part4-129

4.16.1 
SEP Responsibilities and Case Development

4.16.1.1 
(01-01-2003)
Overview

  1. This chapter provides an overview and outlines the purpose and goals
    of the Special Enforcement Program (SEP). SEP is a specialized compliance
    program within the Small Business/Self- Employed Operating Division (SB/SE)
    directed toward that segment of the population which derives substantial income
    from either legal or illegal activities and intentionally understate their
    tax liability.

  2. SEP evolved from a Strike Force program focused on organized
    crime and illegal activity into a compliance program with emphasis on identifying,
    developing and investigating fraudulent income and expense issues of both
    legal and illegal entities.

  3. The goal of SEP is to enhance voluntary compliance and to promote public
    confidence in the tax system. This maximum deterrence is generated by examining
    those cases which significantly impact the public and assisting in the investigation
    and prosecution of prominent or notorious individuals who attempt to evade
    or defeat the tax system.

  4. SEP cases normally involve in-depth examinations. Section 7602(e) of
    the Internal Revenue Code (IRC) provides that the Service is not to use financial
    status or economic reality examination techniques, such as indirect methods,
    to determine the unreported income of any taxpayer unless thee is a reasonable
    indication that there is a likelihood of such unreported income.

  5. The examination of income is a mandatory audit issue. The depth of the
    examination of income and the techniques used are dependent on the facts and
    circumstances of the case. To determine whether unreported income exists,
    the SEP agent should: conduct the minimum income probes; resolve Large, Unusual
    and Questionable (LUQ) income items; perform a financial status analysis;
    and evaluate internal controls in the case of a business return. If the likelihood
    of unreported income has been established, the use of Financial Status Audit
    Techniques (FSATs) would be appropriate and are not prohibited by IRC section
    7602(e).

  6. If the SEP agent has established that there is a reasonable likelihood
    of unreported income, a more in-depth examination of income is warranted.
    Any technique or procedure used to determine the amount of unreported income
    could be labeled a FSAT. A FSAT is, therefore, defined by its purpose which
    is a technique, analysis or procedure used to determine the specific amount
    of unreported income. See IRM 4.16.1.2.6.

  7. In some instances the SEP agent may have reasonable indications that
    the likelihood of unreported income exists prior to the start of the actual
    examination. Examples of such instances could include: informant information;
    CI information; information from other federal, state or local law enforcement;
    or IRP income information on non-filers.

  8. The SEP agent should always document their workpapers on why they reached
    their conclusion along with the date that the conclusion was reached. This
    step should always take place regardless of the methods used or the information
    made available to reach the determination that the likelihood of unreported
    income exists.

4.16.1.2 
(01-01-2003)
Introduction

  1. The primary purpose of SEP is to:

    1. Identify and develop those issues which have significant fraud potential;

    2. Assist in financial investigations of taxpayers who derive legal and illegal
      income, but choose to evade their tax liability through one or more violations
      of the tax law;

    3. To support Criminal Investigation (CI); and

    4. Assist Area Counsel in trial preparation.

  2. The objective of SEP is to:

    1. To perform timely and effectively planned and managed examinations of
      returns filed notwithstanding obstacles created by complexity, diversification,
      scarcity of audit records and evidence, or geographic dispersion of operations.

    2. To accumulated at the Headquarters level and disseminate novel examination
      techniques, issues unique to legal or illegal income sources, avoidance and
      evasion schemes, and all other information useful in planning and executing
      examinations.

    3. To encourage and promote communications and exchange of techniques and
      procedures between compliance officers as an aid in achieving the most effective
      examination.

  3. SEP cases include, but are not limited to:

    1. Unreported income

    2. False expenses/credits

    3. Questionable return preparers (i.e., ELF and/or EITC cases)

    4. Frivolous filers/non-filers

    5. Abusive trusts/abusive trust schemes

    6. Tax Shelters

    7. Fraudulent specialty tax investigations (i.e., Employment Tax and/or Excise
      Tax Investigations)

    8. Health care fraud

    9. Racketeering/organized crime

    10. Narcotic trafficking

    11. Illegal gambling operations

    12. Prostitution

    13. Pornography

    14. Embezzlement and theft

    15. Political corruption

    16. Credit card fraud

    17. Bank fraud

    18. Currency violations

    19. Offshore activities

    20. Internet fraud

4.16.1.3 
(01-01-2003)
SEP Agent Duties and Responsibilities

  1. Revenue Agents in SEP are financial investigative specialists. In addition
    to general tax law knowledge and auditing skills, SEP agents are experts in
    the identification and development of cases with fraud potential.

4.16.1.3.1 
(01-01-2003)
General

  1. SEP agents:

    1. Identify fraud issues and recognize indicators of fraudulent activity.

    2. Conduct in-depth examinations of cases with fraud potential.

    3. Conduct detailed interviews of taxpayers and third party witnesses.

    4. Secure evidence, with a summons if necessary, to determine taxable income.

    5. Submit referrals to CI on cases meeting criminal criteria.

    6. Participate as a tax law expert in joint investigations and assist in
      computing the criminal tax liability.

    7. Balance civil and criminal aspects in joint investigation cases, including
      the protection of the statute of limitations.

