part25-6

This section discusses the procedures to follow
in a civil fraud case.

A civil fraud penalty case may be developed based
on facts and circumstances of a civil examination or result from the completion
of a criminal prosecution case.

Civil fraud penalties will be asserted when there
is clear and convincing evidence to prove that some part of the underpayment
of tax was due to civil fraud. Such evidence must show the taxpayer’s
intent to evade the payment of tax which the taxpayer believed to be owing.
Intent is distinguished from inadvertence, reliance on incorrect technical
advice, honest difference of opinion, negligence or carelessness. In the case
of a joint return, intent must be established for each spouse separately as
required by IRC 6663(c) . The fraud of one spouse cannot be used to impute
fraud by the other spouse. The civil fraud penalty may be asserted on one
spouse only.

Specific guidance on fraud indicators and the
development of fraud may be found in IRM 25.1.1 and 25.1.2.

IRM 20.1 provides specific procedures for assertion
of the civil fraud penalty.

Civil fraud no longer requires a referral to CI.
Determination of this penalty is the shared responsibility of the examiner,
his/her group manager and the FRS. If agreement cannot be reached regarding
the assertion of the civil fraud penalty, the decision will rest with the
examiner and group manager.

Upon concurrence of the group manager and FRS,
cases being developed for potential fraud should be updated to Status Code
17. Form 11661, Fraud Development Status may be utilized to document the decision
to update the case to Status Code 17.

For civil settlement of a prosecution case, the
examiner should contact Cl to ascertain which criminal statutes the taxpayer
was convicted of before attempting to resolve the related civil fraud penalty.
The examiner should obtain a copy of the plea agreement or judgment notating
the applicable criminal statutes and years. See 25.1.5 for procedures to utilize
in securing nongrand jury materials for use in the civil settlement of cases
investigated through grand jury procedures.

In cases where fraud was considered and the civil
fraud penalty is not being recommended, the examiner will explain in the workpapers
why the penalty was not asserted.

If criminal prosecution of a taxpayer has been
recommended by CI to the Department of Justice, the civil fraud penalty or
fraudulent failure to file may be removed only upon written recommendation
or concurrence by Area Counsel. This rule applies also in the case of any
related taxpayer involved in the same transaction and to any other year or
period of the same taxpayer which is related to or affects the year or period
for which criminal prosecution is recommended. Cases back for civil settlement
should be updated upon receipt to AIMS Status Code 12. During the period of
time, however, that the examiner is considering civil fraud in a case back
for civil settlement, the case should be updated to AIMS Status Code 17. If
it is later determined that the civil fraud penalty is not applicable, the
case should be returned to AIMS Status Code 12.

In statutory notice cases, Area Counsel must approve
civil fraud penalties prior to issuance.

Examiners and managers should be aware of collateral
estoppel and the important distinction it can have in civil tax fraud penalty
cases.

Collateral estoppel is a legal doctrine that prevents
a taxpayer, who has been previously convicted of criminal tax evasion under
7201, from asserting a defense to the civil fraud penalty.
”
Collateral estoppel, like the related doctrine of res judicata, has the dual
purpose of protecting litigants from the burden of relitigating an identical
issue with the same party or his privy and of promoting judicial economy by
preventing needless litigation.”
Parklane Hosiery Co. v. Shore, 439
U.S. 322, 326 (1979). The courts routinely look to the presence of several
factors in applying collateral estoppel. The issue for which estoppel is being
sought must have been necessary in reaching the original decision (see Parklane
case cited above), the party to be estopped had a
“full and
fair opportunity to litigate”
the issue in the original suit – Montana
v. United States, 440 U.S. 147, 154 (1979), and the issue must have been part
of a valid and final judgment. Ashe v. Swenson, 397 U.S. 436, 443 (1970).
The doctrine of collateral estoppel applies only to the years for which the
taxpayer has been convicted. Intent must be established for non-conviction
years.

A conviction under 7206(1), false return, does
not collaterally estop the taxpayer from asserting a defense to the civil
fraud penalty since conviction under 7206(1) does not require proof of fraudulent
intent to evade federal income taxes. In these cases, additional development
will be needed to establish the taxpayer’s intent to evade payment of
a tax to be due and owing.

Form 6809 (Civil Fraud Penalty Monitoring Form)
is required in order to monitor all cases where the civil fraud penalty is
an issue.

A separate Form 6809 must be prepared for each
person or legal entity involved. However, only one Form 6809 is prepared for
a joint return.

Upon updating a case to Status Code 17, prepare
Form 6809 in triplicate, completing items 1 – 11. Retain the original
and one copy in the case file. Forward one copy to the fraud referral specialist
(FRS).

When the case is ready to close, the examiner
will complete items 12a–12f. Upon final disposition of the case, the
completed Form 6809 is provided to the FRS.

Closing a fraud case requires an entry of
“C”
or
“F”
on the appropriate line of Form
5344 (currently Line 38 of Form 5344, Revised 1–2002) to ensure the
capture of the penalty on AIMS. Form 5599, EO Examined Closing Record should
be utilized when closing TEGE cases.

Form 3198, Special Handling Notice, may be used
for routing of civil fraud cases.