5.17.12. Investigations and Reports

(1) This section illustrates the type of investigation to be performed upon receipt of an account for collection which may require a legal proceeding to assist in the collection of the account and the type of report to be prepared.

(2) Purpose: This section is designed to aid the revenue officer in securing all the necessary facts by obtaining testimony and documentary evidence. Provided in this IRM are general characteristics and procedures followed in instituting and carrying out a suit. Common types of suits commenced by the United States are discussed in IRM 5.17.4, Suits by the United States. The principal types of suits that may be brought against the United States which revenue officers may encounter are discussed in IRM 5.17.5, Suits Against the United States.

(3) Audience: This IRM is used by Collection employees developing suit recommendations or responding to suits against the IRS. Primarily Collection Advisory staff or Field Collection Revenue Officers use this IRM when assisting Counsel and the Department of Justice with defense actions related to these types of suits.

(4) Policy Owner: Director, Collection Policy. Collection Policy is an organization under Small Business/Sell-Employed Division (SBSE), Collection.

(5) Program Owner: Collection Policy is responsible for overseeing the guidance for the Legal Reference Guide for Revenue Officers and in particular this IRM on Investigations and Reports.

(6) Primary Stakeholders: The primary stakeholders are Chief Counsel and Department of Justice attorneys.

(7) Program Goals: The Legal Reference Guide for Revenue Officers is intended to make available to revenue officers and other personnel engaged in collection efforts the fundamentals of legal knowledge needed in their daily activities.

(8) See also IRM 25.3, Litigation and Judgments.

(1) A thorough investigation requires the following:

• Familiarity with applicable sections of IRM 5.17, Legal Reference Guide for Revenue Officers, IRM 25.3, Litigation and Judgments, and other applicable IRM provisions,

• A working familiarity with basic theories and principles of both federal and state law,

• Some knowledge of the law of evidence,

• Knowledge of the manner in which business and financial transactions occur and are conducted, and

• Full development of facts.

(2) Be impartial and thorough in conducting the investigation. Thorough development of facts may enable the United States to avoid unnecessary litigation and to anticipate and be prepared for the taxpayer's and third parties' defenses. Full development of facts may enable Area Counsel or the Department of Justice to advance other theories to support a position.

(1) Review existing material in the file to determine the issues in the case and those issues that, though not raised, are implicated by the information in the file. Inquire about the existence of other files not in your possession, such as Examination, Appeals, and Criminal Investigation files. The discovery of other files or material might aid substantially in narrowing or enlarging issues, providing leads and establishing a complete background to the case.

(2) Examine the file, or files, to determine the facts that already have been developed, and whether further development is required. Determine the extent to which such facts could be proven in a court of law by evidence contained in the files.

(3) Ascertain contentions or defenses of the taxpayer and other parties to the contemplated legal action and make a list of those facts relied upon by such parties.

(1) Review the file and determine the facts that still need to be established and the evidence (oral and documentary) that needs to be secured. Develop a case strategy that includes the best sources and methods to obtain the information and the most effective order in which to secure it.

(2) Oral evidence consists of testimony that is given by word of mouth. Documentary evidence includes, but is not limited to, the following:

• papers

• letters

• books of account

• canceled checks

• official records

• deeds

• contracts

• maps

• photographs

• computer disks and computer files

• electronic messages, including emails, texts, and direct messages

(1) Voluntary

1. If possible, evidence should be obtained voluntarily. Make no promise that the person you are interviewing (the "witness") will or will not be called to testify as a witness in a court case. If asked, just reply that the witness may or may not be called to testify.

2. In obtaining evidence, whether testimonial or documentary, from persons other than the taxpayer, follow all statutory requirements and internal guidelines concerning third party contacts to comply with IRC 7602(c). See IRM 25.27.1, Third Party Contact Program.

(2) Use of Summons

1. If the witness does not voluntarily give oral testimony or documentary evidence, use the administrative summons to obtain the necessary testimony or documents. If the case is already pending in court, clear the use of the summons with Area Counsel and/or DOJ. See IRM 5.17.6, Summonses, for a discussion on the proper use of a summons and related problems.

