part25-4
- 25.1.4.1
Overview - 25.1.4.2
Request for Cooperating Examiner - 25.1.4.3
Administrative Joint Investigations - 25.1.4.4
Civil Settlement of Prosecution Cases - 25.1.4.5
Special Conditions of Probation
-
This section is designed to assist compliance
employees involved in joint investigations with Cl. -
A joint investigation can originate from one of
two sources:-
Referral Report of Potential Criminal Fraud Cases
(Form 2797) -
Request for a Cooperating Examiner (Form 6544)
-
-
There are two types of joint investigations:
-
Administrative (non-grand jury), or
-
Grand jury.
-
-
Upon initial involvement in a joint investigation,
the assigned examiner should determine the type of joint investigation involved.
Joint investigations may be performed using either administrative procedures
or grand jury procedures. Please refer to Chapter 5 of this Handbook for a
discussion of the differences in joint investigations performed using administrative
procedures versus grand jury procedures.
-
Cl may request the cooperation of an examiner
to assist in a criminal investigation using Form 6544. Upon completion and
approval of Form 6544, the CI special agent in charge (SAC) will forward all
requests for cooperating agents to the FRS Manager. The FRS Manager will work
with the appropriate area/territory manager in having the request assigned.
When workload issues are present, the FRS Manager will consult with the local
Planning & Special Programs office (PSP) in identifying the appropriate
group for assignment. -
Form 6544 for accepted cooperating agent requests
will be assigned to an appropriate group within 30 days of receipt (or any
agreed to extension). The group manager will complete the form and return
it to the SAC. -
If the assignment of an examiner does not appear
to be warranted, a memorandum from the appropriate field territory manager
will be submitted to the SAC. If agreement cannot be reached at the territory
level, the area director and Director of Field Operations, CI will make the
necessary decision. If agreement is still not achieved, the case will be elevated
to the next appropriate level. -
Cl will retain the original tax returns as evidence
and provide copies of returns for all open periods and related entities to
the cooperating examiner. This should occur within 30 days of the initiation
of a joint investigation or when the original returns are received. The special
agent should stamp each copy as a true and correct copy. -
The examiner (responsible for all statutes) should
request AIMS controls on all years involved in the administrative joint investigation
(investigation is not being conducted using grand jury procedures) using push
code 049. Project Code 096, Request for Cooperating Examiner, should be used.
-
This subsection focuses on administrative joint
investigations that are not part of a grand jury investigation.
-
The examiner is primarily concerned with determination
of the civil tax liability. The special agent is primarily concerned with
gathering the evidence to prove criminal violations. -
In general, the following tasks are performed
by the examiner:-
Reconciling taxpayer’s books and records to
the return -
Examining books and records to determine adjustments
-
Analyzing bank accounts
-
Verifying inventories
-
Compiling depreciation schedules
-
Ascertaining basis of assets
-
Assisting in interviews of the taxpayer and witnesses
-
Computing civil tax liability for a pre-prosecution
report -
Assisting in the computation of criminal tax liability
for the special agent’s report -
Maintaining a chronological record of time charged
to the case -
Preparing administrative file prior to placing case
in fraud suspense.
-
-
The criminal aspect is predominant in a joint
investigation. To prevent prejudice to the criminal features of such a case,
the special agent is responsible for the following:-
Reading Miranda rights to the taxpayer
-
Obtaining testimony of witnesses
-
Conducting necessary surveillance and undercover
work -
Arrests
-
Executing search warrants and/or seizures of property
-
Developing and documenting evidence of intent
-
Computing the criminal tax liability
-
Preparing and issuing Summons, Form 2039
-
Scheduling and prioritizing investigative actions
-
-
The examiner and the special agent should work
together with the best interests of the Service in mind with the following
considerations:-
Using non-technical employees to perform voluminous
and/or clerical tasks -
Conserving the cooperating examiner’s time
-
Having the special agent and examiner present at
taxpayer interviews -
Planning the joint investigation so the examiner
is utilized for continuous periods of time without interruptions
-
-
Group managers should ensure a clear delineation
of duties and responsibilities are established in the initial stages of the
investigation. Consistent with the CI Managers Handbook (IRM 1.4, Resource
Guide for Managers), joint quarterly four-ways should be conducted to review
the status of the investigation and plan activities to be accomplished by
the cooperating examiner/officer and special agent in the next quarter. The
CI SSA should initiate contact with the Compliance manager to schedule required
quarterly four-ways. Appropriate follow-up should be made periodically to
ensure prompt completion of the investigation and proper utilization of resources.
During each four-way, the cooperating examiner should review with CI all entities
and tax periods currently numbered. AIMS controls will be established for
any periods numbered not currently controlled on AIMS.
