25.1.3. Criminal Referrals

(1) Mission. The mission of the Office of Fraud Enforcement (OFE) is to promote compliance by strengthening the IRS’ response to fraud and 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 section discusses the purpose and processing of criminal fraud referrals. An important part of this process is the compliance employee's ability to identify potential criminal fraud.

(4) Audience. This handbook is a comprehensive guide for IRS employees servicewide in the recognition and development of potential fraud issues; referrals for criminal fraud; duties and responsibilities in joint investigations; civil fraud cases; and other related fraud issues.

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

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

(7) Primary Stakeholders. The primary stakeholders are SB/SE, LB&I, TE/GE and CI.

(1) The OFE is a servicewide program which has four groups of fraud enforcement advisors (FEAs). The groups are comprised of revenue agents and revenue officers who are located strategically throughout the country to assist with the development of fraud. A list of the groups, FEA group managers and the FEAs can be found on the Fraud Development Knowledge Base website at Fraud Development Knowledge Base - Fraud Contacts - GrpByChapter (sharepoint.com)

(2) The FEA will be consulted in all cases involving potential criminal fraud, as well as those cases that have potential for a civil fraud penalty. The FEA serves as a resource and liaison to civil compliance employees in all operating divisions. The FEA is available to assist in civil fraud investigations and offer advice on matters concerning tax fraud. Upon initial recognition of indicators of fraud, the employee will discuss the case at the earliest possible opportunity with their manager. If the compliance group manager concurs, the FEA will be contacted immediately; through the Specialist Referral System (SRS), and both the compliance group manager and FEA will provide guidance to the compliance employee on how to proceed. Compliance managers will encourage the early involvement of the FEA in all potential fraud cases.

(3) A comment regarding consideration of fraud must be documented by all compliance examination field operations employees on cases involving adjustments to taxable income and/or credits resulting in an underpayment of tax due.

(4) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(5) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(6) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(1) If first indicators of fraud are suspected and the compliance group manager concurs, the FEA will be contacted immediately through the Specialist Referral System (SRS).

(2) The SRS is located at: https://srs.web.irs.gov/default.aspx.

(3) If after consultation with the FEA, it is determined that a potential fraud case has firm indications of fraud/willfulness and meets criminal criteria, the compliance employee will suspend the examination/collection activity without disclosing to the taxpayer or representative the reason for the suspension. When the taxpayer asks if a fraud referral is being considered or whether CI is involved, the examiner or revenue officer must not give a false or deceitful response. Guidance from the courts provides that compliance employees:

• May decline to answer questions about criminal potential

• May not deceive taxpayers when asked specifically about the character or nature of an investigation

• Are not required to initiate disclosure about developing indicators of fraud or a potential referral to CI, or

• May simply advise that when firm indicators of fraud are present, a referral to CI is required

(4) Approval from Automatic Exchange of Information (AEOI) must be secured prior to submission of any suit recommendation or criminal fraud referral containing any Form 8966, FATCA Report, information. The AEOI office may request consent from the host country to use the Form 8966, FATCA Report, or coordinate with the Office of Associate Chief Counsel (International) in connection with civil litigation or a criminal proceeding. Please see IRM 4.60.1.10.3, Access to AEOI Data, for additional information.

(5) The compliance employee will complete the current version of Form 2797 (accessed through the Forms Repository or Integrated Collection System (ICS)). Electronic Publishing provides a fillable form that can be downloaded, saved as a PDF file, edited and electronically transmitted via Microsoft Outlook/Secured Messaging. The FEA is available to assist the compliance employee with preparation of Form 2797.

(6) Preparation of Form 2797

1. The referral will be a detailed presentation of the facts that establish firm indications of fraud/willfulness, including, but not limited to:

Facts:
A description of the firm indications/willfulness [defined in IRM 25.1.1.4(2), Affirmative Acts (Firm Indications) of Fraud ];
Taxpayer’s explanation of the firm indications/willfulness;
The estimated criminal tax liability; and
The method of proof used for income verification.

2. If the fraudulent scheme involves multiple parties, the most culpable individual will be listed in items 1a and 1b. Related individuals or entities (including the person identified in items 1a and 1b) must be listed in item 1c. All known parties involved in the fraudulent scheme (including the one identified in items 1a and 1b) will be listed in item 1c.

   Note: Spouses should not be listed together in a single item.

3. If the referral is a joint referral from multiple sources, the FEA group manager will ensure that each operating division and/or business unit is properly identified and credited for the referral. TE/GE should be notified of any potential criminal investigation that may include a TE/GE type entity.