2. In obtaining testimonial evidence from witnesses, it is desirable that the initial conversation be informal so that the witness will feel at ease. In the event of an obviously recalcitrant witness, place the witness under oath to take testimony.

(3) Taking Testimony:

1. The witness should respond to the questions in their own words.

2. Let the witness do most of the talking.

3. Avoid having the witness respond "yes" or "no."

4. Do not ask leading questions, i.e., questions that suggest an answer in the witness's mind.

5. Witnesses are sometimes forgetful and not entirely accurate. Accordingly, solicit the testimony of other persons or documentary evidence to corroborate the testimony of the witness.

6. Establish that the witness has personal knowledge of the facts with respect to which the witness is testifying. Otherwise, the testimony may not be admissible as evidence in a court of law.

(4) Witness Credibility: Consider the credibility of the witness.Questions to Address Witness Credibility

(5) Giving Testimony: See -

• IRM 10.5.7.9(2), Pseudonym Holders, the Courts and Legal Matters,

• IRM 9.6.4, Trial,

• CCDM 35.6.2.3, Etiquette in Addressing the Court and Courtroom Decorum, and

• CCDM 35.6.2.11, Direct Examination and Cross-Examination of Witnesses

(6) The Federal Rules of Evidence (FRE) as amended effective December 1,2022 are rules governing admissibility of evidence in the United States Federal court system. While the FRE apply only in Federal courts, a majority of states have adopted similar or identical rules for use in their respective courts. Evidence is considered relevant if it tends to make any fact that is of consequence in the case more or less likely than it would be without the evidence. Relevant evidence is generally admissible. Evidence which is not relevant is inadmissible. See FRE Article IV, Rules 401 and 402. However, some relevant evidence may be inadmissible. See FRE Article IV, Rules 403. Generally, only evidence relevant to the case is admitted before the court.

(7) Evidence and case documentation become subject to a litigation hold when litigation is pursued. Electronically Stored Information (ESI) is part of any litigation hold. Review IRM 25.3.1.7, Preserving Electronically Stored Information In Litigation Cases, for information on ESI and Chief Counsel’s, Litigation Hold site to prepare for a litigation hold.

(1) Record any statement by a party against the party's own interest, because the admission of an unfavorable fact will be of value in proving the truth of the fact.

(2) Hearsay (i.e., FRE Article VIII) is evidence that does not come from the personal knowledge of the witness, but from the mere repetition of what the witness has heard said by others, or what others have told the witness. Exercise care to insure that the witness has actual knowledge of the facts stated. Hearsay generally may not be used as evidence, but hearsay may lead you to the witness with actual knowledge of the facts. See also FRE Article VIII, Rule 803, Exceptions to the Rule Against Hearsay.

(1) Make a written memorandum of an interview immediately thereafter, even though it does not appear that the person will be called as a witness or that the information will be of any immediate value.

(2) A formal affidavit (notarized) containing a complete summary of the desired information may be solicited. For example, if there is reason to believe that the witness might change the testimony at a later date, request the witness to give a formal affidavit.

(3) If the witness is unwilling to give a formal affidavit, attempt to obtain the signature of the witness on a typed or handwritten summary of the desired information.

(4) If the witness is unwilling to sign a statement, consider using an administrative summons and having a stenographer prepare a verbatim transcript of the questioning.

(5) The interview may also be recorded.

(1) Obtain the originals of documents whenever possible. If not available, make photocopies of the originals. In all cases, show the source from which the document was obtained. Obtain necessary documents at the outset, removing the possibility that they might be later lost or otherwise unavailable. Including significant items of evidence such as civil penalty approvals (e.g. Form 8278 or other applicable approval document for IRC 6751 compliance).

(2) Consider the authenticity of documents. If there are circumstances that raise a doubt as to authenticity, Criminal Investigation may be of assistance.

(3) Verify information in documents. When a mortgage, deed, assignment, conditional sales contract, or other security device is a material factor in the case, verify the alleged facts on the face of any such instrument. Do not rely on information provided in a letter, by telephone, or orally. Examine the document itself.

