number for QRP referrals and this number will appear in the Lead SSN field (Item 1) of the Form 4930 (see IRM 9.9, Criminal Investigation Management Information System).
The QRP assigned pool number is 9999. For example, the group pool number for Los Angeles will be 000-95-9999.
Questionable Refund Program PIs will appear in the field office’s inventory and on their CIMIS reports and statistical summaries as with any other open PI.
All QRP schemes developed by the FDCs must be linked to one national GI. The GI number (009910003) is assigned to all FDCs.
Upon receipt of the QRP scheme referral from the FDC, the receiving field office will promptly assign a special agent to evaluate the referral, and he/she will update the Form 4930 to reflect the investigation assignment and the due date of the evaluation of the referral.
The due date is 90-days from the receipt of the referral by the field office.
The name of the PI is the scheme number and should not be changed. If a SCI is initiated as a result of the evaluation of the QRP PI, the Form 4930 initiating the SCI should reflect the name of the subject of the investigation. This will not be consistent with the name on the PI. Even though they are not consistent, the PI will still be linked to all SCIs initiated.
During the course of the investigation, identities identified as part of the QRP scheme should be linked to the PI in CIMIS as Associate Identities (AI).
The field office is responsible for closing QRP PIs, as well as any SCI initiated as a result of the evaluation of the QRP scheme referral. These investigations should be closed in a manner consistent with all other PI and SCI investigations (see IRM 9.5.14, Closing Procedures).
At the conclusion of the criminal aspects of a QRP investigation, the SAC will forward a Criminal Investigation Closing Report with attachments to the RAC. The RAC will forward the Closing Report to the Territory Manager, Technical Services, for notification and initiation of civil action. This process is the same for declined or discontinued investigations (see IRM 9.5.14, Closing Procedures).
In the event the field office, rather than the FDC, opens a QRP PI, the special agent will contact the QRP field office coordinator. The QRP field office coordinator will call the FDC at the appropriate IRS Campus to request a scheme number. This will help to prevent duplicating open PIs on schemes the FDC is already tracking.
The field office is responsible for closing all QRP PI and SCI investigations in a manner consistent with all other PI and SCI investigations (see IRM 9.5.14, Closing Procedures).
The PI initiated by the field office is not to be associated with the national GI for QRP investigations.
This program involves claims on Federal income tax returns prepared by unscrupulous return preparers who knowingly claim excessive deductions and exemptions on returns prepared for clients. The clients may or may not have knowledge of the excessive deductions and exemptions claimed.
These preparers may have one or more of the following characteristics:
The preparer develops a large clientele through a reputation for saving clients' money.
The preparer often charges exorbitant fees.
The fee may be based on a percentage of the refund.
The refund check is mailed to the preparer's office or deposited into the preparers account.
In legitimate Refund Anticipation Loan (RAL) processes, the client often receives a check from the preparer for the refund he/she is entitled to less preparation and processing fees. The IRS refund is then automatically deposited into an account specifically set up to receive refunds. Some fraudulent preparers, however, submit a return to IRS with inflated figures that the client is unaware of in order to receive a significantly larger refund. Some even prepare and file amended returns and keep the refunds from prior years as well.
The preparer forges the endorsement and negotiates the refund check without the client's knowledge.
The preparer fails to sign the return as the preparer.
Investigations in this group originate from a variety of sources, such as:
Letters of complaint from the public and information from informants concerning return preparers.
Complaints from ethical practitioners and professional societies.
Screening of returns by IRS Campus personnel.
Identification of suspect preparers by CI and other IRS personnel.
All RPP schemes referred to a field office will be inputted as PIs into the CIMIS database by personnel in the FDC at the IRS Campuses.
The Form 4930 will be prepared at the FDC and entries will be made in items 1-10, 12-18, 23, 24, 27, 29, and 71. The original Form 4930 will accompany the referral to the field office. A copy of the Form 4930 will be retained in the scheme file maintained at each FDC.
The investigation number for each of these investigations will contain a specific identifier for each FDC.
The first two digits, normally the field office number, will identify the IRS Campus where the investigation was initiated.
After the PI is initiated, CIMIS will place the investigation in a RPP group investigation pool. Each field office is assigned a group pool number for RPP referrals and this number will appear in the Lead SSN field (Item 1) of the Form 4930 (see CIMIS User Guide).
The RPP has been assigned pool number 8888. For example, the group pool number for Los Angeles will be 000-95-8888.
Return Preparer Program PIs will appear in the field office inventory and on in the CIMIS reports and statistical summaries as with any other open PIs in the field office.
All RPP schemes must be linked to the national GI for RPP. The GI number (009910005) is assigned to all FDCs.
Upon receipt of the RPP scheme referral from the FDC, the receiving field office will promptly assign a special agent to evaluate the referral, and he/she will update the Form 4930 to reflect the investigation assignment and the due date of the evaluation of the referral.
The due date is 90-days from the receipt of the referral by the field office.
The name of the PI should not be changed. If an SCI is initiated as a result of the evaluation of the RPP PI, the Form 4930 initiating the SCI should reflect the name of the subject of the investigation. This will not be consistent with the name on the PI. Even though they are not consistent, the PI will still be linked to all SCIs initiated.
The field office is responsible for closing RPP PIs, as well as any SCIs which are initiated as a result of the evaluation of the RPP scheme referral. These investigations should be closed in a manner consistent with all other PI and SCI investigations (see IRM 9.5.14, Closing Procedures).
During the course of the investigation, returns identified as part of the RPP scheme should be updated to show an association with the PI in CIMIS as Associate Identities (AI).
At the conclusion of the criminal aspects of a false refund investigation, the SAC will forward a Criminal Investigation Closing Report with attachments to the RAC. The RAC will forward the Closing Report to the Territory Manager, Technical Services, for notification and initiation of civil action. This process is the same for declined or discontinued investigations (see IRM 9.5.14, Closing Procedures).
In the event the field office, rather than the FDC, opens a RPP PI, the special agent will contact the RPP field office coordinator. The RPP field office coordinator will call the FDC at the appropriate IRS Campus to request a scheme number. This will help to prevent duplicating open PIs on schemes the FDC is already tracking.
The field office is responsible for closing all RPP PI and SCI investigations in a manner consistent with all other PI and SCI investigations (see IRM 9.5.14, Closing Procedures).
The PI initiated by the field office is not to be associated with the national GI for RPP investigations.