    8. Prepare examination reports, compute tax liability and propose applicable
      civil penalties.

    9. Act as technical advisor and assist the U. S. Attorneys office with grand
      jury investigations.

    10. Assist U. S. Attorneys office and Area Counsel in preparing tax computations
      and special schedules for trial.

    11. Testify as expert or summary witnesses in criminal and civil tax cases.

    12. Develop leads by networking with local, state and federal agencies.

  2. SEP agents also serve as experts and resource persons for other Service
    functions in the following areas:

    1. Indirect methods of reconstructing income.

    2. Preparation, use and enforcement of summonses (Form 2039).

    3. Development and application of civil fraud penalty, IRC section 6663,
      and fraudulent failure to file penalty, IRC section 6651(f). See Fraud chapter,
      IRM 25.1.6 and the Penalty chapter, IRM 20.1.

    4. Recommendation of jeopardy and termination assessments. See Jeopardy/Termination
      Assessments chapter, IRM 4.15.1.

    5. Expert witness and trial preparation.

4.16.1.3.2 
(01-01-2003)
Interviews

  1. An in-depth interview is one of the most important aspects of a SEP
    examination. Interviews are used to obtain leads, develop information and
    establish evidence. The testimony of witnesses and the admissions of alleged
    violators are major factors in resolving tax cases.

  2. In an initial interview, the SEP agent should obtain as much information
    as possible to evaluate the taxpayers complete financial situation, since
    this may be the only contact with the taxpayer.

  3. SEP agents should interview the taxpayer and every pertinent witness
    connected with the case. See IRM 4.10.3.2.1.

  4. Interviewing taxpayers in custody:

    1. Before interviewing a taxpayer confined in prison or otherwise detained
      by federal, state or local authorities, the SEP agent will first evaluate
      the case for fraud potential.

    2. If the case has no fraud potential, the SEP agent may conduct the interview
      without the assistance of a Special Agent (SA).

    3. If the case has firm indications of criminal fraud, the SEP agent will
      refer the case to CI without interviewing the taxpayer in custody.

    4. If the evaluation of fraud potential is not possible without interviewing
      the taxpayer in custody, the SEP agent will prepare a memorandum to the Special
      Agent in Charge (SSA), CI. This memorandum will request the assignment of
      a SA to assist in the interview and to inform the taxpayer in custody of their
      constitutional rights in accordance with the decision of Miranda
      v. Arizona, 86 S. Ct. 1602 (1966)      .

    5. After the interview, the assigned SA may assist the SEP agent in evaluating
      any possible fraud implications. If firm indications of criminal fraud are
      not present, the SEP agent will continue to work the case.

    6. It is not necessary for a SA to be present when interviewing a
      third party witness       in custody.

  5. The SEP agent must prepare a permanent record of every interview using
    one or more of the following:

    1. Memorandum of interview;

    2. Transcript of interview or Question and Answer Statement;

    3. Affidavit; or

    4. Audio recording.

  6. Interviews of members of a federally recognized Indian tribe should
    be in accordance with protocols set forth by relevant Presidential Executive
    Orders. See IRM 5.1 Chapter 12.

4.16.1.3.2.1 
(01-01-2003)
Securing Affidavits

  1. One of the principal responsibilities of a SEP agent is to obtain early
    and accurate information.

  2. SEP agents must initiate and proceed with in-depth examinations on the
    assumption that cases will result in litigation. It is, therefore, incumbent
    upon the SEP agent to obtain as much documentation as possible.

  3. During the examination, the SEP agent may obtain oral testimony which
    may significantly affect the outcome of the case. The SEP agent should have
    the individual attest to the accuracy of their statements by preparing and
    signing an affidavit or statement.

  4. The average individual is not familiar with the law, therefore, the
    SEP agent should advise them that preparing or the giving of a false statement
    is a criminal offense. Therefore, an attested statement has greater validity
    when properly prepared and voluntarily given.

  5. Affidavits and statements are used to:

    1. Record the testimony of a witness;

    2. Refresh the memory of a witness;

    3. Deter a witness from becoming hostile and changing their testimony;

    4. Impeach a hostile witness;

    5. Be used as evidence; and/or

    6. Help accumulate complete and accurate information.

  6. Some of the methods to record statements by a SEP agent are as follows:

    1. Affidavit (Form 2311);

    2. Narrative Affidavit – Primarily is used by SEP agents. Variations are
      accepted as long as the basic elements remain unchanged. If feasible, the
      subject should be requested to examine and sign the document. If they refuse
      to sign, the following legend should be inserted at the end of the statement:
      “This statement was read by [subjects name] on [date], who stated
      that it is true and correct, but refused to sign it”
      .

    3. Summarized Narrative – A summary of a conversation or statement made by
      a taxpayer or witness who should be requested to sign the document. The SEP
      agents present at the interview should always sign the statement.

    4. Question and Answer – The witness should attest to its accuracy.

    5. Reports of Interview – A summary of an interview that is not signed by
      the taxpayer or witness, but attested to by the SEP agent.

  7. The SEP agent may decide to administer an oath to the taxpayer and/or
    witness at the start of the interview. The authority to administer oaths and
    affirmations, whether pursuant to the issuance of a summons or a request for
    information, is in IRC sections 7602 and 7622. While CI may normally administer
    oaths on a regular basis, it is recommended that SEP agents seek Area Counsel
    guidance prior to the creation of an oath to record statements.