(4) Determine whether all filing and recording requirements of state law have been satisfied that are necessary to perfect the document against third parties. Carefully scrutinize family transactions to determine whether consideration actually passed. When the outstanding balance on a mortgage remains unchanged over a period of time, it could mean that it is a sham.

(5) Whenever possible, secure certified copies of documentary evidence. Any internal IRS transcript or other document can be certified as well. To preserve their value as self-admitting evidence, certified document copies must not be marred, defaced, or altered in any way.

(1) Public Records — Public records such as copies of mortgages or assignments, deeds, or conditional sales contracts, may be obtained from the county recorder or other appropriate officer with whom they are required to be filed under state recording statutes. If the taxpayer, or other party, has testified in any court regarding the transaction in question, a certified copy of the relevant portion of the transcript may be desirable. If the taxpayer is a corporation, the files of the state custodian of corporate records may provide valuable information.

(2) Within the IRS — Area Counsel or Department of Justice may, request special agents' or revenue agents' reports, the taxpayer's income, estate, gift, or employment tax returns for prior years, tax returns of related entities or parties, trust fund recovery penalty files, miscellaneous civil penalty approvals (e.g. Form 8278 or other applicable approval document for IRC 6751 compliance), and other records in certain circumstances. The originals of these documents may be needed for litigation where the underlying liability is challenged or is the result of a substitute for return process. Where there are no complications, the certified transcript Form 4340, Certificates of Assessments and Payments, is acceptable documentation for internal data sources.

(3) Other Federal and State Agencies — State and Federal agencies such as the State Insurance Commissioner, the Small Business Administration, and the State or Federal Securities and Exchange Commission may have information of a non-public nature that may be of assistance.

(4) Commercial Institutions — Life insurance companies may provide copies of policies; banks may provide canceled checks in some cases or transcripts of account; and loan companies or loan departments of banks may provide copies of financial statements prepared by the taxpayer.

(1) Probability of Litigating the Merits — If suits for judgment are recommended, taxpayers may deny liability for the taxes involved. Anticipate such arguments at an early stage and take steps to obtain the original tax returns, revenue agents' reports, and other assessment related files for the account modules in question to avoid their destruction. Ensure that Advisory, Area Counsel, and DOJ are aware that these types of administrative files are available upon request. Discuss the probability of litigation on the merits in the suit recommendation.

(2) Previous Court Litigation and Appeals Settlements — Often the liability in question has been determined in the IRS' favor by proceedings in the Tax Court, by the allowance of tax claims in bankruptcy and receivership proceedings, or by other court action. In such cases, the taxpayer may not contest the case on the merits again. Similarly, if a case has been settled by mutual concessions in Appeals, the taxpayer may be precluded from raising the merits. (See IRM 8.6.4.3, Agreements Forms Secured in Appeals Cases). Make reference to any court decisions or settlements and include copies of any such decisions or settlement agreements, if possible, in the suit recommendation.

(3) Collectibility of the Judgment — Discuss the taxpayer's earning power, age, health, business connections, marital status, dependents, and the possibility of inheriting or acquiring assets from others.

(4) For an example of a suit to reduce claims to judgment see Knowledge Management Suit Forms Page under Related Forms and Documents click either option located there to open the page Suits - Resources/Examples.

(1) Fraudulent Conveyance. The DOJ, on behalf of the IRS, may bring a fraudulent transfer action to set aside the transfer, or in some instances, to obtain a judgment of liability against the transferee.

1. State law. Fraudulent conveyance laws were initially developed by state courts. That common law is reflected now in state statutes based on the Uniform Fraudulent Conveyance Act (UFCA) (proposed in 1918) and the Uniform Fraudulent Transfer Act(UFTA) (proposed in 1984). The liability under these laws is termed "in equity" because of the common law origin. Most states have enacted statutes based on the UFTA. There are two kinds of fraudulent conveyances that may result in liability “in equity”: those effected though constructive fraud and those effected though actual fraud. See IRM 5.17.12.11, at (2) and (3), below, respectively. The elements of an action vary state by state even if a statute is based on a uniform act: e.g., a state may change an element provided in the uniform act or retain an element of the common law in its statute. A state might continue to allow an action based on the common law and if so precedent under that common law may make it a preferred alternative to an action based on a statute.

