part25-3
- 25.1.3.1
Overview - 25.1.3.2
Preparation of Form 2797 - 25.1.3.3
Referral Evaluation - 25.1.3.4
Accepted Criminal Referrals - 25.1.3.5
Declined Criminal Referrals - 25.1.3.6
Estate & Gift - 25.1.3.7
Return Preparers
-
This section discusses criminal referrals and
prosecutions. Criminal prosecutions serve to enhance voluntary compliance.
The identification of potential criminal cases by compliance employees is
an important part of this process. When firm indications of fraud exist and
criminal criteria are met, the compliance employee should prepare Form 2797,
Referral Report of Potential Criminal Fraud Cases. The fraud referral specialist
(FRS) is available to assist (determine if firm indications of fraud are present,
criminal criteria has been met, etc.).
-
The primary objective of CI is the prosecution,
conviction and incarceration of
individuals
who violate criminal tax laws and related offenses. The Federal
Sentencing Guidelines tie the period of incarceration to the monetary value
of the violation, and consequently, the amount of the
“tax loss
”
(see 2 below) must usually be higher than the minimum LEM criteria
for a sentence of incarceration to be imposed. Tax loss is commonly referred
to as
“criminal criteria.”
United States Attorneys are
reluctant to use their resources to prosecute individuals who cannot be sent
to prison. When evaluating a criminal fraud referral, it is essential to determine
if the individual is likely to be incarcerated if convicted. -
“Tax loss”
as defined for
individual taxpayers in the Federal Sentencing Guidelines, may encompass amounts
greater than the criminal tax computation in the Special Agent’s Report.
It may include amounts from years outside of the prosecution period, it may
also include state tax loss, depending upon the determination of the taxpayer’s
“relevant conduct”
as it relates to those amounts. Tax loss
is computed using all of the years for which a preponderance of the evidence
shows that the understatements or tax due is attributed to fraud. The criminal
tax computation differs from the civil tax computation, as it includes only
those adjustments due to the criminal conduct of the taxpayer.
-
If after consultation with the fraud referral
specialist (FRS), it is determined a potential fraud case has firm indications
(affirmative acts) of fraud and meets criminal criteria, the compliance employee
will suspend the examination or collection efforts without disclosing to the
taxpayer or representative the reason for the suspension. A referral to CI
will be prepared using Form 2797. -
The referral will be a detailed factual presentation
of those factors used to establish firm indications of fraud, including, but
not limited to:-
Affirmative act(s) of fraud
-
Taxpayer’s explanation of the affirmative
act(s) -
Estimated criminal tax liability
-
Method of proof used for income verification
-
-
No workpapers or attachments are required with
the referral. The initial conference allows the compliance employee the opportunity
to explain the case in detail and address any questions regarding the potential
criminal violations. Cl will be provided access to all workpapers and documents
needed to effectively evaluate the referral during the initial meeting. -
Form 2797 should be prepared for the principal
individual or legal entity involved in the fraud. Only one Form 2797 is prepared
despite having multiple entities involved, i.e., individual, corporate, partnership,
employment tax, etc. Only one Form 2797 is prepared for a husband and wife
who filed a joint return. A separate Form 2797 is no longer prepared for each
type of tax involved. Related entities should be identified and discussed
in the body of the referral. Related returns will be associated with the referral
if they are false as to a material item. -
Only one Form 2797 is prepared covering an allegation
of failure to comply with a notice issued as provided in IRC 7512, even though
withheld income, social security tax, or collected excise taxes may be involved. -
Form 2797 is prepared in triplicate, and must
be approved by the compliance employees group manager. One copy of the report
is to be retained with the case file. The original and one copy are forwarded
to the FRS for concurrence. Form 2797 will be prepared in quadruplicate for
referrals of return preparers, see IRM 25.1.3.3. -
The FRS will review Form 2797 to ensure the quality
of the referral. The FRS will forward the original and two copies of reviewed
Forms 2797 via Form 3210, Document Transmittal to their group manager (FRS
G/M) for review and approval and retain a copy for his/her referral pending
file. -
The FRS G/M will forward via Form 3210, Document Transmittal, the approved
Form 2797 containing the criminal referral to the appropriate CI Lead Development
Center (LDC). A copy of Form 3210 transmitting each approved fraud referral
to the LDC will be provided to the FRS. The LDC will make the initial determination
if the referral is fully developed, meets CI’s criminal criteria and
is in concert with CI’s workplan (Strategic Performance Plan (SPP) and
Annual Compliance Guidance ACG). If so, the referral will be forwarded to
the appropriate field office for evaluation.