  8. For additional information on oaths and the waiver of constitutional
    rights, see IRM 9.4.5.11.3.2.2 and related exhibits.

4.16.1.3.2.2 
(01-26-2004)
Electronic or Verbatim Recording of Interviews

  1. Requests to make audio tape, audio disk, stenographic or other verbatim
    recordings of interviews will ordinarily be allowed except where the taxpayer
    or representatives behavior is disruptive. Requests to make video recordings
    will not be permitted.

  2. A request to record an interview requires:

    1. Ten (10) calendar day advance notice;

    2. Group manager approval;

    3. The taxpayer or representative to furnish their own equipment and allow
      the Service to produce its own recording; and

    4. The recording takes place in a suitable location, ordinarily in an IRS
      office.

  3. If the ten (10) calendar day advance notice is not given and/or Service
    equipment is not available, a new appointment will be scheduled.

  4. When the SEP agent has concerns that testimony may later change, the
    Service can record an interview of a taxpayer or witness. In instances where
    the Service initiates the recording, the provision to record at an IRS office
    is not required.

  5. The Service must notify the individual ten (10) calendar days in advance
    of the interview using Pattern Letter 2156. The Territory Manager must approve
    all Service initiated recordings. See Exhibit 4.10.3-1 for a copy of the pattern
    letter.

  6. At the outset of the recording the SEP agent must identify themselves,
    provide the taxpayers name and SSN/EIN, the date, time, place and purpose
    of the proceeding. Each participant in the proceeding also must identify themselves,
    their role in the proceeding, and their acknowledgement to the making of a
    verbatim recording.

  7. The arrival or departure of a participant must be noted on the recording.

  8. Written records presented to the taxpayer or witness must be clearly
    identified on the recording.

  9. At the conclusion, the SEP agent should state the interview has been
    completed, the recording has ended and the time.

  10. Immediately after the interview, the recording should be labeled with
    the date and a brief description of the contents.

  11. Upon request, the Service will provide the taxpayer with a transcript
    or copy of the recording if the taxpayer provides reimbursement for the cost
    of the transcription or reproduction.

  12. IRC section 7521(a)(2) requires that the Service notify the taxpayers
    of its intent to record an interview. The code section does not require that
    the taxpayer must consent to the audio recording. Cumulative Bulletin Notice
    89-51 (1989-1 CB 691) does specify that the taxpayer must be given prior notice
    of the intent to record an interview and provide a transcript upon request.
    See also IRM 4.10.3.2.5 (Examination of Returns chapter) for further guidance
    on audio recordings.

4.16.1.3.3 
(01-01-2003)
Evidence

  1. SEP examinations are unique because of the significant potential for
    fraud and litigation. Many SEP cases result in recommendations for criminal
    prosecution and an even greater number involve assertions of the civil fraud
    penalty.

  2. The nature of SEP cases increases the likelihood that the burden
    of proof     will rest with the government. SEP agents must gather the
    evidence necessary to sufficiently prove the facts of the case.

  3. SEP agents should be familiar with the Federal Rules of Evidence (FRE)
    particularly:

    1. Best evidence rule (FRE 1001 through 1006);

    2. Hearsay rule and exceptions (FRE 801 through 806); and

    3. Attorney client and accountant client privilege rules (FRE 501).

  4. SEP agents should also be familiar with case law interpretations of
    evidential principles and the law of privileges, e.g., the attorney-client
    privilege and the practitioner privileges of IRC section 7525.

  5. When securing evidence, SEP agents must always be aware of the secrecy
    provisions of Rule 6 of the Rules of Federal Criminal Procedure. SEP agents
    must always verify that the information received was not grand jury information.

4.16.1.3.3.1 
(01-01-2003)
Search Warrant Secured Evidence

  1. SEP agents can utilize evidence secured by federal, state or local law
    enforcement agencies in securing leads and developing cases.

  2. SEP agents should obtain a copy of the search warrant and/or inventory
    to document how the evidence was obtained.

  3. Consult Area Counsel if there is a motion to suppress the search warrant
    or other technical problems with the search warrant evidence. In
    U.S. v. Janis, 76-2 USTC 16,299, 428 U.S. 433, 96 S. Ct. 3021    , the
    Service was allowed to use evidence for civil purposes that was suppressed
    from criminal usage by the local authorities.

4.16.1.3.3.2 
(01-01-2003)
Electronic Communications Monitoring (Wire Tap) Evidence

  1. Evidence developed from a court ordered electronic monitoring can be
    an important source of information in SEP cases. The evidence may support
    a computation of income for a period of time in cases such as wagering or
    narcotics as well as links to assets, expenditures, associates of a taxpayer
    or other leads. Generally, the evidence will consist of tapes of actual telephone
    conversations, listing of telephone numbers called (Pen Register) and places
    from which calls were received (Trap and Trace).

  2. Title 18 USC section 2517 sets forth a statutory theme under which disclosure
    and use of intercepted oral and wire communications are permitted. Section
    2517(1) permits law enforcement officers who obtain wiretap evidence to turn
    such evidence over to other law enforcement officers for the latters use.
    Section 2517(2) permits the receiving law enforcement officer to use wiretap
    evidence in their official duties, such as issuing summonses; obtaining jeopardy
    assessments; investigating tax offenses or preparing a Special Agents Report
    (SAR).