4. No work papers or documents are required with the referral. If attachments are necessary to enhance the referral, they must be embedded in the Form 2797 as a PDF file. The initial evaluative conference, referred to as the 10-day conference, between the referring compliance employee, the FEA and the evaluating special agent (SA) allows the compliance employee the opportunity to explain the case in detail and address any questions regarding the potential criminal violations. CI will be provided access to all work papers and documents needed to effectively evaluate the referral during the initial conference.

(7) The compliance employee will complete the Form 2797 and enter their name and grade, and enter the date and forward the referral Form 2797 via secured e-mail to the compliance employee's group manager.

(8) The compliance employee's group manager will review the referral and if in agreement, will ensure that the proper Area/Territory/Group is entered, approve the referral and forward it via secured e-mail to the FEA for consideration. The compliance employee's group manager will retain a copy of the referral for the case file.

(9) The FEA will review the referral and if in agreement, will approve the referral and prepare a one-page narrative (used to describe additional facts and/or the fraud development process), if necessary, embed the narrative in the Form 2797 PDF file, and forward it via secured e-mail to the FEA group manager for consideration.

(10) The FEA group manager will review the referral and if in agreement, will approve the referral and enter the FEA Management Control Number and forward it via secure e-mail to the appropriate CI Field Office.

(1) Within 10 workdays of receipt of the referral, the SA assigned to evaluate the referral will identify the subject (individual or entity under criminal investigation consideration) as the primary investigation (PI), assign a PI number to the case and set up the initial conference. At the 10-day evaluative conference, the referring compliance employee, their group manager, the evaluating SA, their supervisory special agent (SSA) and the FEA will meet to discuss the referral and review tax returns, evidence gathered to support the alleged offense, criminal tax computations, etc. Also, the following issues should be discussed at the initial conference:

1. Verification of income and/or assets

2. Explanations offered by the taxpayer, the taxpayer's representative, and/or the return preparer concerning the alleged offense

3. Whether returns were solicited and attempts were made to resolve the civil issues, and prior IRS action(s) involving a similar alleged offense and

4. Observations about the age, health (physical and mental), education and occupation of the taxpayer

(2) Within 30 workdays of receipt of the referral, the same individuals will meet again (disposition conference) to discuss CI’s decision to accept or decline the referral. CI is required to provide written feedback to the referring compliance employee, as to their decision (see IRM 25.1.3.5 and IRM 25.1.3.6). Area Counsel will be invited to offer legal advice, if it is deemed necessary. Also, the transfer of original tax returns, the need for a cooperating compliance employee, and civil actions concerning statute and prior/subsequent/related return consideration need to be discussed.

(3) The FEA will monitor the conference dates and response obligations to ensure all actions occur in a timely manner.

(4) The decision to accept or decline a referral may be extended by written agreement of the appropriate field territory manager (TM). The agreement should specify the reason(s) for the request (e.g., delay in receiving original tax returns or an opinion from Counsel) and the date the referring office can expect a determination.

(1) If CI accepts the referral, the PI will be elevated as a subject criminal investigation (SCI). CI will provide feedback by completing the "For Criminal Investigation Use Only" portion of item 1c, item 10 and item 11 of Form 2797 and return it via secure e-mail to the FEA group manager.

(2) CI is responsible for placing the TC 914 controls in the Master File record. Once the referral is accepted, the CI Special Agent and SSA will discuss the entity and modules associated with the referral with the FEA to ensure the FEA and referring group are aware what Master File records and tax years controls will be placed upon. CI will make the final decision regarding the necessary 914 controls based on the needs of the investigation and the necessity to protect the criminal case.

(3) The FEA group manager will forward the accepted referral via secure e-mail to the referring FEA. The FEA will send the accepted referral via secure e-mail to the referring compliance employee and their group manager. If the referral was initiated by Examination, the examiner/group manager will update the case to AIMS Status Code 18. If the referral originated from Collection, the revenue officer/group manager will close the case when the TC 914 is posted to the module, if no further action is required (see IRM 25.1.8.10, Collection Case Disposition). If further action is required, the revenue officer should open an Other Investigation (OI). See IRM 25.1.8.10(7).

(4) The SA 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 returns (preparer) under criminal investigation. If a memorandum is needed, the following should be included:

1. The date of each contact the referring compliance employee had with the taxpayer, the taxpayer’s representative, and/or the preparer; and

2. A summary of what took place during each contact, any explanations offered concerning the alleged offense, and/or any action that could be construed as solicitation, condonation, or an attempt at civil settlement.