-
Jeopardy assessments will not be made if such
action would imperil successful criminal investigation or prosecution. However,
if collection of civil liability in the case is in jeopardy, and a jeopardy
assessment is recommended, care should be taken to avoid unnecessary disclosures
in the deficiency letter and in any accompanying statement that would imperil
successful criminal investigation or prosecution. -
Due to the urgency in jeopardy assessments, the
file will be given the highest priority of handling between various functions.
When fraud is an issue, additional approval will be required from the SAC
before the deficiency can be assessed. The fraud referral specialist (FRS)
will also be consulted regarding the civil fraud penalty on jeopardy assessments. -
Recommendations for jeopardy assessments should
be made in accordance with IRM 4.15.
-
In a failure to file case where Master File controls
were established using push code 037 prior to the TC 914(Z) freeze being put
on the module, a TC 424 record will remain on the module for 26 months or
until a return posts. After 26 months, the TC 424 will drop from the system.
If the TC 424 drops from AIMS prior to the case being submitted to criminal
suspense, the examiner should request Non-Master File controls by submitting
Form 5354 (TEGE Non-Master File controls should be requested via Form 5588,
TEGE Non-Master File Request). Prior to input of Form 5354, however, the group
secretary should contact the local AIMS Coordinator. The local AIMS Coordinator
will input TC 421 to reverse the L freeze to enable establishment of non-master
file controls. -
In a failure to file case where there is no TC
150 or TC 424 record on the module, if CI inputs a TC 914(Z) freeze before
Compliance requests controls, the examiner should request Non-Master File
controls by submitting Form 5354. The examiner, however, should secure CIs
approval prior to establishing the return(s) on AIMS. -
In a case where returns are filed and CI has a
TC 914(Z) freeze on the module, the examiner should request Master File controls
using push code 049. The examiner, however, should secure CIs approval prior
to establishing the return(s) on AIMS. -
Per IRM 25.1.4.2 (5), the examiner (responsible for all statutes) should
request AIMS controls on all years involved in the administrative joint investigation
(investigation is not being conducted using grand jury procedures) using push
code 049. Project Code 095, Request for Cooperating Officer Based on Examination
Referral or Project Code 096, Request for Cooperating Officer not Based on
Examination Referral should be used as appropriate.
-
During a joint investigation involving multiple entities, for example,
individual Schedule C, related employment, corporate and partnership returns,
the decision may be reached that criminal aspects are not present on all entities. -
Consideration should be given to concluding entities civilly after due
consideration of any adverse impact on criminal proceedings. -
Policy Statement P-4-84, indicates that civil enforcement actions, including
collection activity with respect to taxable periods of the same and other
types of tax not included in the criminal investigation generally do not imperil
successful criminal investigation or subsequent prosecution (see IRM 1.2.1.4.25).
The Policy Statement concludes by indicating civil enforcement actions in
these cases should proceed concurrently. -
During required quarterly discussions involving the CI SSA, special
agent, Compliance manager and revenue agent or revenue officer, the Compliance
manager should propose concurrent civil enforcement action consistent with
P-4-84. If the issue is still unresolved, the decision should be elevated
to the next appropriate management level.
-
During the joint investigation, the examiner will
obtain all prior and subsequent period returns to those included in the joint
investigation and will review the return(s) for examination potential. -
Examiners must assure that administrative actions
on any prior or subsequent year will not imperil successful prosecutions.
Compliance must notify CI of any proposed action such as examining or surveying
returns, soliciting consents or issuing reports. Notification of CI may be
made via Form 10498A, Joint Investigations Intent to Commence Civil Actions
(if this form is not available, the examiner will prepare a memorandum requesting
approval for proposed civil action). -
In cases where CI does not concur, the cooperating
agent may utilize Form 10498A (if available) to document CIs dissent to the
proposed action. If Form 10498A is not available, the examiner will initiate
a memorandum for the signatures of the field territory manager and the SAC
with appropriate instructions to withhold civil action, in whole or in part,
while the criminal investigation is pending. -
If agreement cannot be reached between Compliance
and CI, the area director and Director of Field Operations, CI will make the
decision consistent with policy statement P-4–84 (IRM 1.2.1.4.25). If
agreement is still not achieved, the case will be elevated to the operating
division commissioner level and Chief, CI for resolution. -
If civil action is withheld, the suspended years
will be periodically reviewed to protect the government’s interest.