  3. Caution -Title 18 USC section 2515 prohibits the use of
    evidence derived from intercepted wire communications, if that information
    is in violation of the law. Before receiving such evidence, SEP agents must
    obtain the subsequent court order releasing the evidence to the IRS for use
    in an income tax examination. Follow the procedures set forth below to preserve
    the IRSs right to use this evidence.

  4. The SEP agent is responsible for initiating an application for disclosure.
    On a U.S. District Court approved case the application should be made through
    Area Counsel to the U.S. Attorneys office. On a state court approved case,
    the application will be made through Area Counsel to either the District Attorneys
    office or the U.S. Attorneys office. When the order is obtained through the
    District Attorneys office, the final order should be forwarded to Area Counsel
    after receipt for its approval of the order.

  5. Once approval of the court and/or Area Counsel is secured, the SEP agent
    will make arrangements for a SA to be assigned to accompany the SEP agent
    to secure the evidence. The SA will make a determination about the criminal
    aspects of the evidence received. If none is found or prosecution is declined
    due to dual prosecution or other reasons, the SA will refer the evidence to
    the SEP agent for civil purposes.

  6. Disclosure by the SEP agent should be limited to those named on the
    order. Title 18 USC section 2517(3) allows disclosure of such evidence while
    giving testimony under oath in any proceeding held under the authority of
    the United States.

  7. When closing an unagreed case, the electronic communications evidence
    must be removed from the case file and stored in a secured access storage
    area within an IRS office to prevent unauthorized disclosure. The workpapers
    should indicate that additional evidence is under the control of the SEP agent
    and would be available for litigation. On an unagreed case, the evidence should
    be held in the secured area until the statutes for any claims have expired
    at which time the evidence should be destroyed.

  8. See IRM 31.7.5 (Electronic Surveillance) for further information on
    electronic surveillance.

4.16.1.3.4 
(01-01-2003)
Summons

  1. The summons is an important tool for obtaining financial data to complete
    in-depth examinations. Frequently SEP cases involve uncooperative taxpayers
    who do not have records or will not make records available. The SEP agent
    may find it necessary to summons information from taxpayers and/or third parties.

  2. SEP agents should be familiar be familiar with provisions of the law
    relating to the use and enforcement of a summons. SEP agents should use good
    judgement when considering the issuance of a summons, including the potential
    legal problems associated with summons enforcement.

  3. A summons should be prepared and issued in accordance with the Summons
    chapter contained in IRM 25.5.

4.16.1.3.5 
(01-01-2003)
Specific Item and Indirect Methods

  1. SEP cases often involve taxpayers who do not maintain adequate books
    and records. Therefore, SEP agents must be well versed in the various methods
    of reconstructing income. The two basic approaches in determining correct
    taxable income are:

    1. Specific item method; and

    2. Indirect method.

  2. The specific item method uses specific items to identify unreported
    income from both legal and illegal sources. These preferred methods limit
    the taxpayers ability to challenge the governments determination since the
    methods are based on information personal to the taxpayer.

  3. When specific items are not traceable, it may be necessary to use indirect
    methods to reconstruction income based on circumstantial evidence. The use
    of indirect methods is allowed by IRC section 446 and has been upheld by the
    courts in civil and criminal tax cases.

  4. The court tested methods of reconstructing income include:

    1. Bank deposit;

    2. Source and application of funds

    3. Net worth;

    4. Percentage of mark-up; and

    5. Unit Volume.

  5. The indirect method used must include evidence of a likely source of
    taxable income. In addition, the SEP agent must be able to refute defenses
    such as nontaxable sources of income and cash hoards.

  6. IRM 4.10.4.6 provides guidance on the use of various indirect methods.

4.16.1.3.6 
(01-01-2003)
Joint Investigations

  1. SEP agents devote a significant amount of time working joint investigations
    with CI. Joint investigations are also known as administrative tax cases.

  2. Joint investigations are comprehensive investigations conducted jointly
    by CI and Examination. The primary purpose of a joint investigation is to
    determine if criminal tax fraud is involved and whether criminal prosecution
    should be recommended. In addition to assisting with the criminal tax computation,
    SEP agents are responsible for the civil aspects of the case including:

    • Statute protection (see Fraud chapter, IRM 25.1.4.3.5)

    • Consideration of subsequent year and related returns

    • Preparation of the Revenue Agent workpapers and examination report of
      adjustments for prosecution and non-prosecution years

    • Civil closing.

  3. Joint investigations can originate from the following:

    1. Referral Report of Potential Criminal Fraud Cases (Form 2797) or

    2. Request for Cooperating Examiner (Form 6544).

  4. Upon assignment, the SEP agent should verify that the case is an administrative
    tax case rather than a grand jury case. Different procedures apply for grand
    jury cases as explained in the following section.

  5. SEP agents and SAs have separate, clearly defined roles in joint investigations.
    SEP agents must not participate in law enforcement activities nor be placed
    in situations for which they are not trained and/or which may put them or
    others at risk.

  6. SEP agent responsibilities and detailed procedures regarding joint investigations
    can be found in the Fraud chapter, IRM 25.1.4.

4.16.1.3.7 
(01-01-2003)
Grand Jury Investigations

  1. A grand jury is a powerful investigative tool for the government used
    to investigate allegations criminal wrongdoing. SEP agents are frequently
    involved with grand jury investigations and grand jury material.