Controls should be placed on client returns that are part of the criminal investigation (see LEM 9.14.5, Automated Data Processing Account Controls).
Controls should be placed on the preparer's accounts while the criminal investigation is being conducted (see LEM 9.14.5, Automated Data Processing Account Controls).
The investigative techniques used in RPP investigations are different from those used in QRP investigations. Return Preparer Program investigations are directed toward:
determining the responsibility for the overstatement of the deductions and exemptions claimed
establishing whether such overstatements were made with corrupt intent
The returns in this group of investigations usually report income of authentic origin but are fraudulent because of overstated deductions or exemptions.
Some of the most flagrant violations are committed by unscrupulous return preparers who have illiterate, trusting clientele.
Occasionally, it is established that a preparer has conspired with the client to file a false and fraudulent return.
Consideration should be given to using an undercover operation to learn the practitioner’s modus operandi and obtain evidence. Keep in mind that if the practitioner prepares a correct return for the undercover agent it does not necessarily mean he/she is an honest preparer.
Unless there is a good reason not to, the special agent should contact the civil return preparer coordinator. The return preparer coordinator can assist the special agent in determining what audit path is best for the particular preparer. Client audit results can be used to identify witnesses in the criminal investigation. Great care should be taken to avoid even the appearance that the special agent is directing aspects of the civil audit function other than referring the preparer.
Multiple refund investigations involving unscrupulous preparers are developed by patient and painstaking interviews of the clientele to determine responsibility for fraudulent returns.
If the client interview discloses information or records material to the investigation, consideration should be given to obtaining a sworn affidavit from the client.
The investigation should establish if the fraud is attributable to the preparer, the client, or both. An interview will, therefore, be designed to ascertain:
The name of the person that recommended the preparer and the identity of others known to have used the preparer's services. It is advisable to obtain prior years' returns filed by the client. Prior year returns not prepared by the subject can be used for comparison.
Information and records used in the preparation of the return.
Any memorandum or notes the preparer made of information furnished.
Any discussion between the preparer and client regarding the amount of deductions and exemptions to be claimed.
Any suggestions made by the preparer that more deductions should be claimed. These suggestions should be fully explained.
If each deduction claimed is the same amount furnished to the preparer by the client, obtain documents and statements concerning the amounts claimed. If the amount claimed is different than that which was furnished to the preparer, obtain the client's explanation.
If the client knew that an excessive amount was claimed, determine why he/she permitted it and, if the client was unaware of the actual amount claimed, how it escaped his/her attention.
The circumstances surrounding the client's execution of the return, including: was the return signed before or after it was completed; if the return was completed before the client signed it, did the client review the contents, and how did excessive amounts escape him/her.
Did the client know a refund was claimed? If so, how much was the refund? (Some preparers have claimed significantly higher refunds and kept the difference without the client’s knowledge.)
Why the client believed he/she was to receive a refund.
The client's literacy, knowledge, or training in tax matters.
The amount of the preparer's fee and whether the fee was based on the amount of the refund to be obtained?
Where the refund check was to be mailed/deposited; if to the preparer's address/account, why?
Did the client cash the refund check?
Obtain a full statement (who, what, where, etc.) relative to the cashing of the check. If it was cashed by the preparer, determine if the preparer took a fee from the proceeds and if possession of the check by the preparer was used to coerce payment of an exorbitant fee?
Did the preparer endorse the client's name to the check? If so, did the client authorize it?
The items above should assist in the preparation of an outline for preparer and client interviews. Other pertinent questions may be necessary to meet the facts of each case and follow-up questions may arise as the interview proceeds. If possible, during the preparer interview, obtain copies of:
any memorandums or notes made during interviews with clients
any memorandums, documents, and data furnished to the preparer by the client for use in preparing the client's return
any list of fees charged, list of clients, retained copies of returns filed, or other pertinent material that the preparer maintains
The preparer's employees should be interviewed to establish procedures for the preparation of returns. The outline for the interview of the subject preparer should also be used for all employees preparing returns.
Investigations which most often lead to successful criminal prosecutions are those which involve:
returns having claims that are completely without basis
clients who testify that deductions were listed without their knowledge and/or undercover tape recordings clearly demonstrating the preparer’s knowledge that expenses were fabricated
the actions of the practitioner corroborate the testimony of his/her clientele
Special agents should not use possibly legitimate deductions as evidence.
Special agents should keep in mind that the clients might be as culpable as the practitioner. Client culpability should be resolved as soon as possible.
These are investigations in which the unscrupulous preparer accepts payment for the tax liability of the client at the time the return is prepared but does not file the return or pay the tax. In these investigations, it is recommended the preparer be charged with violation of 26 USC §7201.
InUS vs. Mesheski, the court held that such acts involve only the crime of embezzlement under state law and do not come within the definition of attempt to evade or defeat tax.
Other courts have disagreed with the US vs. Mesheski conclusion, and have found that the defendant intended to cheat not only his/her clients by embezzling their money but also the government by evading the clients' taxes, see US vs. Charles L. O. Edwards.
Full development of a refund fraud investigation often requires that audits be conducted on the questionable returns. The civil operating divisions conduct the audits. Requests for a large number of audits are to be forwarded to the Area Planning and Special Programs (PSP) Office. If a mass correspondence audit would be appropriate, the field office QRP/RPP coordinator will contact the FDC RAC to coordinate the request. Coordination with the SB/SE return preparer coordinator to determine the correct audit approach is highly recommended. Often, a combination of face to face audits to determine a pattern, then followed up by correspondence audits, is effective and will provide optimal use of resources.
Special agents will not be present during the civil audit. Interviews of the potential witnesses will not be conducted until all aspects of the civil audit pertaining to that individual are concluded.
Criminial Investigation is prohibited from giving advice or direction to the other operating divisions regarding a specific case under examination. It is imperative that special agents not specifically direct the other operating division concerning the selection of taxpayers for civil examination or the degree of substantiation to be required from these individuals. Any such actions could be regarded as overreaching and manipulative and could potentially jeopardize the success of the investigation. These restrictions, however, do not constrain special agents or the attorney for the government from sharing relevant non-grand jury information with the other operating divisions. Further, these restrictions do not preclude CI from providing the other operating divisions with general (non-case specific) criteria for determining which examinations might be criminally referred as long as the purpose is not to influence the civil examination.