2. Federal law. The Federal Debt Collection Procedures Act of 1990 (FDCPA), 28 U.S.C. 3001 et seq., provides a federal cause of action for fraudulent transfers. Provisions regarding fraudulent transfers involving debts are at 28 U.S.C. 3301-3308 (Subchapter D). Section 28 U.S.C. 3304 provides a remedy similar that provided by the UFTA. For debts arising before a transfer, see 28 U.S.C. 3304(a) (compare constructive fraud under UFTA), and for transfers without regard to the date the debt arose, see 3304(b) (compare actual fraud under UFTA). The FDCPA should complement state procedures; but, if not, the Act preempts any state law that is inconsistent with the Act; see 28 U.S.C. 3003(d).

(2) Constructive Fraud — Constructive fraud occurs when a taxpayer (or other person liable for the tax) makes a conveyance and such taxpayer or person is or will be thereby rendered insolvent when the conveyance is made without adequate consideration. Discuss in detail the facts pertaining to:

• The transfer of assets made when the transferor was liable for the tax. While tax liability arises at the end of the tax year, a transfer made during the tax year may give rise to a contingent tax liability at the time of the transfer in some jurisdictions,

• The insolvency of the taxpayer as of the date of transfer, or immediately thereafter,

• The absence of reasonably equivalent value or fair consideration (terminology depends on the statute) in exchange for the transfer, and

• The value of the assets (fair market value) on the date of transfer, which generally determines the limits of the transferee liability.

(3) Actual Fraud - Transfer With Actual Intent To Hinder, Delay or Defraud Creditors —- The proof must be clear and convincing to set aside a conveyance on the ground of actual intent to defraud the government. Usually it is impossible to prove actual fraudulent intent by direct evidence because the facts relating to the fraudulent transfer are within the knowledge of the taxpayer or other transferor. Proof of the fraud must, therefore, usually come by inference from circumstances surrounding the transaction and the relationship and interest of the parties thereto. To establish actual intent to defraud creditors, thoroughly analyze and discuss the facts and evidence relating to:

1. Knowledge of the transferor's intent by the transferee, the parties involved, and their relationship,

2. The property transferred or obligation incurred, the value of the property at the time of the transfer and its current value, and

3. Competing claims to the property by bona fide lien holders or security holders.

(4) Transferee and Other Third Party Liability. State law may provide that in a particular situation the transferor’s tax liability is directly imposed on the transferee. The imposition of liability under these laws is termed "at law."

1. Bulk sales. Most states have adopted some form of the Uniform Commercial Code (UCC). Article 6 of the UCC governs bulk sales and establishes liability of persons who purchase substantial inventory or equipment from a merchant if certain procedures are not followed.

2. Transfers or distributions leaving the person without enough assets to pay debts.

   Note: References

   IRM Number	IRM Title
   IRM 5.17.14.2.3.3	Trust Fund Doctrine
   IRM 5.17.14.2.3.5	Transferee Liability of a Shareholder or Distributee of a Corporation
   IRM 5.17.14.2.3.1(3)	Transferee Liability Directly Imposed on the Transferee (At Law) at d. (distributions upon dissolution of corporation).

3. Corporate merger or consolidation statutes.

   Reminder: See also IRM 5.17.14.2.3.4, Successor Liability of a Corporation as a Transferee.

4. Transfers made as a part of a scheme to avoid debts; e.g., sale of assets to another corporation that is tantamount to a "de facto merger" or a "mere continuation."

   Reminder: See also, IRM 5.17.14.2.3.4(4), Successor Liability of a Corporation as a Transferee.

5. Transferee entered into a contract in which the transferee expressly or implicitly agreed to assume the transferor’s tax liability.

(5) See IRM 5.17.14, Fraudulent Transfers and Transferee and Other Third Party Liability, for additional information regarding suits to set aside fraudulent transfers.