  2. Proceedings of a grand jury are secret and are governed by Rule 6(e)
    of the Rules of Federal Criminal Procedure. The use of grand jury information
    for civil purposes is further restricted by the decisions in
    United States v. Baggot, 103 S. Ct. 3164 (1983)     and
    United States v. Sells Engineering Co., Inc., 103 S. Ct. 3133 (1983)    .

  3. The SEP agent assigned to a grand jury assists the U.S. Attorneys office,
    which controls the investigation. The SEP agent is primarily concerned with
    the consideration, resolution and review of issues as they relate to the criminal
    charges being investigated.

  4. Although the SEP agent involved in the grand jury case will not complete
    the final civil tax liability, they must be aware of the civil ramifications
    of information received or developed during the grand jury investigation.
    Only information made a matter of public record or obtained prior to or independent
    of the grand jury can be used in a subsequent civil case.

  5. SEP agents may use their credentials for identification, but must make
    it clear that they are assisting in a grand jury investigation as a grand
    jury agent.

  6. IRS summonses are not used in a grand jury investigation. Documents
    and testimony are obtained by the U.S. Attorneys office through the use of
    grand jury subpoenas.

  7. The grand jury SEP agent is considered tainted and is prohibited
    from participating in any civil aspects of the case resulting from the grand
    jury.

  8. Guidance for grand jury investigations can be found in IRM 25.1.4 of
    the Fraud chapter.

4.16.1.3.8 
(01-01-2003)
Expert Witness and Trial Preparation

  1. SEP agents often assist and/or testify in civil and criminal court proceedings.
    Examples include:

    1. Criminal tax trials;

    2. Tax court cases;

    3. Grand jury proceedings;

    4. Bankruptcy hearings;

    5. Summons enforcement hearings; and

    6. Judicial reviews of jeopardy and termination assessment cases.

  2. SEP agent responsibilities will vary depending on the issues of the
    case. The government attorney will determine the role of the SEP agent.

  3. Government prosecution cases require extensive time for preparation
    and trial. SEP agents should be prepared to spend any additional time necessary
    to assist the government attorney in the case.

  4. The SEP agent should contact the local Disclosure Office to determine
    whether a testimony authorization is required pursuant to 26 CFR section 301.9000-1
    and Delegation Order 156. In general, a testimony authorization is not required
    in a case referred by the Service to the government where the government is
    calling the SEP agent as a witness.

  5. The most common duty as a SEP agent in courtroom proceedings is testifying
    during a criminal trial as an expert witness or as a summary witness.

  6. An expert witness is a person skilled in some area or who has experience
    or knowledge not generally known to ordinary persons (Federal Rules of Evidence,
    Rule 702). Under Rule 16(e) of the Federal Rules of Criminal Procedure, the
    defense can ask for the witnesss qualifications. It is imperative that SEP
    agents maintain all professional requirements and a current resume.

  7. Once qualified before the court, the expert witness is called upon to
    express an opinion based on facts presumably in the record of the case. The
    expert witness reviews the governments evidence and expresses an opinion
    as to the issue needing expert assistance. Generally, the expert witness is
    called to testify immediately prior to the governments final witness and
    is excluded from hearing testimony during the trial.

  8. A summary witness listens to all evidence presented during the trial
    and is the final witness called in the governments case to convince the jury
    there was harm to the government. A summary witness will be qualified as an
    expert in matters of accounting and tax computation. Generally, the summary
    witness is a SEP agent or a compliance officer with no prior involvement in
    the investigation.

  9. Occasionally, SEP agents will be used as both the expert witness and
    the summary witness. In this situation, the SEP agent renders an expert opinion
    and prepares the tax computation.

4.16.1.3.9 
(01-01-2003)
Ex Parte Orders for Disclosure of Tax Returns
and Tax Return Information

  1. SEP agents may obtain information during an income tax investigation
    indicating that non-tax criminal violations have occurred or may witness criminal
    acts failing under the jurisdiction of another federal agency. Except in rare
    and unusual cases, this information is considered tax return information as
    defined under IRC section 6103. See IRM IRM 11.3.34 (Disclosure for Non-Tax
    Criminal Violations) for situations where observing a criminal act would not
    be tax return information and could be disclosed to local, state or federal
    law enforcement agencies.

  2. In general, tax returns and tax return information cannot be disclosed
    to other federal law enforcement agencies. However, other federal law enforcement
    agencies pursuing potential non-tax federal criminal charges
    may obtain an ex parte order through the U. S. Attorneys
    office in accordance with the requirements set forth in IRC section 6103(i).
    See IRM 11.3.28 (Disclosure to Federal Agencies for Administration of Non-Tax
    Criminal Laws) for IRC section 6103(i) procedures. The ex parte
     order is forwarded to the Disclosure Office to obtain the necessary
    documents.

  3. The Disclosure Office will only provide the information specified in
    the ex parte order.

  4. For disclosure of Currency Transaction Report Information (Title 31),
    refer to IRM 11.3.28.5.1 (Disclosure of Currency Transaction Report Information).
    Information will not be released through an ex parte order
    if it is determined by the Service that disclosure would identify a confidential
    informant or seriously impair a civil or criminal investigation. See IRM 11.3.28.1.(11).