-
Within 10 workdays of the receipt of the referral
by the evaluating field office from the LDC, an initial conference will be
arranged by the evaluating field office. At the initial conference the referring
compliance employee, his/her group manager, the evaluating CI special agent,
his/her supervisory special agent and the FRS, if available, will meet to
discuss the referral, review tax returns, evidence, etc. Within 30 workdays
of receipt of the referral by the evaluating field from the LDC, the same
parties will meet again at a disposition conference to discuss CI’s
decisions to accept or decline the referral. CI will provide feedback to the
referring compliance employees and the FRS as to their decision. Area Counsel
will be invited to offer legal advice, if deemed necessary. -
The final decision as to whether the referral
meets or does not meet the criminal criteria should be made no later than
the 30 workday disposition conference. Any further extensions must be granted
by written agreement of the appropriate field territory managers. The agreement
should specify the reason for the request (such as a delay in receiving signed
tax returns or an opinion from Counsel) and the date the referring office
may expect a final determination. -
The FRS will monitor the conference dates to ensure
that all dates and response schedules are followed. -
The following information should be discussed
no later than the initial conference:-
Verification of income and/or criminal tax computations;
-
Explanations offered concerning the alleged offense;
-
Whether returns were solicited, any attempts made
at civil settlement, or prior actions similar to the alleged offense condoned
by the IRS; -
Observations about the age, health (physical and
mental), and education of the taxpayer.
-
-
Additional factors considered during the evaluation
of the referral include additional tax due to fraud, flagrancy, significance,
public interest and possible deterrent effect.
-
If CI evaluates the referral as meeting the criminal
criteria and no obvious barriers to prosecution exist, the existing primary
investigation will be numbered as a subject investigation and assigned to
a special agent. -
Cl will complete the original Form 2797 and return
it to the referring group manager with a copy to the FRS. Area compliance
employees will then update the case to Status Code 18. Cl will initiate the
input of TC 914 controls in the Master File. When the TC 914 is posted to
the module on collection function cases, the file may be forwarded to the
closed file, if no further action is required (see IRM 25.1.8.6). -
The special agent assigned the referral that has
been elevated to a subject investigation will promptly meet with the referring
compliance employee and determine whether a detailed memorandum is required
concerning contacts with the taxpayer, the taxpayer’s representative,
or the preparer of the taxpayer’s return. If a memorandum is needed,
the following areas should be included:-
The date of each contact the compliance employee
had with the taxpayer, the taxpayer’s representative, or the preparer
of the taxpayer’s return; and -
A summary of what took place during each of those
contacts, any explanations offered concerning the alleged offense, and/or
any action that could be construed as solicitation, condonation, or an attempt
at civil settlement.
-
-
Within 30 calendar days of numbering the referral
as a subject investigation, CI will, if necessary, request a cooperating compliance
employee from the referring territory. -
IRM 25.1.4 provides specific guidance to compliance
employees assigned to a joint investigation case as a cooperating examiner/officer.