Special agents or the attorney for the government should not have a role in determining what civil penalties are asserted against abusive preparers and/or their clients.
In the case of a grand jury investigation, Rule 6(e) of the Federal Rules of Criminal Procedure severely limits the exchange of information derived from the grand jury investigation. The attorney for the government should be consulted for specific guidance.
It is permissible for the other operating division to share return information and completed revenue agent’s reports (RAR) with special agents conducting both administrative and grand jury investigations. These civil examinations may identify additional individuals who could become witnesses or subjects. The identification of these individuals may be legally shared with special agents by the other operating divisions. The other operating divisions should only turn over reports once a civil examination is completed. This will avoid the appearance that the special agent is either interfering with or directing the civil examination.
In order to enhance compliance in these investigations, it is critical that both civil and criminal remedies be fully pursued. This includes the examination of clients, as well as, criminal prosecution recommendations against promoters, preparers, and clients when warranted. When the individual under audit may be culpable in the refund crime, CT Counsel should be consultated.
A determination must be made regarding the protection of the civil statute on QRP/RPP returns where the civil assessment statute is due to expire within the next ten months, (See LEM 9.14.5, Automated Data Processing Account Controls):
Controls should be placed on all related returns.
On a quarterly basis, the FDC will notify the field office of all returns with approaching assessment statute expirations. Appropriate controls must be established for notification to occur.
If a return preparer investigation involves attorneys, CPAs or enrolled agents, the Office of Professional Responsibility (OPR) is to be notified regarding the misconduct as soon as practical without compromising the criminal investigation or prosecution (see IRM 9.5.13, Civil Considerations).
If information is developed which involves allegations of employee misconduct or an attempt to corrupt an employee, CI personnel are required to immediately report the matter to the nearest Treasury Inspector General for Tax Administration (TIGTA) office. The Treasury Inspector General for Tax Administration’s office will be responsible for providing the information to OPR.
Criminal Investigation is an active participant in national projects aimed at identifying and prosecuting the most flagrant frivolous filers/non-filers. These projects include individuals who object or refuse to file returns, pay income taxes and/or withhold employment taxes.
Criminal Investigation pursues the most egregious, high profile, high impact frivolous filers/non-filers. Areas to consider when numbering an investigation are:
level of sophistication
reasonableness of the subject’s beliefs
professional advice received
Criminal Investigation is also active in the development of criteria for identifying potential fraud referrals from the Repeat Non-filers Project. This initiative examines the specific market segments of repeat non-filers and establishes a tracking system to better evaluate subsequent compliance efforts.
In every frivolous filer/non-filer investigation, it is important to determine if the subject has corresponded with the IRS and what response, if any, they received. The following actions should be taken:
Interview the referring agent/officer to determine if frivolous correspondence was received and if a response was issued.
Contact the program analyst in charge of the program at the Refund Crimes Unit, Ogden Fraud Detection Center.
Contact the local disclosure officer and request the Electronic Disclosure Information Management System (EDMIS) be queried for Freedom of Information Act (FOIA) requests filed by the subject. The EDMIS will contain a record of all FOIA request and where the requests was filed.
If frivolous correspondence is received subsequent to the initiation of a criminal investigation and the frivolous correspondence unit of disclosure has not previously responded, it is the field office’s decision as to whether a response is appropriate. Criminal Tax Counsel should be contacted when drafting responses to frivolous correspondence.
Per IRS Restructuring and Reform Act of 1998 (RRA 98) Section 3707, officers and employees of the IRS are prohibited from utilizing designations that might stigmatize an individual.
IRS has centralized its frivolous return program at the Ogden Compliance Campus. All frivolous correspondence is being forwarded to Ogden for processing in accordance with the procedures set forth in IRM 4.19, Liability Determination.
Generally, upon receipt of frivolous correspondence, the frivolous return program unit will send letter 3175 (SC) (2-1999). The unit will also include the brochure Why Do I Have To Pay Taxes? (Publication 2105). The letter and publication explain the basis for the individual’s duty to file returns and pay taxes and warn of the criminal and civil sanctions that can result from failing to comply with the tax laws. If the individual fails to heed this advice, no further letters are sent.
When an individual files a frivolous return, the frivolous correspondence unit will send the individual letter 3176 (SC) (2-1999) admonishing the individual that the information they have sent is frivolous and their position has no basis in law. The letter also warns the individual that a civil penalty of $500 can be assessed if a corrected return is not filed within 30-days. A copy of the brochure Why Do I Have To Pay Taxes? is also provided.
In corresponding with frivolous filers/non-filers, the IRS has adopted the approach of giving the individual fair warning that their actions are illegal, but refusing to engage in an "ongoing dialogue with the individual about the legality of the tax system" .
The centralization of the Frivolous Return Program at the Ogden Compliance Campus did not occur until FY 2001, therefore the handling of frivolous correspondence may not have been handled consistently during the IRS reorganization.
The Frivolous Filer Unit generally does not maintain copies of most frivolous correspondence received, due to the sheer volume of documents.
Inquiries should be made to the program analyst in charge of the program at the Refund Crimes Unit, Ogden Fraud Detection Center.
The illegal source income program encompasses a broad range of illegal activity, exclusive of those investigations meeting the criteria of the narcotics program. These investigations are often conducted in conjunction with other Federal, state and/or local enforcement agencies. These priority areas include:
Bankruptcy -- investigations involving embezzlement, abuse, misappropriation, or deception in bankruptcy proceedings.
Financial Institution Fraud -- investigations involving fraud against or related to a bank, credit union, savings bank, check cashing business, thrift, stockbroker, or related regulatory agency
Entitlement and Subsidy Fraud -- investigations involving embezzlement, abuse, misappropriation, or deception in various government sponsored programs
Health Care Fraud -- investigations involving embezzlement, abuse, misappropriation, or deception by or from the health care industry (provider, supplier, or broker)
Insurance Fraud -- investigations involving embezzlement, abuse, misappropriation, or deception against the insurance industry that is not related to health care insurance
Pension Fraud -- investigations of embezzlement or abuse of pension funds
Public Corruption -- investigations involving violations of the public trust by government officials or employees
Telemarketing Fraud -- investigations involving the use of telephonic or wire communications to fraudulently promote, solicit, or market products or services
Organized Crime/Strike Force -- investigations involving specific organized crime elements. These investigations may be investigated as part of an organized crime strike force See IRM 9.4.13, Financial Investigative Task Forces).