  5. The SEP agent should consult with the Disclosure Office as to whether
    material developed subsequent to the ex parte order
    may be disclosed on a continuing basis. Such subsequent disclosure may be
    made only if the ex parte order provides for further
    disclosures and designates a specific cutoff date. See IRM 11.3.28.5(19).

  6. State and local law enforcement agencies cannot obtain
    an order.

4.16.1.4 
(01-01-2003)
Sources and Development of SEP Cases

  1. The following overview reflects the restrictions on SEP agents in identifying
    and developing their casework.

4.16.1.4.1 
(01-01-2003)
Overview

  1. This section provides guidelines for the identification and development
    of leads for SEP cases. The leads can be obtained from internal and/or external
    sources. These leads can then be developed into potential fraud cases using
    all available resources.

  2. To properly develop a case, SEP agents must go beyond examining and
    interpreting taxpayer records. It is often necessary to go to third parties
    to obtain and/or verify information to determine the correct tax liability.

  3. SEP agents must always follow the third party contact provisions of
    IRC section 7602(c) when identifying and developing cases.

  4. SEP agents must follow current Service guidelines relating to case development
    and case assignment. SEP agents may not develop their own cases from leads
    received from internal or external sources. All leads should be forwarded
    to the local PSP via Form 5346 (Examination Information Report). See the PSP
    chapter, IRM 4.1, for an expanded explanation on case development, case assignment
    and workload delivery.

4.16.1.4.2 
(01-01-2003)
Sources for Obtaining Leads

  1. Internal sources include:

    1. CI referrals (Form 3949);

    2. Collection referrals (Form 3449);

    3. EP/EO referrals (Form 5666);

    4. Information pertaining to illegal income or jeopardy and termination assessments;

    5. Compliance Initiative Project (CIP) information;

    6. Title 31 and Form 8300 leads; and

    7. Closing Agreements and Revenue Agent Reports on closed criminal cases.

  2. External sources include:

    1. Informant information;

    2. Information received from federal, state and local law enforcement agencies;
      and

    3. Court documents, public databases, newspaper articles, internet, etc.

4.16.1.4.3 
(01-01-2003)
Internal Resources for Case Development

  1. Prior year Revenue Agent Reports (RAR) and workpapers.

  2. Prior year Special Agent Reports (SAR) and exhibits.

  3. CI information and case development files.

  4. Collection files containing financial information.

  5. Transcript of accounts (IDRS).

  6. Information Return Processing (IRP) transcripts.

  7. Currency Banking Retrieval System (CBRS) information.

  8. International Revenue Agent Reports.

  9. Treasury Enforcement Communication System (TECS).

4.16.1.4.4 
(01-01-2003)
External Resources for Case Development

  1. Research databases (i.e., Lexis-Nexis, Choicepoint, etc.).

  2. Asset locator services.

  3. Records of civil and criminal cases from federal, state and local courts.

  4. Records of parole and from probation officers.

  5. Bankruptcy filings.

  6. U.S. Coast Guard (vessels registered with the Coast Guard may not be
    registered with a state).

  7. Drug Enforcement Administration (DEA).

  8. Federal Bureau of Investigation (FBI).

  9. U.S. Customs.

  10. U.S. Secret Service.

  11. Bureau of Alcohol, Tobacco and Firearms (ATF).

  12. National Crime Investigation Center (NCIC) through CI.

  13. Immigration and Naturalization Service (INS).

  14. Department of State.

  15. Treasurer of the United States.

  16. Federal Aviation Agency (FAA).

  17. Securities and Exchange Commission (SEC).

  18. U.S. Postal Service.

  19. State and local law enforcement agencies.

  20. Department of Motor Vehicles (DMV).

  21. Department of Agriculture.

  22. Health and Human Services.

4.16.1.4.5 
(01-01-2003)
Third Party Contacts

  1. When obtaining information from outside sources, SEP agents must follow
    third party contact procedures in accordance with IRC section 7602(c) and
    IRM 4.10.1.6.12.

  2. Before making a third party contact, SEP agents must determine which
    advance notification letter is appropriate. Because of the nature of their
    cases, SEP agents are authorized to use Letter 3164E except for non-filers.
    When examining non-filers, SEP agents must use Letter 3164C(DO). See IRM 5.1.17.3.

  3. Contact with the Service, initiated by a third party such
    as a member of law enforcement or an informant, is not considered
    a third party contact. However, if the SEP agent contacts a third party regarding
    a specific taxpayer, the contact requires advance notification
    to the taxpayer and a recordation of the contact.

  4. Advance taxpayer notification requirements do not apply when:

    1. The taxpayer authorizes the third party contact;

    2. Such notice would jeopardize collection of any tax; or

    3. There is a pending criminal investigation.

  5. In jeopardy/termination assessment cases no advance notification
    is required. However, Form 12175 (Third Party Contact Report Form) must be
    prepared for each contact and submitted to the Third Party Coordinator when
    the jeopardy situation no longer exists. If additional contacts will be made,
    the SEP agent will also prepare and send the appropriate Letter 3164 if one
    has not already been provided to the taxpayer.

  6. Advance notification requirements do not apply when the third party
    has a reprisal concern. Therefore, it is important to make a
    reprisal determination during the initial contact with third parties. Form
    12175 is submitted with the reprisal block marked rather than listing the
    name of the third party.

