25.1.7. Failure to File

(1) Mission. The mission of the Office of Fraud Enforcement (OFE) is to promote compliance by strengthening the IRS’ response to fraud, and by mitigating emerging threats. This includes:

• Improving fraud detection and development to address areas of high fraud/risk noncompliance.

• Cultivating internal and external partnerships to identify new treatment streams to enhance enforcement.

• Pursuing civil fraud penalties and recommending criminal cases that will lead to prosecutions, where appropriate.

(2) OFE builds strong internal and external partnerships and serves as the primary civil liaison to IRS-Criminal Investigation. By supporting cases throughout the life cycle and through full consideration of available treatments, OFE facilitates optimal disposition of cases with civil or criminal fraud potential.

(3) Purpose. This IRM section provides direction and guidance for IRS employees servicewide when working potential fraud cases.

(4) Audience. This handbook is a comprehensive guide for IRS employees servicewide working fraudulent failure to file cases; and other related fraud issues.

(5) Policy Owner. Director, OFE, Small Business/Self Employed (SB/SE).

(6) Program Owner. OFE, Policy, SB/SE.

(7) Primary Stakeholders. Employees in IRS compliance.

(1) On the initial screening of a non-filer case, the compliance employee must determine if the facts indicate potential fraud. Indicators of fraud for consideration, in addition to those previously identified in IRM 25.1.2.3, Indicators of Fraud, are as follows:

(2) If indications of fraud exist, the compliance employee will discuss the case with the group manager. If the group manager concurs that the possibility of fraud exists, the fraud enforcement advisor (FEA) will be contacted. Initial contact with the FEA should be completed by submitting a request through the Specialist Referral System (SRS). Campus employees do not use the SRS and should refer to IRM 25.1.14, Fraud Handbook, Campus Examination Fraud Procedures, for campus procedures. Whenever feasible, a face-to-face meeting will be held between the compliance employee, group manager and FEA to discuss the need for fraud development.

(3) To request a consultation with the FEA, the compliance employee will submit a request through the SRS by going to: https://srs.web.irs.gov/default.aspx

(4) If the possibility of fraud exists:

1. DO NOT SOLICIT tax returns. If returns are submitted to an Exam revenue agent, they should be accepted but not processed, and clearly documented in the case history. See IRM 4.4.9.7.3, Delinquent Return Secured by Examination After SFR TC 150 Posted - Accepted as Filed Procedures, IRM 4.4.9.7.4, Delinquent Return Secured by Examination After TC 150 SFR Posted, With Audit Potential - Process Partial Assessment Procedures, and IRM 25.1.7.6, Secured Delinquent Return (DEL RET), for proper handling. If returns are submitted to a Collection revenue officer, process as detailed in IRM 5.1.11.6, Secured Returns.

2. DO NOT VOLUNTEER ADVICE to the taxpayer concerning any potential course of action to follow.

3. DO NOT DISCUSS tax liabilities, penalties, fraud, or criminal referral possibilities with the taxpayer.

(1) In non-filer cases where a criminal referral is probable and where it is determined that a substitute for return (SFR) should not be posted to the Master File, use push code 037, potential criminal investigation referral/non-filer. For most examiners, the Audit Information Management System (AIMS) will remain a skeletal base until a transaction code (TC) 150 posts. Otherwise, use push code 036, non-filer, and an SFR will be generated. The request for push code input is made using Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, or Form 5345-B, Examination Request Non-ERCS Users. The request is routed by the compliance employee to his/her group manager for review and approval. Upon group manager approval, the form is routed to the group secretary or other designated person for input.

(2) The AIMS project code should be changed to 0149, non-filer referral for fraud, if a criminal referral is probable.

(1) If there are indicators of fraud that warrant fraud development, see IRM 25.1.2.2, Fraud Development Procedures, for specific guidance to compliance employees on the procedures required in such cases. The following actions assist the employee in establishing affirmative acts (firm indications) of fraud:

1. Interview the taxpayer to determine the reason or the intent of the taxpayer's noncompliance.

2. Ask sufficient questions to determine the extent of the delinquency, including the periods and tax due.

3. Document verbatim, if possible, the questions asked and the taxpayer's response or lack of response.

4. Identify any personal reasons that could affect the taxpayer's ability to comply. If the information is not provided by the taxpayer, attempt to secure the information from third party sources.

5. Attempt to get a definitive statement from the taxpayer regarding additional expenses not listed in the books and records. These expenses could include, but are not limited to, expenses paid in cash or "under-the-table" payments to employees.

6. Attempt to establish beginning and year-end cash on hand for each year under investigation.

(2) Verify income from all available sources. Methods of income verification include, but are not limited to:

1. Reviewing FinCEN Query data;

2. Securing IRP data if not already available or reviewing Information Data Retrieval System (IDRS) via command codes: INOLE, IROLE, SUPOL, IRPTR, IRPOL;

3. Securing copies of Forms W–2 from employers and Forms 1099 from customers;

4. Securing copies of checks issued to the taxpayer from Form 1099 issuer(s);

5. Examining the taxpayer's books and records of income and expenses;

6. Reviewing the last return filed. This assists in identifying income sources as well as deductions and exemptions used in tax computations; and

7. Securing current financial information including a check of public records for assets, and a physical observation of the taxpayer's residence, place of business and/or other identified properties. When checking public records, in addition to identifying the assets, information may be available as to when the assets were acquired and the amount paid for such assets. This information will determine whether the taxpayer had the ability to pay the taxes owed when due.