Identity Theft – CI investigates and recommends prosecution under 18 USC §1028 in tandem with the investigation of substantive tax and money laundering violations emanating from refund fraud and money laundering schemes. Identity theft violations should only be utilized when it enhances the overall investigative strategy.
Fictitious Obligations – To the extent the investigative activity involves violations relating to Title 26, CI can investigate and recommend prosecution under Title 18 USC §514.
Investigations may involve violations of any or all of the criminal statutes within the jurisdiction of CI, including money laundering and currency crimes.
The criminal provisions relating to bankruptcy fraud were enacted to preserve honest administration in bankruptcy proceedings and ensure the distribution to creditors of as much of the bankrupt's estate as possible. As IRS may be a major creditor in a bankruptcy proceeding, field offices are authorized to use bankruptcy fraud statutes (18 USC §1952, Concealment of Assets, and 18 USC §157, Bankruptcy Fraud) to investigate tax crimes involving bankruptcy. There are special disclosure provisions for a bankruptcy investigation, (see IRM 11.3.2, Disclosure to Persons with a Material Interest).
The goals of the bankruptcy fraud program are to:
increase voluntary compliance with Federal tax laws through the prosecution of those committing significant tax crimes involving bankruptcy fraud
enhance the IRS' presence among bankruptcy fraud professionals and practitioners for the dual purpose of increasing compliance and providing contact points to report allegations of criminal conduct
foster closer cooperation between CI and the other operating divisions in attaining mutual compliance goals
Preferably, bankruptcy fraud will be charged in conjunction with violations of the tax, money laundering, or currency statutes within CI's statutory jurisdiction. In instances where prosecution of these offenses is not practicable, prosecution can be recommended for bankruptcy fraud alone.
Bankruptcy fraud prosecutions will be considered tax-related offenses and are subject to review by CT Counsel and DOJ, Tax Division.
Investigation selection is critical in accomplishing program goals. The following should be carefully weighed in selecting bankruptcy investigations:
Investigations should have a strong tax nexus: the IRS being a major creditor.
IRS generated fraud referrals should receive priority (a successful fraud referral program is essential to meeting mutual compliance goals).
Employment tax related bankruptcy fraud investigations should be vigorously pursued.
Emphasis should be placed on egregious high impact investigations, the estimated tax liability should materially exceed the LEM criteria (see LEM 9.14.1, Criminal Investigation Official Use Only Procedures, LEM 9).
The estimated loss due to bankruptcy fraud should equal or exceed a base offense level 14 of the US Sentencing Guidelines.
The investigations selected should further the goals of CI's bankruptcy fraud program, the employment tax initiative, and the fraud referral program.
In bankruptcy fraud investigations, collection function records should be researched for potentially false Forms 433A, Forms 433B or offers in compromise. If assets were concealed in the bankruptcy, it is very likely that the same assets were omitted from Forms 433A and/or 433B (resulting in potential 26 USC §7206(1) charges).
Criminal Investigation's compliance effort in financial institution fraud is designed to address criminal violations involving fraud relative to banks, savings and loan associations, credit unions, and other financial institutions such as check-cashing businesses, stockbrokers, and thrifts. Criminal tax, money laundering and currency investigations make major contributions to the Federal government's effort to combat the various fraudulent schemes being committed against financial institutions. For CI, these investigations focus on unreported income or the illegal laundering of income obtained by violators operating inside and outside the financial institution.
Criminal Investigation is a member of the Interagency Bank Fraud Working Group (IBFWG). This group is comprised of regulatory and law enforcement agencies that either regulate financial institutions or investigate frauds committed against these institutions. This group also seeks to improve the coordination and exchange of information between agencies involved in the investigation and prosecution of financial institution fraud cases.
See IRM 1.2.2, Delegation Order 158 and Delegation Order 143 for authority to initiate investigations of financial institutions.
Entitlement is a legal right to benefits, income, or property, which may not be abridged without due process. In some instances, in order to establish the entitlement, citizenship is not required, only residency in the United States. Various Federal agencies manage entitlement programs, which may be administered through corresponding or related state agencies. The respective Federal agencies have been empowered through legislation to establish rules and regulations concerning the methodology and procedures for setting qualifying and/or quantifying eligibility standards in order to provide recipients economic assistance or relief with financial hardships.
The applicant bears the burden of proving his/her entitlement to a subsidy. The applicant must usually comply with any procedural restrictions or qualifications. The award of assistance is not discretionary. It is a matter of entitlement once the applicant has demonstrated his/her eligibility for economic subsidy or assistance. Accordingly, proof of entitlement to an economic benefit does not include proving the validity of the doctrines or beliefs of the applicant.
Most Federal agencies have their own Office of Inspector General (OIG), which oversees and investigates civil misuse and criminal abuse of their respective entitlement programs. Criminal Investigation's involvement in entitlement fraud is based on fraudulent undue economic enrichment from these programs. Tax and/or money laundering charges may be applicable. Criminal Investigation may investigate these economic crimes with or without the respective OIG's assistance. The respective agency's OIG can provide valuable information regarding their entitlement program requirements and qualifications.
A few of the larger, non-health care, entitlement programs are listed below:
Department of Agriculture (USDA) - Usually administered through state welfare agencies, USDA funds Food Stamp, Women with Infant Children (WIC) and other programs for economically disadvantaged individuals and families.
Housing & Urban Development (HUD) - Guaranteed loans and low income housing programs.
Small Business Administration (SBA) - Business related loans. The SBA and the IRS entered into an agreement to ensure that IRS enforcement action will not unnecessarily reduce SBA's potential recovery. The agreement is limited to FICA and withholding tax liabilities and covers all types of SBA loans: Direct, Participation, and Guaranteed.
Social Security Administration (SSA) - Social Security & Disability benefits, along with identity fraud related misuse of Social Security Cards.
Veterans Administration (VA) - Guaranteed loans, services and benefits.
The cost of health care, especially Medicare and Medicaid, has focused attention on the fraud and abuse taking place in the health care industry. Many health care insurers operate independently without compatible data processing systems. This limits cooperative efforts among insurers and contributes to the problem of health care fraud. So, a fraudulent scheme discovered in one jurisdiction may well continue to operate undetected in other jurisdictions.
While most health care fraud is investigated by the Federal Bureau of Investigation (FBI), Health and Human Services, and the US Postal Service as mail fraud violations, CI frequently investigates them as income tax or money laundering violations.