-
If CI evaluates the referral as not meeting the
criminal criteria or if there is an obvious barrier to prosecution, the referral
will be declined. If the declination determination is made at the LDC, the
LDC manager will prepare a declination memorandum explaining the reason(s)
the referral is being declined. The declination memorandum will be directed
to the FRS manager and will be transmitted to that manager along with the
original Form 2797. If the declination determination is made at the evaluating
field office level, the Special Agent in Charge (SAC) will send a declination
memorandum explaining the reason(s) the referral is not being accepted. The
SAC declination memorandum will be directed to the FRS manager and will be
transmitted to that manager along with the original Form 2797. A copy of the
SAC declination memorandum will be provided to the LDC manager. -
If there is a disagreement between CI and the
referring operating division (OD) as to whether the referral should be accepted
or declined, the area director and the CI Director of Field Operations will
intervene to settle the disagreement at their management level. -
The compliance employee will continue to be alert
for new indications of fraud in declined referrals. If new indications of
fraud develop, the case will again be referred to Cl as outlined above. -
Groups of cases involving similar examination
issues declined by Cl will be afforded special attention. Area Counsel will
be consulted in such cases before an agreement is obtained for the deficiency
in tax and penalty in any one case. This will permit Area Counsel to advise
of the litigation possibilities in the event subsequent cases are unagreed.
-
When initial indications of fraud are uncovered, the Estate and Gift
Tax examiner should initiate a discussion with his/her group manager and the
fraud referral specialist. -
Present procedures call for preparing a report utilizing Form 2797 (Referral
Report for Potential Criminal Fraud Cases). This form was designed primarily
for income tax cases. It should be adapted as necessary to refer the case.
Instructions for the preparation of Form 2797 are contained in IRM 25.1.3.4. -
A separate report should be prepared for each principal involved. For
example, if there are coexecutors, cotrustees, collusion with heirs, or donees,
or split gifts involved, an evasion of tax may result in more than one fraud
prosecution.
-
All potential criminal referrals regarding preparers should be discussed
with the return preparer coordinator and the fraud referral specialist (FRS).
When revenue agents examine clients of a promoter (a person subject to penalty
under 6700 – relating to penalty for promoting abusive tax shelters, etc.)
or preparer under criminal investigation, they should assert the appropriate
tax and penalties against the clients based on the facts in each case, regardless
of whether the clients may testify for the government against the preparer
or promoter or become a defendant. -
When the group manager concurs a return preparer is involved in fraud,
Form 2797 will be prepared as described in IRM 25.1.3.4, except four copies
are made. The original and two copies of Form 2797 will be forwarded to the
FRS. One copy will be retained in the preparer case file in the group. The
FRS will forward a copy to the compliance return preparer coordinator (RPC)
or TEGE returns classifying officer (RCO) for appropriate action. -
The RPC/RCO will notify all group managers, in writing, to assure that
all civil actions with regard to the subject preparer are suspended. The coordinator
should continue to monitor Form 5808 (Return Preparer-Penalty Follow-up) and
Form 5809 (Preparer Penalty Case Control Card) files to assure that no new
civil penalties are asserted on the subject preparer until the criminal case
is resolved. -
Form 2797 should be prepared for the principal individual or legal
entity involved in the fraud. Only one Form 2797 is prepared despite having
multiple entities involved, i.e., individual, corporate, partnership, employment
tax, etc. Only one Form 2797 is prepared for a husband and wife who filed
a joint return. A separate Form 2797 is no longer prepared for each type of
tax involved nor when there are dissimilar fraudulent acts by the same return
preparer. Related entities should be identified and discussed in the body
of the referral. Related returns will be associated with the referral if they
are false as to a material item. Form 2797 should give specific details relating
to the apparent fraudulent act(s) including:-
Name of the taxpayers
-
Taxpayer identification numbers
-
Tax form numbers
-
Amount of the adjustment
-
Resulting deficiencies
-
-
The compliance employee should retain a copy of each taxpayer’s
report of examination and relevant workpapers so that after disposition of
the criminal case, the civil preparer penalty under IRC Section 6694(b) can
be pursued. -
If Cl declines a referral of a return preparer or an investigation is
discontinued, Cl may provide advice and assistance concerning application
of IRC 6694(b), willfulness penalty.