(5) IRM 25.1.4, Administrative Joint Investigation, provides specific guidance to compliance employees assigned to a joint investigation case as a cooperating compliance employee.

1. A joint investigation case can originate from one of two sources:

Sources:
A compliance initiated criminal fraud referral (submission of Form 2797), or
A CI initiated criminal investigation

2. There are two types of joint investigations, administrative or non-Grand Jury (referred by CI as a "Prosecution Recommendation" case) and Grand Jury (referred by CI as a "Further Investigation") case. Among the procedural distinctions are the roles and requirements that apply to mandatory quarterly (four-way) conferences.

Roles:
Specific guidance for the compliance employee cooperating in administrative joint investigations is found in IRM 25.1.4, Administrative Joint Investigation.
Specific guidance for the compliance employee cooperating in Grand Jury investigations is found in IRM 25.1.5, Grand Jury Investigations.

(6) All criminal investigations (administrative and Grand Jury) involving cooperating compliance employees (joint investigations) are subject to mandatory quarterly (four-way) conferences. Quarterly conferences are also required for all accepted criminal referrals (administrative and Grand Jury) in which a compliance employee is not asked to participate (non-joint investigations). The mandatory quarterly conferences are designed to inform the referring compliance function of the updated investigation status. A status update for this purpose could include:

• The SA is writing the special agent’s report (SAR).

• The case is being discontinued.

• The case has been forwarded to Department of Justice (DOJ) Tax or the Assistant United States Attorneys (AUSAs) office.

• The case is going to trial. etc.

(7) The SSA and the manager of the cooperating examiner/officer should exercise sufficient control and follow-up to ensure the conferences are conducted. The SSA should contact the compliance group manager to schedule the required quarterly conference. If the SSA has not contacted the compliance group manager to schedule the mandatory quarterly conference when one is due, the compliance group manager may also contact the SA to schedule the quarterly conference. However, CI has primary responsibility for scheduling the mandatory quarterly conference. Quarterly conferences are not required if the compliance employee has been engaged solely to review and validate the Special Agent’s tax computation.

1. The purpose of the quarterly conference is to review the status of the investigation and plan actions required of the cooperating compliance employee and the SA. Appropriate follow-up should be done periodically to ensure productive quarterly meetings are being held.

2. The quarterly conference should include the SSA, SA, the compliance group manager and the cooperating compliance employee. When necessary, the FEA will be invited to attend the quarterly conference. The inclusion of the FEA does not override the compliance group manager's responsibility for case and resource oversight.

3. Form 6084, Quarterly Joint Workplan and Conference Memorandum, is used to document the conference discussion. The form is completed by the SSA and should include the following information:

Form 6084 information:
Status/progress of the investigation;
Investigative obstacles (technical issues, noteworthy defenses);
Planned activities of both the SA and the cooperating examiner/revenue officer;
Discussions of civil actions (statute extensions, statutory notices of deficiency, prior/subsequent year and related return considerations); and
Coordination of related investigations with other field offices (venue issues, similar investigative agendas/plans).

Note: A copy of the completed form must be issued to all attendees.

(8) If a taxpayer files a delinquent or amended return during a joint investigation (administrative or Grand Jury), the assigned cooperating compliance employee must discuss such filing with the assigned SA. The assigned SA must provide written guidance to the cooperating compliance employee regarding whether or not any tax shown on such return should be immediately assessed. If the SA determines that such an assessment may jeopardize the criminal case, then the SA should advise the cooperating compliance employee to not make the assessment at that time. At a minimum, however, the cooperating compliance employee must update the statute for assessment on AIMS to reflect receipt of the delinquent return and ensure transaction codes are reflected on Master File to reflect the receipt of an amended and/or delinquent return. See IRM 4.4.9, Delinquent and Substitute for Return Processing, and IRM 4.4.21, Non-Examined Closures and Deleting AIMS Records, for additional guidance on processing amended and/or delinquent returns. When there is no cooperating compliance employee assigned, then the assigned SA must ensure that the transaction codes are reflected on Master File to reflect the receipt of an amended and/or delinquent return, and to ensure the statute is properly reflected.

(9) The SA must advise civil compliance functions if the case has been referred/accepted by the DOJ for prosecution (referred by CI as a "Prosecution Recommendation" case) or if the case is the subject of a Grand Jury (referred by CI as a "Further Investigation" case). In either case, CI must submit a Notice of Department of Justice Referral memorandum to the appropriate civil compliance functions advising of such. The memorandum will serve as civil compliance function's supporting documentation to submit the case to Technical Services for suspense, or to the appropriate TE/GE suspense unit. Other civil business operating divisions will forward the case to their appropriate suspense unit.

