25.1.10. LB&I Fraud Procedures

(1) Mission. The mission of the Office of Fraud Enforcement (OFE) is to promote compliance through strengthening 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) The 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 provides additional guidance to Large Business and International (LB&I) employees.

(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, Office of Fraud Enforcement, Small Business/Self Employed (SB/SE).

(6) Program Owner. Office of Fraud Enforcement, Policy, SB/SE.

(7) Primary Stakeholders. The primary stakeholders are LB&I, CI and the OFE.

(1) The detection and deterrence of fraud is every compliance employee's responsibility and should be a top priority when discovered. The procedures prescribed in IRM 25.1.25.1 , Overview/Definitions, and IRM 25.1.2 , Recognizing and Developing Fraud, should be reviewed.

1. Recognizing and developing fraud requires a thorough determination of all the relevant facts and circumstances surrounding the potential fraud issues. This requires detailed interviews of all individuals who may possess first-hand knowledge. Examiners should follow the specific guidelines in IRM 4.10.3.3 for conducting all the necessary interviews in a timely manner.

2. When taxpayers and their employees, return preparers, bookkeepers, and other third parties do not voluntarily provide testimony and/or documents as requested, it may be necessary to issue summonses. Examiners should follow the specific guidelines in IRM 25.5 for issuing summonses in a timely manner.

(2) If the examiner suspects indicators of fraud while working a case, the examiner should discuss the case with their team manager. If the team manager agrees, then the examiner will request a consultation with an FEA. To request an FEA consultation, the examiner will submit a request through the Specialist Referral System (SRS). The link to the SRS is https://srs.web.irs.gov/default.aspx.

(3) LB&I Counsel established a counter-fraud working group to monitor fraud issues and to ensure consistency in fraud matters. LB&I Counsel will work with the teams and the FEAs to review and provide assistance on all criminal fraud referrals and cases involving development and assertion of the civil fraud penalty and/or the fraudulent failure to file penalty. LB&I Counsel involvement does not replace the requirement to contact and include the FEA.

(4) The Assistant Deputy Commissioner & Compliance Integration Division (ADCCI) senior program specialist within LB&I is responsible for program issues related to fraud. In addition, each geographic practice area within LB&I has designated a fraud coordinator to assist and act as a liaison for their industry.

(5) If the examiner, his/her manager, and the FEA agree that the potential for fraud exists, the examiner must prepare the Form 11661, Fraud Development Recommendation - Examination. The FEA comments and specific action plan is mandatory and must be included on the Form 11661 submitted for approval. See IRM 25.1.2.2(1), through IRM 25.1.2.2(4), Fraud Development Procedures.

(6) An approved Form 11661 places a case in Fraud Development status. Team managers must update Audit Information Management Systems (AIMS) to status code 17. Case development should continue in accordance with the FEAs Plan of Action. A case must not be placed in or out of fraud development status without consulting the FEA. If a disagreement exists on whether a case should be in fraud development status, contact the ADCCI senior program specialist for assistance.

(1) The examiner and team manager must sign Form 2797, Referral Report of Potential Criminal Fraud Cases, for referrals of privately-held entities or individuals. Referrals related to publicly-traded entities or any case deemed highly sensitive must additionally be coordinated with the ADCCI senior program specialist.. For additional information on criminal referrals see IRM 25.1.3, Criminal Referrals.

(1) Administrative cases remain with the team in AIMS status code 18 until either the CI investigation is completed, discontinued, or a grand jury investigation is approved. The cooperating agent may have full access to documents secured by CI during the course of the investigation. The referring agent may have full access to all documents secured by CI once the criminal investigation is complete or during the investigation with concurrence of the Supervisory Special Agent. See IRM 25.1.4.4.2, Duties and Responsibilities, for the role of the cooperating examiner in a joint administrative investigation.

(2) Quarterly conferences are critical to the effective management of cases referred to CI. CI retains primary responsibility to schedule these meetings every 90 days commencing after the referral is accepted. Team Managers should assure these meetings are held timely and documented by CI as required on Form 6084, Quarterly Joint Workplan and Conference Memorandum. Face-to-face or conference calls are preferred. E-mail only updates are not recommended. See IRM 25.1.3.4(5) , Accepted Criminal Referrals, for more information on quarterly conferences involving a cooperating agent in an administrative joint investigation.

(3) Quarterly conferences are also required for all accepted criminal referrals where the referring revenue agent is not asked to participate as the cooperating agent. In this scenario, the mandatory quarterly conferences are designed to inform the referring team of the updated investigation status. All documents secured by CI and information learned during the course of the investigation may be freely shared with the team during an administrative investigation. For additional information on administrative joint investigations see IRM 25.1.4, Administrative Joint Investigations.

(1) Grand jury investigations can be very complex and involve Federal Rules of Criminal Procedure, Rule 6(e). When an examiner is going to be involved in a grand jury investigation, it is highly recommended that the team manager seek immediate advice from the ADCCI senior program specialist. See IRM 25.1.5, Grand Jury Investigations.

(2) LB&I employees will be assigned to grand jury cases and placed on the Grand Jury list when requested by CI. LB&I team managers should not be placed on the grand jury list.