Headquarters keeps apprised of changes in the health care industry and of significant investigations through participation in the National Health Care Anti-Fraud Association and various fraud working groups. At the field office level, many investigations are developed through participation in the DOJ mandated Health Care Task Forces.
Traditionally, processing health care claims and disbursing funds to health care providers is cumbersome and paper intensive. Innovative methods to process and pay claims electronically to reduce costs and increase productivity at the Federal, state, and private insurance levels have facilitated fraud, making it difficult for Federal officials to detect.
During the course of an investigation involving health care, patient records are often sought by special agents. While there is no recognized privilege in this area, the physician-patient privilege must be addressed. This also applies to patient records for psychotherapy-related matters. The privilege is determined on a case-by-case basis, depending on the judicial district and circuit involved. Criminal Tax Counsel advice should be sought when patient records are to be requested.
The use of the money laundering and forfeiture statutes in health care fraud prosecutions presents unique issues, because health care fraud investigations often involve health care providers that conduct on a substantial amount of legitimate business.
In such investigations, the legitimate and illegitimate funds are often deposited into the same account. While it is permissible to charge a transaction where proceeds from a specified unlawful activity have been commingled with legitimate funds (18 USC §1956 (a)(1)), special agents should consult with CT Counsel. Special agents do not need to trace the origin of all funds deposited into a bank account to determine exactly which funds were used for what transaction. However, every effort should be made to trace the flow of illegal funds in financial transactions as closely as possible.
The Asset Forfeiture Money Laundering Section of the Criminal Division, DOJ, guideline for charging a 18 USC §1956 violation is that more than 50 percent of the money in the commingled account is Specified Unlawful Activity (SUA) proceeds. If less than 50 percent of the money in the account is SUA proceeds, then care should be exercised in charging a 18 USC §1956 violation. In such investigations, the special agent should make an effort to carefully trace the flow of the SUA proceeds in the proposed money laundering transactions.
The Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 110 Stat. 1936, contains a definition of "federal health care offense" in 18 USC §24 and provides for criminal forfeiture under 18 USC §982 for violations of (and conspiracies to commit) such health care fraud offenses. Civil recovery of health care fraud proceeds must generally be accomplished under the money laundering forfeiture statute, 18 USC §981(a)(1)(A).
Health care expenses are generally paid by:
government entitlement programs
insurance plans such as plans sponsored by employers through private insurance companies or plans purchased by individuals
Medicare and Medicaid account for nearly one-third of the nation's health care spending. Medicare is the Federally funded program designed to provide health care insurance to the aged, blind, and disabled. Medicaid is a joint Federal and state-funded health care program that provides subsidized payments for medical services for persons unable to afford them. The states administer the Medicaid program, even though it is funded on a 50-50 basis between the Federal government and the states. Oversight of Medicare and the Federally funded portion of Medicaid comes within the jurisdiction of the Health Care Financing Administration (HCFA), which is an agency within the Department of Health and Human Services.
Medical insurance plans make payments to medical providers on a fee-for-service basis, a capitated basis, or a blend of fee-for-service and capitated basis. The major difference between a fee-for-service and a capitated plan (managed care usually by a health maintenance organization (HMO)) is the delivery of and payment for services. In a fee-for-service, profits increase with increased submission of billings for services. Capitated payments are based on a per-patient rate. The medical provider in a capitated HMO plan reaps profits if the cost of services for a patient is less than the allocated payment per patient. The under utilization of services is a significant consideration in the capitated system, while over utilization of services (i.e. over billings) is a concern in the fee-for-service system. There has been a trend toward managed care, or HMOs, in the health care industry. Healthy patients are selecting less costly HMOs versus he traditional fee-for-service plans. Investigators have to concentrate on vulnerable areas of fraud, particularly with the knowledge that the under utilization of services is a concern in this particular industry and provides the opportunity for kickbacks to keep referrals for service to a minimum.
Criminal Investigation's Insurance Fraud Program addresses criminal tax and money laundering violations relative to insurance claims and other frauds perpetrated against insurance companies (exclusive of medical or health care fraud investigations.) Specifically, investigations in this program involve property or casualty insurance, staged or caused accident insurance claims, reinsurance, premium diversion (including Multiple Employer Welfare Arrangements), and worker's compensation insurance.
The McCarran-Ferguson Act of 1945 reserves regulation of the insurance industry to the states. As a result, the Federal oversight role of the insurance industry is limited. Regulation of solvency requirements; licensing of insurance companies, agents and brokers; setting policy forms and rates; resolving consumer complaints; and imposing administrative sanctions are just some of the responsibilities of the state authority in the insurance industry. These are generally handled by a state insurance commissioner or department that may have limited resources or lack jurisdiction to effectively confront and prosecute some of the sophisticated fraudulent schemes that have multi-state or international off-shore operations. There have been reports by Congress, private organizations, and industry groups that over the last few years insurance company insolvencies are a growing threat to the health of the industry and that fraud is a contributing factor.
As there are essentially no Federal agencies or laws regulating the insurance industry, CI plays a role in the investigation of tax and money laundering violations associated with insurance fraud. The primary Federal statutes available to prosecutors to combat insurance fraud are mail and wire fraud and violations of the interstate transportation, money laundering, and tax statutes.
As regulated by the states, there are requirements for reserves of assets that are actuarially determined to insure that funds are available to cover the claims that occur relative to the types of policies written. Once policies are written that encumber the current level of reserves, additional policies can only be written if additional reserves are obtained through operating profits, returns on investments, or the amount of liability against current reserves is reduced.
As a result, the reinsurance industry has emerged as a method for insurance companies to write more insurance policies when current reserves have reached their limit. Reinsurance treaties are simply insurance policies taken out by an insurance company that will pay the principal insurance company for a certain type of claim. Also, some unscrupulous reinsurance companies have used phony letters of credit or other fraudulent assets to qualify for business. Foreign reinsurers have, for the most part, been beyond the reach of state regulators, especially if the reinsurers are domiciled in countries where regulation is weak. Reinsurance frauds are surfacing in many parts of the country and have grown significantly. Frauds involving reinsurance usually have international implications and often involve foreign and domestic trusts.
Criminal Investigation can utilize the database of the National Association of Insurance Commissioners (NAIC) as a source of information in fraud investigations.