  7. Advance notification requirements do not apply to any general, primary,
    subject criminal or subject seizure investigation initiated by
    CI. Form 12175 is not required in these cases.

  8. For additional guidance, see IRM 4.10.3.2.1.4. See also IRM 4.10.1.6.12
    for full details relating to third party contact impact relating to the changes
    brought forth by the Restructuring and Reform Act of 1998 (RRA98).

4.16.1.5 
(01-01-2003)
AIMS

  1. The following overview should be used in conjunction with the material
    located in the AIMS portion of the IRM.

4.16.1.5.1 
(01-01-2003)
Overview

  1. This section identifies the various source codes, status codes, activity
    codes and project codes unique to SEP.

4.16.1.5.2 
(01-01-2003)
Source Codes

  1. Source Code 88 (Special Enforcement) is used to request returns and/or
    AIMS control on case(s) involving illegal activity.

  2. Source Code 90 (Fraud Regular) is used to request returns and AIMS/or
    AIMS control on case(s) for a joint investigation or for the purpose of referring
    such returns to CI. In general, returns already open on AIMS with another
    source code should not be updated to Source Code 90. A fraud project code
    should be used to identify the case.

4.16.1.5.3 
(01-01-2003)
Status Codes

  1. Status Code 17 is used when the revenue agent, the group manager and
    the Fraud Referral Specialist (FRS) agree that fraud potential exists.

  2. Status Code 18 is used when CI accepts a criminal fraud referral.

  3. When returned from CI for civil settlement, Status Code 17 is used for
    civil fraud development if concurrence was reached by the revenue agent, the
    group manager and the FRS. If no fraud potential exists, Status Code 12 is
    used.

4.16.1.5.4 
(01-01-2003)
Project Codes

  1. Project Code 135 – CI referrals for civil action.

  2. Project Code 146 – Form 8300 fraud.

  3. Project Code 147 – Title 31 fraud.

  4. Project Code 149 – Non-filer fraud.

  5. Project Code 153 – Informant Claim Reward Program.

  6. Project Code 691 – EITC fraud.

4.16.1.5.5 
(01-01-2003)
Activity Codes

  1. SEP Non-Case Time (597) – To develop contacts for potential leads.

  2. Narcotics/Information Gathering Projects (592) – No return examined;
    to gather information and develop leads.

  3. Grand Jury Non-Narcotics Related (815).

  4. Grand Jury Drug Enforcement Task Force Case (816).

  5. Grand Jury Narcotics Related (817) – Other.

  6. Trial Assistance (821).

4.16.1.6 
(01-01-2003)
Illegal Source Income

  1. SEP work now includes legal source income, however, initially SEP was
    directed only toward illegal income sources. The following subsections provides
    a background on initial source of SEP work.

4.16.1.6.1 
(01-01-2003)
Background

  1. SEP is directed toward that segment of the public who derives substantial
    income from illegal activities, including High Level Drug Leaders Tax Enforcement
    Project (DEP). The very nature of these illegal activities require close cooperation
    with the Department of Justice (DOJ) and other federal, state and local law
    enforcement agencies.

  2. To further implement SEP, the Commissioner signed a Memorandum of Understanding
    (MOU) with the Deputy Attorney General of the Department of Justice on January
    8, 1976 and with the Administrator of the Drug Enforcement Administration
    on July 27, 1976. A new Service/DEA Memorandum of Understanding was signed
    February 11, 1980. These agreements established guidelines regarding investigations
    conducted by these agencies and the Service.

  3. The DOJ agreement established guidelines which were compatible with
    the Services policy of fair and effective administration and enforcement
    of tax laws and the objective of DOJ to give priority to the investigations
    and prosecution of organized criminal activity, corruption in government,
    narcotics trafficking, and all forms of white-collar crimes. Provisions were
    also made for continued cooperation between the Service and DOJ on Strike
    Force matters. The document also established a Coordinating Committee to resolve
    any disagreements that may arise.

  4. The DEA agreement was aimed at high-level drug trafficking and to promote
    effective enforcement of the tax laws against those individuals who are violating
    these laws by implementing a tax enforcement project designated as the High
    Level Leaders Tax Enforcement Project (DEP). Primary liaison between the Service
    and DEA would be maintained at the Headquarters level of the Service and
    at the Headquarters level of DEA.

4.16.1.6.2 
(01-01-2003)
Definitions

  1. IRS Racketeer (SEP-1) – A taxpayer identified as being engaged in organized
    crime activities; notorious or powerful with respect to local criminal activities;
    receiving substantial income from illegal activities as a principal, a major
    subordinate, or an important aider or abettor; or infiltrating legitimate
    businesses through illegal means or through loaning or investing therein the
    proceeds from illegal activities.

  2. Wagering (SEP-2) – Taxpayers engaged in an occupation requiring registrations
    one who is engaged in receiving wagers.

  3. Strike Force (SEP-3) – If DOJ advise the Service that the CI investigation
    is authorized for inclusion in the DOJ Strike Force, CI and Compliance will
    promptly reclassify the case as an SEP-3. Otherwise, the case shall continue
    to retain its original classification.

  4. Illegal Income (SEP-4) – Includes any person who, while not meeting
    the criteria of SEP-1, SEP-2 or SEP-3, is reasonably believed to be receiving
    substantial income from an illegal activity that is separate and apart from
    the alleged tax violations, such as corruption in government, welfare fraud
    or commercial bribery.