(3) If the case is grand jury, all quarterly conference participants must be on the Rule 6(e) list. See IRM 25.1.5.4, Cooperating Grand Jury Examiner/Revenue Officer Procedures, for more information on quarterly conferences and the role of a cooperating examiner in the grand jury investigation.

(4) If the LB&I team is examining a related case or is participating in a parallel civil investigation, a separate quarterly meeting will be required with that team as well. No grand jury information can be discussed; however, issues such as the status of the case, statutes, or timing of various activities may be discussed without violating grand jury rules. Examples of status updates may include the following:

1. The special agent (SA) is writing the special agent's report (SAR);

2. The SA is discontinuing the case;

3. The case is being forwarded to Department of Justice (DOJ) - Tax or the Assistant United States Attorneys (AUSAs) office; or

4. The case is going to trial, etc.

(1) When a joint administrative investigation is completed and CI recommends criminal prosecution, LB&I teams must forward the case to Technical Services using AIMS status code 21. Technical Services will update the case to AIMS status code 32 and hold the case in fraud suspense until the criminal case is completed. See IRM 25.1.4.4.11, Fraud Suspense, for procedures for general fraud suspense.

(2) CI may request a grand jury investigation at any point in the investigation. If a grand jury investigation is approved, it is critical that LB&I suspend all actions unless a parallel investigation is approved. See IRM 25.1.10.8 below. The LB&I team must forward the case to Technical Services using AIMS status code 21. Technical Services will update the case to AIMS status code 36 and hold the case in fraud suspense until the criminal case is completed. See IRM 25.1.5.3, Grand Jury Suspense, for procedures for grand jury suspense.

(3) All questions regarding suspense issues should be discussed with the respective geographic practice area functional fraud coordinator.

(4) The examiner may contact the Technical Services Fraud and Grand Jury Suspense Coordinator http://mysbse.web.irs.gov/examination/tip/fraud/contacts/11888.aspx for additional guidance on preparing the case for transfer to suspense.

(1) Civil fraud penalties will be asserted when there is clear and convincing evidence establishing that some part of the underpayment of tax is due to fraud. A civil fraud penalty may be developed based on facts and circumstances from a civil examination, a case initiated by CI, or from a post prosecution case.

(2) The FEA and LB&I Counsel should work jointly with the team to develop and ensure that both the fraud penalty narrative and the direct and circumstantial evidence does, in fact, substantiate the assertion of the civil fraud and/or fraudulent failure to file penalty. The FEA will indicate his/her concurrence with the assertion of the civil fraud penalty and/or fraudulent failure to file penalty on Form 11661. This concurrence is mandatory.

(3) Cases developed for civil fraud must be in AIMS status code 17. Case closing requires:

1. Form 5344, Examination Closing Record, to capture the following information in item 38:

• Enter "F" if criminal prosecution has been successfully concluded;

• Enter "C" if the 75% fraud penalty was asserted under IRC 6663; or,

• Enter "B" if both apply.

2. Form 3198, Special Handling Notice, must be used for routing of civil fraud penalty cases. The revenue agent identifies the applicable penalty code section and computed penalty amount for each tax period on this form and provides any special closing instructions for Centralized Case Processing.

(4) LB&I Counsel must approve the civil fraud penalty and/or fraudulent failure to file penalty prior to issuance of a statutory notice of deficiency. If a statutory notice of deficiency is anticipated, early involvement of LB&I Counsel is recommended. For additional information on civil fraud see IRM 25.1.6, Civil Fraud.

(1) LB&I cases typically involve many entities and individuals. The purpose of a parallel investigation is to balance both the civil and criminal aspects of a case under criminal investigation. The team manager and/or examiner should discuss the potential parallel investigation with the ADCCI senior program specialist and LB&I Counsel. LB&I team managers must discuss with CI the possibility of continuing civil activity on related taxpayers and/or tax years that does not adversely impact the criminal proceeding. For additional information on parallel investigations see IRM 25.1.4.4.6, Parallel Investigations, and Policy Statement (Formerly P-4-84) located at IRM 1.2.1.5.11 .

(1) Contact the ADCCI senior program specialist for guidance and procedures for any case received with criminal restitution assessed.

(2) Refer also to IRM 25.26, Restitution, for additional information.

(1) CI initiates many investigations during each year. In addition, the DOJ and US Attorney’s office will request assistance for their cases. This may require LB&I agents to cease all civil activity on an open examination, request a parallel investigation, or provide technical tax law assistance when requested.

(2) If LB&I managers receive a request from CI to cease civil activity on a taxpayer that has not been referred, cease all contact as requested. Contact the ADCCI senior program specialist immediately for additional guidance.

(3) If an LB&I manager receives a request for a cooperating agent for a CI initiated case (non-referral), then:

1. For a domestic case he/she should advise CI to send the request via Form 6544 to the ADCCI senior program specialist for assignment; and,

2. For an international case the request for assistance should be emailed to lbi.iic.requests.and.leads.from.ci@irs.gov.

(1) Potential third party examinations that have indications of fraud should be secured for examination by the same LB&I team. If the identified third party is located outside the team's geographical area, or it is determined that the examination should be assigned to another operating division, prepare Form 5346, Examination Information Report, and forward it to:
LB&I Ogden PSP - Attention: LB&I Info Item Classifier M/S 4912
1973 N. Rulon White Blvd
Ogden, UT 84404