(1) If the referral is declined, CI will complete items 9 through 11 of Form 2797 and return it to the FEA group manager via secure e-mail along with a memorandum explaining the reason(s) for the declination.

(2) The FEA group manager will forward via secure e-mail the declined referral to the referring FEA. The FEA will send the declined referral via secure e-mail to the referring compliance employee and their group manager. The referring compliance employee will resume the examination/collection activity once notification of the declination is received. The compliance employee and FEA will amend the plan of action (Form 11661, Fraud Development Recommendation-Examination, or Form 11661-A, Fraud Development Recommendation-Collection), which will include a schedule of future discussions, if warranted. If additional (new) firm indications of fraud develop, the case may again be referred to CI for criminal investigation consideration, as outlined in IRM 25.1.3.3.

(3) If a referral is declined and the FEA, in conjunction with the referring compliance employee and compliance group manager, disagrees with the reasoning behind the declination, it is the FEA’s responsibility to elevate the issue to the FEA group manager. If the FEA group manager concurs with the disagreement, they will consult with the appropriate TM/equivalent and request that the special agent in charge (SAC)/assistant special agent in charge (ASAC) reconsider the referral. If an agreement still cannot be reached, the matter will be elevated to the area director/equivalent and the CI Director of Field Operations for resolution.

(4) The compliance employee should remove the case from fraud development status if no further actions related to criminal or civil fraud development are anticipated. For Collection cases, the TC 971 AC 281 should be reversed and/or the Sub Code 910 should be removed. See IRM 25.1.8.8(4), Aging of Collection Fraud Cases, for more information. Examination cases will be returned to AIMS Status Code 12 or other appropriate status code if civil fraud (Civil Fraud Penalty and/or Fraudulent Failure to File Penalty) is not being pursued. See IRM 25.1.6.2, Procedures; IRM 25.1.7.7, Civil Closure and IRM 25.1.7.7.1, Assessment Procedure for the Fraudulent Failure to File (FFTF) Penalty, for additional information.

(1) All potential criminal fraud referrals regarding a return preparer should be discussed with the SB/SE return preparer coordinator (RPC) Exam Procedures Knowledge Base - PSP - Return Preparer Coordinators (RPC’s) and the FEA. For cases involving any Tax Exempt/Government Entities (TE/GE) related entity (Employee Plans, Exempt Organizations, Indian Tribal governments, Federal, State or Local governments, or Tax Exempt Bonds) a discussion with the TE/GE Fraud Specialist and/or Functional Fraud Subject Matter Expert (SME) should take place. For cases involving LB&I preparers/tax shelter promoters, contact the LB&I Senior Program Fraud Analyst for coordination of various resources available.

(2) Form 2797 will be prepared, as described in IRM 25.1.3.3, when the compliance group manager and FEA agree that a return preparer is involved in criminal fraud. The compliance group manager will retain a copy of Form 2797 for the return preparer case file and the FEA will forward a copy of the Form 2797 via secure e-mail to the SB/SE RPC or the TE/GE RPC if the returns are TE/GE-related. Notification will also be sent to TE/GE via e-mail to *TE/GE-EO-FIU. See IRM 4.1.10, Planning and Special Programs - Return Preparer Program Coordinator, for procedures relating to preparer action cases (PACs). If it is determined that the return preparer is not involved in criminal fraud, the Area RPC should be contacted for consideration of a PAC.

(3) If the return preparer/promoter scheme involves multiple entities/individuals, only one Form 2797 should be prepared. The individual or legal entity that is considered most culpable will be identified in items 1a and 1b and all entities and/or individuals, including the individual or legal entity identified in items 1a and 1b, will be listed in item 1c. A separate Form 2797 is no longer prepared for each type of tax involved or dissimilar fraudulent acts. The Form 2797 should give specific details relating to the apparent fraudulent act(s) including:

• Names of the taxpayers (i.e. clients of the return preparer/promoter);

• Taxpayer identification numbers (TINs);

• Tax form numbers;

• Amount of the adjustment for each client of the return preparer/promoter; and

• Resulting deficiencies for each client of the return preparer/promoter.

(4) The examiner should retain a copy of each taxpayer's report of examination and relevant work papers so that the IRC 6694 civil return preparer penalty can be pursued after disposition of the criminal case.

(5) See IRM 25.1.2.9, Return Preparer Fraud, for additional guidance.