4.16.1.7 
(01-01-2003)
Management Responsibilities for Strike Force Activities

  1. The Chief, CI and the Commissioners of the Operating Divisions share
    responsibility for:

    1. Implementing the objectives for the Services participation in Strike
      Forces;

    2. Providing functional guidance to area and field offices;

    3. Maintaining liaison with Department of Justice (DOJ) to ensure full coordination
      of the Strike Force operations at a national level;

    4. Accumulating and disseminating information on unusual schemes, novel techniques
      etc. for use in planning and executing investigations and the subsequent examinations
      or the collection of assessments against individuals involved in illegal activities;
      and

    5. Ensuring that the dissemination of information is consistent with the
      provisions of IRM 1.3 (Disclosure of Official Information chapter) and IRM
      9.3.1.

  2. Each Area Director (Compliance) through the Director, CI Field Operations
    is responsible for:

    1. Determining whether the Strike Force representative position will be assigned
      to the area or field office, where it is assigned to the area office and selecting
      the representative to fill that position;

    2. Implementing objectives in accordance with national objectives for the
      Services involvement in a Strike Force for that area;

    3. Maintaining an effective area Strike Force operation through periodic
      review of field office Strike Force activities to evaluate the effectiveness
      of those operations in meeting its objectives and the proper utilization of
      personnel;

    4. Coordinating all Strike Force activities with inter-field office and inter-area
      aspects as well as with all other area and field office programs;

    5. Exercising supervision and control over, and evaluating, each Strike Force
      representative assigned to the area office as to their relationship with DOJ
      and other law enforcement or regulatory agencies involved in the Strike Force;

    6. Evaluating Strike Force inventories to determine that investigations qualify
      under the established criteria and that resources are being effectively utilized;
      and

    7. Keeping Headquarters advised of any significant changes or problem area
      in the Strike Force operation.

  3. Each Special Agent in Charge (SAC), CI along with the corresponding
    Operating Division manager, is responsible for:

    1. Selecting and exercising supervision and control over the Strike Force
      representative, when that position has been assigned to the field office,
      and evaluating their relationship with DOJ and other law enforcement or regulatory
      agencies involved in the Strike Force;

    2. Gathering, assembling, evaluating and disseminating directly tax related
      information pertaining to the identification of areas of noncompliance within
      illegal activities and the principals consistent with the Services procedures;

    3. Developing, implementing, reviewing and updating Strike Force objectives
      in conjunction with the Strike Force representative;

    4. Participating in the identification of individuals for investigation and/or
      examination;

    5. Advising Headquarters, through the area office, about unusual tax avoidance
      or evasion schemes, novel examination or investigative techniques and other
      information useful in planning and conducting investigations, examinations
      or the collection of assessments against individuals involved in illegal activities.
      Providing access to files, investigations and information for use by the Strike
      Force representative in liaison work and in the preparation of any reports
      required of that position. Field offices involved in more than one Strike
      Force will separately maintain material for each Strike Force;

    6. The respective agents and Supervisory Special Agent (SSA) will update
      the work plan and evaluate progress made on the investigation assuring that
      appropriate review of each joint investigation is made. The Strike Force representative
      will be invited to attend these reviews;

    7. Designating an operating division manager to function, as needed, as a
      program and technical advisor in civil compliance matters to the Strike Force
      attorney. The operating division manager will remain under the supervision
      of the compliance function and will not function as a Strike Force representative;

    8. Ensuring that when the operating division is involved in collection activity
      in a Strike Force investigation, the compliance officer will check the Strike
      Force files and cooperating compliance division workpapers for any information
      that will assist in the collection of the outstanding liabilities;

    9. Ensuring compliance with the requirements of Policy Statement P-4-84;

    10. Ensuring that the dissemination of information is consistent with the
      disclosure statutes, regulations and with the Services policies and procedures;
      and

    11. Meeting with the Strike Force attorney to evaluate the Services participation
      and resolve mutual problems as needed.

  4. Each Strike Force representative is responsible for:

    1. Maintaining a working relationship with, and serving as the point of contact,
      with the Strike Force attorney, other Strike Force members and Service personnel;

    2. Furnishing technical advise to the Strike Force attorney;

    3. Participating with the Strike Force attorney and representatives of other
      agencies in the identification of areas of organized illegal activities to
      be investigated;

    4. Coordinating all Service related Strike Force activities with appropriate
      field office and area office personnel and other Strike Force members;

    5. Liaison between Service field personnel and other federal, state and local
      law enforcement agencies on Strike Force matters;

    6. Developing directly tax related information through other Strike Force
      members by personal contacts, reports, etc. and the dissemination of the information
      to the appropriate Service personnel;

    7. Ensuring compliance with disclosure provisions in disseminating information
      to the Strike Force attorney and other involved agencies in accordance with
      IRM 1.3.35;

    8. Soliciting information from Strike Force attorney relating to individuals
      and entities that may become Strike Force subjects; and

    9. Participating in the identification of individuals for investigation at
      the field office level.

Law Offices of Darrin T. Mish, PA

100 S. Edison Ave. Suite A, PO Box 3414, Tampa, FL 33606 (813) 229-7100
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