(3) Access to a full credit report is governed by the Fair Credit Reporting Act. See IRM 25.5.4.5.6, Statutory limitations on Acquiring Credit Reports From a Consumer Reporting Agency-Summons Required, for guidance.

1. If subsequent to receipt of a full credit report for a Balance (BAL) DUE investigation, fraud is discovered on a delinquent return (DEL RET) or a previously filed return, or unreported income is discovered, a summons must be issued under IRC 7609 for another credit report.

2. However, the IRS may not obtain a full credit report of a sole proprietor, partner or fiduciary without a summons where there is no lien against the individual taxpayer.

3. Finally, if a full credit report is used as a basis for a referral to Criminal Investigation (CI), a summons must be issued in accordance with IRC 7609, because of the third party record keeper notice requirement.

(1) Contact the FEA for the criminal criteria when considering submission of a criminal fraud referral of a non-filer.

(2) When the group manager and the FEA concur that firm indications of fraud exist and criminal criteria are met, the compliance employee will prepare Form 2797, Referral Report of Potential Criminal Fraud Cases. Form 2797 should be prepared as described in IRM 25.1.3.2, Preparation of Form 2797 - Referral Report of Potential Criminal Fraud Cases.

(1) Compliance employees should consider referring the secured DEL RET to CI for consideration if it has been determined that the DEL RET has a substantial understatement of income and/or a substantial overstatement of deductions that are fraudulent, and criminal criteria is met. The group manager and the FEA should become involved as discussed in IRM 25.1.7.5.

(2) If failure to file and the DEL RET are fraudulent, assertion of both the FFTF penalty (based on the FFTF net amount due) and the civil fraud penalty (based on the DEL RET deficiency) should be considered. Again, the group manager and the FEA should become involved as discussed in IRM 25.1.7.5. See IRM 20.1.2.3.7.5(5)Fraudulent Failure to File—IRC 6651(f), which cautions the FFTF penalty and the civil fraud penalty can be determined with respect to the same return, if failure to file is due to fraud and the taxpayer files a return with a deficiency attributable to fraud. However, the court is not likely to sustain the determination of both penalties unless compelling facts support the IRS’s position. Area Counsel should be consulted before determining both penalties on the same return.

(1) If the criminal criteria are not met, the compliance employee will complete the examination or SFR action whether or not the taxpayer files a DEL RET.

(2) Compliance employees should contact the FEA, if necessary, for assistance in developing the FFTF penalty. Further direction on assertion of the penalty is contained in IRM 20.1, Penalties Handbook.

(3) The addition to tax under IRC 6651(f) (fraudulent failure to file) should be proposed when evidence clearly indicates the taxpayer fraudulently failed to file a return, or filed the return late. The civil fraud penalty under IRC 6663 applies only if the IRS possesses clear and convincing evidence that the taxpayer reported an underpayment on his or her return attributable to fraud. Penalties should not be used as a bargaining tool.

(4) In non-filer cases, a criminal conviction for willful failure to file a Federal return under IRC 7203 collaterally estops a taxpayer from denying liability under IRC 6651(a), the delinquency addition to tax, in a civil case. The addition to tax for FFTF, however, is not automatic. Although a conviction under IRC 7203 does not collaterally estop a taxpayer from challenging the FFTF addition, the conviction further supports indications of fraud.

(5) If the non-filer is convicted under IRC 7201, the taxpayer is collaterally estopped from denying fraudulent intent in relation to the civil fraud penalty or the FFTF penalty. The taxpayer may, however, contest the amount of the underpayment supporting the civil fraud penalty determined by the IRS or the amount of the tax required to be shown on the return in connection with the determined FFTF penalty. Collateral estoppel for a conviction under IRC 7201 only applies to the year(s) of the conviction and the civil fraud penalty or FFTF penalty, not the tax liability.

(6) The mere fact of failing to file a return does not constitute sufficient evidence to sustain fraud. Overt acts of evasion must be identified to impose the FFTF penalty. In addition to the previously listed firm indications of fraud, the following examples can apply to failure to file cases:

1. Attempts by the taxpayer to conceal or transfer assets to evade collection of tax subsequently assessed;

2. Taxpayer furnishes a false W–4 to his employer; and/or

3. Taxpayer’s use of dummy business entities, bank accounts opened under assumed names and use of false taxpayer identification numbers in an attempt to conceal the source of income or identity of the owner.

Caution: For example, some marijuana businesses have created dummy business entities in an attempt to get a bank account, thereby hiding the true nature of their business.

(7) Area Counsel must provide written approval for non-assertion of the FFTF penalty under IRC 6651(f) if a taxpayer has been successfully prosecuted by the Department of Justice under any criminal statute for failing to file. If successful prosecution has not been obtained, non-assertion of the FFTF penalty will be at the discretion of the compliance group manager. Compliance group managers are encouraged to consult with their local FEA for assistance.