The large amount of money involved in employee plan trust funds and tax exempt organizations provides both a temptation and an opportunity for fraud. The traditional criminal and civil provisions of Title 26 will apply to violations in these areas. The only significant difference may be that instead of a tax deficiency, the element of damage to the government may be established by showing a tax benefit, such as attempting to make taxable income non-taxable or taxable contributions tax deductible.
While the Department of Labor (DOL) is primarily responsible for the Employee Retirement Income Security Act enforcement, the IRS has significant involvement, since qualified employee plans receive favored tax treatment via the deduction of the contribution by the employer, tax exemption for the related trust, and the deferral of income by the employee. These tax advantages can be used in criminal investigations to meet the requirements that a tax be due and owing as described in 26 USC §7201 (Attempt to Evade or Defeat Tax) and that financial damage is attributed to the government as described in 26 USC §7206 (Fraudulent or False Statement).
The Tax Reform Act of 1969 and other tax laws subsequently enacted establish new and more stringent requirements:
for recognition as an exempt organization
expanded information reporting and annual reports
imposed a new series of excise taxes
placed substantial restrictions on the permissible activities of an exempt organization
Title 26 USC §6033 requires that every exempt organization, with some exceptions, file an annual return stating specifically the items of gross income, receipts and disbursements and such other information as may be prescribed by the Secretary or appropriate delegate. In addition, 26 USC §6011 requires the filing of certain taxable returns by exempt organizations. These information reports and returns are used to determine whether the submitting organization continues to qualify for favored tax treatment and to report any taxes for which it may be liable. Like the application forms, these reports and returns are subscribed under the penalty of perjury. If an organization ceases to qualify under the provisions of 26 USC §501 or 26 USC §521 for which exemption was granted, its exempt status will be revoked.
Indications of fraud in this program area are typically discovered by the other operating division‘s examiners or officers and are referred to CI and evaluated in accordance with the IRM 25.1.3, Fraud Referrals.
When a special agent learns that the subject of an information item or PI, is also the subject of an open case in the Tax Exempt Government Entity Division (TEGE), CI will immediately evaluate the information and if warranted, number a SCI. If not, the information item or PI will be closed and all applicable information will be forwarded to the appropriate operating division in accordance with established procedures (see IRM 9.4.1, Investigation Intiations and IRM 9.5.14, Closing Procedures).
The Form 3949 Information Report Referral, along with all pertinent information regarding the subject, will be transmitted by a brief memorandum, through the SAC to the Denver Lead Development Center (LDC). The Denver LDC will forward the information to the appropriate Area Manager, TE/GE.
Criminal Investigation's transmittal memorandum to the other operating division with the open case will advise the operating division that information CI obtained is being referred for association with their open case. No suggestions, guidance, or direction is to be provided by CI as to actions to be taken by the receiving operating division. This is a precaution against the use, or perceived use, of this provision for developing a criminal investigation under the guise of a civil proceeding.
Some of the more common fraudulent schemes and devices used in employee plan investigations are:
backdating of applications and related documents
diversion of funds by officials of exempt organizations or by trustees of employee plans
payment of improper expenses of exempt organization and trust officials
loans of trust funds disguised as purchases or allowable deductions
intentional failure to keep proper or accurate financial records
disguising taxable receipts (interest and dividends) as non-taxable receipts
making false statements on applications
providing false receipts to donors by exempt organizations
willful and intentional failure to implement and comply with those plan amendments which were agreed to during the review of the determination letter application
placing friends, relatives, or associates on a company payroll when they perform no duties
failure to pay over or deposit payroll deductions or the employer contributions to pension plans
under funding pension plans or obtaining minimum funding waivers
excessive tax deductions for pension plan contributions
Title 26 USC §7206(1), Declaration under Penalties of Perjury, is the criminal provision which will probably be the most useful in the employee plans and exempt organizations area. This section makes it a felony for anyone to willfully subscribe to a return or other document made subject to penalties of perjury, which is not believed to be true and correct as to every material matter. This provision also applies to documents other than tax returns, and a prima facie violation of 26 USC §7206(1) can be proven even in the absence of a tax deficiency.
Forms filed with the IRS in connection with employee plans and exempt organizations contain a declaration that they are made subject to the penalties of perjury. Additionally, the declaration includes a statement that supporting documents are certified as being true and correct and this certification is subject to the same penalty. Thus, filing an application for a determination letter containing false statements, submitting falsified documents in support of such an application, or submitting a falsified annual return for an employee plan or exempt organization would give rise to a potential 26 USC §7206(1) prosecution if the falsifications are shown to be willful and material.
Filing of a false application for a determination letter, minimum funding waiver, annual return, or registration statement can also be an affirmative act leading to tax evasion proscribed by 26 USC §7201 (Attempt to Evade or Defeat Tax). To prove tax evasion, the government must show a tax deficiency, affirmative acts to evade assessment or payment of tax, and willfulness.
Willful failure to file annual returns, registration statements, or actuarial statements can be a criminal violation of 26 USC §7203 (Willful Failure to File Return, Supply Information, or Pay Tax).
Criminal Investigation participates in numerous investigations involving individuals who have violated the public trust. The subjects of these investigations are persons from all levels of government - local, county, state, Federal, and foreign.
Public corruption investigations involve a variety of offenses including bribery, extortion, embezzlement, kickbacks, money laundering, and tax fraud. Criminal Investigation generally investigates the tax and money laundering aspects in conjunction with other law enforcement agencies.
Telemarketing fraud is one of the largest segments of consumer fraud. The development of advanced telecommunication networks expanded the abilities of telemarketers, and a corresponding increase in complaints alleging fraudulent schemes has been reported in all 50 states. Statistical data from the Federal Trade Commission and American Association of Retired Persons (AARP) shows that 56 percent of telemarketing victims surveyed were age 50 or older. Criminal Investigation is combating telemarketing fraud by conducting investigations of the major schemes in conjunction with multi-agency task forces. Criminal Investigation brings a financial expertise to these investigations that is critical to their success.
Criminal Investigation has been granted access to the Federal Trade Commission (FTC) fraudulent complaint system. The computer software for obtaining access to the FTC database is in the Document Manager packages to facilitate availability of the database by the field.
Sometimes, 26 USC §7211 proves to be an effective tool in plea bargain negotiations to obtain the cooperation of minor players in illegal telemarketing operations. This statute may be utilized where a prize is promised upon payment of the related tax and makes it a crime for anyone to solicit payment for the sale or lease of an article and falsely state, orally or in writing, that any part of the payment, both sale or lease, is to pay Federal tax.