-
Examiners are responsible for all civil statutes
in administrative joint investigation cases, including prior and subsequent
year(s) and related returns. -
Examiners must be aware of subsequent filing in
failure to file cases to protect the statutes. The examiner should check AIMS
periodically to monitor any possible filing. -
Examiners should not rely on IRC 6501(c), the
fraud statute, to keep the statute open. A consent should be solicited before
the three or six-year statute expires (IRC Sections 6501(a) and 6501(e) respectively).
All efforts should be made to obtain a consent before the three-year statute
expires rather than relying on the six-year statute. -
When there are less than 210 days remaining on
a statute, the examiner should initiate Form 10498B, Joint Investigations
Consent Form Preparation Recommendation (if not available the examiner will
prepare a memorandum requesting CIs permission to solicit a consent) and
forward to the territory manager for signature. The territory manager will
forward Form 10498B to the SAC indicating the intent to solicit a consent
to extend the statute. CI will have 10 workdays after receipt of the Form
10498B or memorandum indicating the intent to solicit a consent to extend
the statute to accept or decline the request. -
If CI approves the request, the consent must be
solicited via Letter 907 and Publication 1035. If in person, in the accompaniment
of a special agent both Letter 907 and Publication 1035 should be presented
to the taxpayer. Per the Statute Handbook (IRM 25.6), solicitation of the
consent should be documented on Form 9984 in the case file that the required
notification was made (notification of the taxpayers rights). A copy of the
Letter 907 soliciting the consent should be maintained in the case file. See
the Statute Handbook (IRM 25.6) for procedures to extend the statute. Any
subsequent inquiry received from the taxpayer should be referred to the special
agent assigned. CI should be informed of the results of the solicitation. -
If CI does not approve the request or a consent
cannot be obtained, a decision will be made whether to issue a statutory notice
of deficiency or allow the statute to expire. See IRM 25.6 of the Statute
Handbook for procedures to follow. -
Form 10498B (or memorandum if Form 10498B is not
available) should be utilized to document the decision to issue a statutory
notice of deficiency. After securing the signatures of the territory manager
and SAC via Form 10498B, the case will be forwarded to Area Counsel for concurrence
in issuing a statutory notice of deficiency. The properly executed Form 10498B
should be attached to the appropriate return. -
If the decision is made to allow the statute to
expire, Form 10498B will document this decision (or a memorandum as referred
to above) and will contain the signatures of the territory manager and SAC.
The properly executed Form 10498B should be attached to the applicable tax
return. The statute should immediately be updated on AIMS using the appropriate
alpha code. The Form 895 should also be updated to reflect the correct statute
date. -
If agreement cannot be reached at the territory
level, the area director and Director of Field Operations, CI will make the
necessary decision. If agreement is still not achieved, the case will be elevated
to the operating division commissioner level and Chief, CI for resolution.
-
IRC 6501(e) extends the three-year statute of
limitations to six years when the taxpayer has omitted in excess of 25% of
the gross income disclosed on the return. The six-year statute is a fixed
and determinable statute date and must be protected. Fraud need not be proved
for IRC 6501(e) to apply. -
The burden of proof for the omission of gross
income is on the Government. Only income reportable but omitted from the return
is included in the computation. Omitted or overstated deductions and expenses
are not considered in the computation. Gross income for IRC 6501(e) computation
includes the following (not all-inclusive):-
Gross income, in the case of a trade or business,
means the total amount received or accrued from the sale of goods or services
(gross receipts) not reduced by cost of goods sold. -
In the case of a partner in a partnership, the gross
income for this computation is his/her share of the partnership’s gross
income, not the net flow-through. Thus, a copy of the partnership return is
required to correctly determine the taxpayer’s share of the partnership’s
gross income. -
In the case of a shareholder in a S-corporation,
the gross income for this computation is his/her share of the S-corporation’s
gross income, not the net flow-through or distributed and undistributed taxable
income. Thus, a copy of the S-corporation return is required to correctly
determine the taxpayer’s share of the S-corporation’s gross income. -
Only the net amount of capital gain (sales price
less cost basis) on a transaction is included in the computation. Capital
losses on transactions aren’t included (they are not netted against
capital gains). -
In the case of a taxpayer who is deemed to be in
the trade or business of selling stock the gross income for this calculation
is the gross sales price of the stock (no reduction for cost basis). -
The taxable portion of pensions and annuities are gross income.
-
Be careful when using an indirect method of computing income. Determination
of an understatement of adjusted gross income (which includes expenses) is
not the same as the IRC 6501(e) computation of gross income. -
The six-year statute can be extended on Form 872.
Additional language or reference to IRC 6501(e) should not be included on
the consent. -
All efforts should be made to protect the three-year
statute before relying on a secondary statute. -
If the Service proves a substantial omission of
gross income, a taxpayers entire tax year is open for adjustment therefore,
the Service can determine deficiencies attributable to items other than those
items that created the substantial omission. Colestock v. Commissioner, 102
T.C. 380 (1994).
-
-
CI should withdraw from all investigations when
it is determined that the case no longer has criminal potential. The SSA will
communicate the withdrawal with the cooperating examiner’s group manager. -
If the examiner’s group manager objects
to the proposed withdrawal, the field territory manager will discuss it with
the SAC. If agreement cannot be reached at the territory level, as applicable
the area director or director of field operations, LMSB industry director
and Director of Field Operations, CI will make the necessary decision. -
If Cl withdraws from the joint investigation,
the special agent will prepare a discontinued investigation report stating
the reason(s) for the withdrawal. A copy of the report and the original tax
returns will be forwarded to the field territory manager. The cooperating
examiner will continue the civil settlement of the case.
-
Upon the completion of the joint investigation,
the examiner will prepare an unagreed report explaining all civil and criminal
adjustments and penalties in detail. The report should be labeled at the top,
“Pre-Prosecution Report.”
Taxpayer’s Position is not necessary. -
The civil fraud penalty should be asserted for
all applicable years. Accuracy related and/or delinquency penalties should
be proposed as an alternative position. -
Innocent spouse report writing procedures should
be followed when applicable. -
The report of civil adjustments should not be
provided to Cl until it has been approved by the field territory manager designee. -
Upon receipt of the case file, the field territory manager designee
will review and approve the pre-prosecution report for technical accuracy.
This report will be provided to Cl for use in the Special Agent’s Report. -
Form 4665, Report Transmittal, should be attached
to the front of the Revenue Agent’s Report. The Report Transmittal should
be labeled at the top,
“Pre-Prosecution Report,”
and contain
the following information:-
Background of the case including current status;
-
Summary of statute dates for all years involved;
-
Computation of 25% omission of gross income for
all tax years regardless of whether reliance is on the IRC 6501(e), six-year
statute. -
Current power of attorney status;
-
Comments regarding innocent spouse relief under
both IRC 6015 and IRC 6663; -
Recommendations regarding audit potential of subsequent
year returns and/or related returns; -
Information of a confidential nature, including
informant information. However, the informant should not be identified by
name nor should the report contain information that might reveal the identity
of the informant. -
Information that may be helpful when the case is
returned for civil settlement, including potential civil issues not fully
developed.
-
-
The case file should contain sufficient documentation
to support the adjustments and penalties in the Revenue Agent’s Report. -
Copies of sensitive documents should not be included
in the workpapers. The workpapers should make no mention of an informant or
specific agencies. -
Form 6809, Civil Fraud Penalty Monitoring Form,
should be completed and placed in the case file. -
Form 3198, Special Handling Notice, should identify
the case as a
“Fraud Suspense Case.” -
Form 5348, Examination Update should be prepared
updating the case to AIMS Status code 51. -
The case file will be forwarded to Tech Support
Fraud Suspense until the criminal aspects of the case have been completed.
-
When the criminal prosecution aspects have been
completed, CI will prepare a closing memorandum transmitting the administrative
file back to field compliance for civil settlement. No civil action may be
taken prior to receipt of this memorandum. -
The administrative file will be closed from Fraud
Suspense and forwarded back to the originating group for civil closing.
-
The Court may order probation for the taxpayer
as part of the sentence imposed. The order of probation may contain special
conditions relating to the settlement and/or payment of civil tax liability
and penalties. The SAC will notify the field territory manager of the special
probation requirements. -
Cl will update Transaction Code(s) 914 to TC 910.
The TC 910 will not be released until the special conditions of probation
have been satisfied or the conditions are terminated by the Court. -
The field territory manager will inform the SAC
of the status of the case by the earliest of the following dates:-
When the case is disposed of by the compliance function;
or -
180 days prior to expiration of the probationary
period specified.
-
-
The memorandum will include information relative
to the taxpayer’s cooperation and should indicate any unwarranted actions. -
The SAC will recommend legal action if the taxpayer
fails to comply with the conditions of probation. -
IRC 6103(h)(4) allows for disclosure of returns
and return information to a U.S. probation officer under the following circumstances:-
The returns and return information must relate to
a taxpayer convicted of a criminal tax violation, -
The U.S. Probation Officer must have the responsibility
of determining compliance with the tax related conditions of probation, -
The returns and return information are limited to
those years specified in the conditions of probation, and -
The disclosure would not identify a confidential
informant or seriously impair a civil or criminal tax investigation.
-
-
Any disclosure to a U.S. Probation Officer must
be coordinated with the area disclosure officer.