Organized crime refers to self-perpetuating, structured, and disciplined associations of individuals who combine for the purpose of obtaining monetary or commercial gains or profits, either wholly or in part, by illegal means. These groups traditionally have a strong leader to whom group members and associates owe loyalty and to whom they pay a percentage of their profits. These groups generally engage in illegal enterprises such as drug trafficking, gambling, loan sharking, extortion, theft, arson, labor racketeering, pornography, prostitution, white collar crimes of all descriptions, and money laundering. They usually employ extortion, bribery corruption and violence to achieve their objectives. Criminal Investigation, in conjunction with other Federal, state and local law enforcement agencies, pursues tax, currency, and money laundering investigations of organized crime groups. For additional information see IRM 9.4.13, Financial Investigative Task Forces.
Title 18 USC §1028 can be investigated in conjunction with refund fraud and money laundering investigations. Identity theft should only be utilized when it enhances the overall investigative strategy. Title 18 USC §1028 violation is not intended to stand alone.
An identity fraud violation could be applicable where a subject steals another person’s identity for the purpose of falsely representing their identity to the IRS. The issue is most likely to occur in the QRP area where individual identities are stolen with the intent to file false tax returns claiming tax refunds. In such investigations, the individuals who steal the identities may be different from the individuals who actually file the tax returns and ultimately obtain the false refunds. In some instances, the investigation may be unable to develop sufficient evidence to sustain a criminal prosecution for substantive tax or conspiracy charges against the supplier of the false identities. In these instance, Title 18 USC §1028 could be charged against those individuals when the evidence of substantive tax or conspiracy violations falls short of the required threshold to sustain a criminal prosecution. The identity fraud must have a direct link to the substantive tax or the related conspiracy violation that is the focus of the criminal investigation. Therefore, it should be a rare exception that identity theft is charged without a companion substantive tax or related conspiracy violation.
Per DOJ Directive 99, criminal and civil forfeiture provisions are not applicable when 18 USC §1028 violations are directly linked to the investigation of a substantive tax charge, absent extraordinary and compelling circumstances. The special agent should seek the advice of CT Counsel if forfeiture is being considered.
If directly linked to substantive tax violations, prosecution recommendations will be reviewed in the same manner as traditional tax investigations to assure appropriate application and favorable prosecution potential.
Title 18 USC §1028 also impacts CI’s investigative jurisdiction under the money laundering laws. IRS has explicit jurisdiction with regard to 18 USC §1956 and §1957. Title 18 USC §1956(e) and §1957(e) specifically grants investigative jurisdiction to "such components of the Department of the Treasury as the Secretary of the Treasury may direct. " IRS jurisdiction is further set forth in a Memorandum of Understanding between the Attorney General, Secretary of the Treasury, and Post Master General dated August 1990 and revised in 1994. The money laundering laws criminalize activity involving the transacting of proceeds derived from " specified unlawful activity" in a subsequent financial transaction. Title 18 USC §1956(c)(7)(A) defines the term "specified unlawful activity" (SUA) as any act or activity constituting an offense listed in 18 USC §1961(1). Title 18 USC §1961(1) defines racketeering activity and includes 18 USC §1028. Note: Converting a pure tax administrative investigation to a money laundering investigation is contrary to DOJ policy.
Title 18 USC §1028 violations can be charged in conjunction with money laundering violations or separately if there is insufficient evidence to support a money laundering charge. For example, when investigating potential money laundering violations involving a health care fraud scheme, if evidence of a 18 USC §1028 violation is developed, an 18 USC §1028 charge may be brought in conjunction with the substantive money laundering violation. However, if money laundering violations cannot be proven, it does not preclude 18 USC §1028 from being recommended against the supplier of the fraudulent identities when no financial nexus exists to the underlying fraud scheme.
Civil and criminal forfeiture provisions may be applicable in money laundering violations involving 18 USC §1028.
Schemes involving the submission of sight drafts, bills of exchange and other fictitious financial instruments to the IRS and other government agencies are a continuing problem. To the extent the criminal activity involves violations relating to Title 26, CI can investigate and recommend prosecution under 18 USC §514 (Fictitious Obligations).
The FDC, in cooperation with the Frivolous Return Processing sections at the campuses and the Office of the Comptroller of Currency (OCC), issues fraud alerts when schemes are detected.
The Denver LDC will be responsible for analyzing bogus monetary instruments to identify potential schemes and trends.
Fictitious obligations prosecution recommendations will be reviewed in the same manner as a traditional tax investigation to ensure appropriate application and favorable prosecution potential.
Criminal Investigation investigates leaders and other top echelon members of high-level drug trafficking organizations, including business and financial associates, and the orchestration of financial activities directing the transportation, distribution, and laundering of illegal drug proceeds. Narcotics investigations include the pursuit of criminal tax, currency, and/or money laundering charges. The Director of the Office of National Drug Control Policy (ONDCP) oversees the coordinated law enforcement and intelligence gathering efforts to combat illegal drugs.
Within the narcotics program, there are four sub-programs:
Organized Crime Drug Enforcement Task Force (OCDETF) — investigations involving members of high-level drug trafficking organizations authorized by a regional multi-agency OCDETF committee. The OCDETF designated standards and criteria are set forth in LEM 9.14.1.
High Intensity Drug Trafficking Area (HITDA) — co-located multi-agency investigations involving organizations or individuals involved in narcotics trafficking or narcotics money laundering (worked through the HIDTA program of the Office of National Drug Control Policy (ONDCP)).
HIDTA/OCDETF — investigations worked jointly through OCDETF.
Narcotics Other — investigations involving financial activities of significant individuals or entities who direct the transportation, distribution, and laundering of illegal drug proceeds.
Narcotics investigations are often investigated through joint investigative task forces such as OCDETF and HIDTA. See IRM 9.4.13, Financial Investigative Task Forces.
Money laundering and currency violations are discussed in IRM 9.5.5, Money Laundering and Currency Crimes. Schemes are also detailed in subsection 184.108.40.206.
Criminal Investigation plays an active role in the implementation of the National Money Laundering Strategy (NMLS). The NMLS is the blueprint for the Federal government's comprehensive effort to aggressively combat money laundering. Money laundering techniques are not only employed by criminals to divert illicit funds into legitimate enterprises, but are often used to facilitate tax evasion by making possible the movement of untaxed funds through the world's financial systems. Money laundering and currency crimes are discussed in IRM 9.5.5, Money Laundering and Currency Crimes.
Criminal Investigation's mission is to identify and prosecute the most significant tax, currency, and money laundering offenders and to pursue the assets of those offenders both domestically and internationally. Investigative efforts are designed to use the broad authority of the statutes (criminal, tax, and forfeiture) within CI's investigative jurisdiction.
Investigations may be developed and investigated through joint task force efforts. See IRM 9.4.13, Financial Investigative Task Forces.
In order to accomplish its mission, CI has developed an international strategy.
International efforts include:
Assignment of special agents to strategic foreign posts to facilitate the development and use of information obtained in host foreign nations.
Coordination of requests from information from foreign countries.
Coordinate foreign travel requests.
Coordinate Simultaneous Criminal Investigation Program; (see IRM 9.4.2, Sources of Information).
Criminal Investigation, in support of the national effort to fight terrorism, provides financial investigative and devoted resources in support of terrorist task force initiatives and security demands. Criminal Investigation utilizes all violations within its jurisdiction to combat terrorism. These violations include, tax, money laundering and currency violations.
Criminal Investigation also assists the Treasury Secretary in conducting a global financial war on terrorism, protecting the integrity of the financial system, fighting financial crime, enforcing economic sanctions programs, locating assets for blocking, forfeiture and/or seizure, assisting in the implementation of Executive Orders, and otherwise providing financial investigative expertise as needed by the Secretary, through Treasury’s Executive Office for Terrorist Financing and Financial Crimes.
In accordance with 18 USC § 2332(b)(f), the Attorney General is the lead investigative authority for counterterrorism investigations. The FBI, as the Attorney General’s investigative arm, conducts terrorism investigations through Joint Terrorism Task Forces (JTTFs). Criminal Investigation special agents assigned to the JTTF utilize their unique financial investigative skills to investigate terrorist financing and combat international terrorism (see IRM 9.4.13, Financial Investigative Task Forces).
Title 18 USC §2339A (Providing Material Support to Terrorist), 18 USC §2339B (Providing Material Support or Resources to Designated Foreign Terrorist Organizations), and 18 USC §2339C (Prohibitions Against the Financing of Terrorism) can be recommended in investigations of terrorism related financial transactions. The authority to recommend prosecution for 18 USC §2339A, 18 USC §2339B, and §18 USC 2339C is intended to support not supplant CI’s primary statutory jurisdictions of tax, money laundering and currency violations.
Every terrorism investigation must be classified under fraud scheme code 207 (Domestic Terrorism) or 208 (International Terrorism). See IRM 9.9, Criminal Investigation Management Information System. The illegal activity code of 186 (Terrorism) should be used in addition to the appropriate terrorism fraud scheme code. Every JTTF investigation must contain a multi-agency code 22, (Joint Terrorism Task Force) in addition, to all other multi-agency codes.
The USA Patriot Act: (a) amended the Right to Financial Privacy Act, allowing CI to obtain financial institution information and records relative to terrorism in certain circumstances by a "Special Procedures Request" as opposed to obtaining them via subpoena or court order, and (b) created a Patriot Act Section 314 request for obtaining account and transaction information relating to terrorism or money laundering (see IRM 9.4.4, Requests for Information).
The FBI’s Automated Case Support (ACS) system of electronic case files contains investigative information, including interviews (see IRM 9.4.2, Sources of Information).
| DEPARTMENT OF THE TREASURY|
INTERNAL REVENUE SERVICE
WASHINGTON, DC 20224
|City, State ZIP Code|
|Dear [Name] :|
|We are in receipt of your letter dated [date], wherein you enclosed a check in the amount of [amount of check] and stated that your client, who wishes to remain anonymous, seeks to make a voluntary disclosure concerning his/her tax liability in exchange for the Internal Revenue Service’s agreement to not recommend criminal prosecution to the Department of Justice.|
|Please be advised that it is the position of the Internal Revenue Service that a voluntary disclosure does not bar criminal prosecution, but rather, is a factor to be considered when deciding to recommend prosecution. Thus, the decision whether to investigate your client and to recommend prosecution remains an option available to the IRS whether you disclose the identity of your client or the IRS learns of your client’s identity through its own efforts.|
|In order for a disclosure to be considered a "voluntary disclosure" the communication must be: truthful; complete; and the taxpayer must show a willingness to cooperate (and does in fact cooperate) with the Internal Revenue Service in determining his/her correct tax liability.|
|Your letter dated [date] is not considered to be a voluntary disclosure for the following reasons:|
|[Discuss why the communication is not a voluntary disclosure; e.g., the disclosure is not complete because the client/taxpayer is anonymous, and thus, the Service is unable to ascertain on whose behalf the disclosure is being made.]|
|The check that was enclosed with your letter purporting to be payment of an anonymous taxpayer’s tax liability for the years [include the years] was sent to the [Name] Service Center for posting to the "unidentified remittance" amount.|
|Should additional information be required from the Internal Revenue Service, please contact [Name of District Counsel] at [Telephone Number]. He/she stands willing to provide additional information should you so request.|
|Special Agent In Charge|
|MEMORANDUM FOR AREA SUPPORT MANAGER, AREA # PLANNING AND SPECIAL PROGRAMS SMALL BUSINESS SELF EMPLOYED (SYMBOLS)|
|FROM:||Special Agent in Charge XXXX Field Office (CI:FO:XXX) Criminal Investigation|
|City, State, ZIP|
|In accordance with Paragraph 1 of Internal Revenue Manual (IRM) 9.5.3 a voluntary disclosure is being transmitted for further action. Based on the facts currently available, it is Criminal Investigation's (CI) preliminary assessment that the taxpayer has met the IRS's voluntary disclosure criteria.|
|Acceptance of this voluntary disclosure is contingent on the continued cooperation and truthfulness of the taxpayer. If evidence is developed that the taxpayer has not fully cooperated or provided materially false information, this matter may be sent back to CI for evaluation utilizing the fraud referral process.|
|Documents relevant to this voluntary disclosure are attached. (Note: Specifically describe all attachments.) This taxpayer is represented by (name, address, telephone:(XXX)XXX-XXXX).|
|If you have any questions, please call (name, title) at (XXX)XXX-XXXX.|