(6) For assistance and examples of suits involving transfers see the following references -

(1) Property Involved - Accurately describe the property. Appraise the property, state the current forced sale and fair market values and how they were derived. Ensure reliable sources and methods are used. Indicate what steps can be taken, if any, to generate interest among prospective buyers.

(2) Competing Claims or Liens

1. Perform thorough property records checks and secure certified copies of all documents evidencing claims to or liens on the property. Ensure records checks are current and accurate.

2. Do not alter certified documents in any way. This restriction includes any sort of alteration or defacement to the documents, including marking or writing on them, affixing labels or tabs, cutting them, punching holes in them, or stapling or unstapling them.

3. Identify the owners of competing claims or liens and state their current addresses.

4. Describe the type of claim or lien (for example, mortgage, trust deed, contract for sale, state tax lien).

5. State the date of the instrument.

6. Give recording data (date and place of filing, book and page number, where lien is filed).

7. State the original amount of the claim.

8. Determine and provide the outstanding balance, including amount of principal, interest and other charges separately stated.

9. Discuss the validity of the competing claim or lien or any of its terms or conditions that are questionable.

10. Discuss whether any action has been taken or is to be taken to enforce the competing claim or lien, the nature of such action, the court in which it is pending, and its current status.

(3) For lien foreclosure on a taxpayer's principal residences, also see IRM 5.17.4.8.2.5, Lien Foreclosure on a Principal Residence, and IRM 5.17.12.20.2.2.4, Additional Items for Lien Foreclosure of Taxpayer’s Principal Residence.

(1) Include the following information in the suit recommendation:

• Name and address of person failing to honor levy,

• Dates on which all collection notices were served,

• Dates of contact for purpose of requesting payment,

• A full description of the property or rights to property levied upon,

• A discussion of the facts establishing the taxpayer's interest in the property or right to property,

• Information as to whether the debt is disputed,

• Contentions advanced by the person levied upon, and

• Facts tending to controvert the contentions of the person levied upon.

  Note: If there are competing claims to the property or right to property levied upon, it may be necessary for the IRS to institute an action to foreclose the federal tax lien(s), rather than to bring an action to enforce the levy, in which case you should provide information necessary for lien foreclosure actions.

(1) The complaint of the stakeholder-plaintiff will usually describe the property in question and the parties claiming rights to it. Analyze the complaint to determine what type of action should be taken to protect IRS’s rights to property.

(2) On occasion, you will learn of litigation between the taxpayer and other parties, the result of which may add to or diminish the taxpayer's assets. In such cases, if administrative remedies are not sufficient protection or are impractical, determine whether intervention is desirable or necessary.

(1) In some cases, such as injunction proceedings, quiet title actions, or suits for damages in which the Government is the defendant, you may be requested to make reports of events that have culminated in litigation or to investigate and make reports on some feature of the litigation. In such cases, use the same general principles set forth in this section to prepare the report. See also IRM 5.17.5, Suits Against the United States.

(1) On occasion, you may recommend the institution of miscellaneous types of proceedings such as:

• Suits against sureties under the performance bond provisions of the Miller Act (see IRM 5.17.7.3, Liabilities of Sureties - Bond on Public Works Contracts, and IRM 5.1.14.4, Performance Bond Provisions of the Miller Act),

• Suits against third parties paying or supplying funds for payment of wages (see IRM 5.17.7.2, Liability of Third Parties Paying or Providing Wages, and IRM 5.1.14.3, Liability for Third Party Paying Wages or Supplying Funds for Payment of Taxes),

• Suits on bonds (see IRM 5.1.14.4.1, Procedures for Holding Surety Liable for Unpaid Withholding Taxes),

• Proceedings to obtain writs of entry (see IRM 5.17.4.13, Writs of Entry),

• Suits to recover erroneous refunds (see IRM 5.17.4.14, Suits to Recover Erroneous Refunds), or

• Proceedings to obtain permission to seize the principal residence of a taxpayer (see IRM 5.17.4.9, Proceeding to Seize a Principal Residence).

(2) Use the general principles set forth in this section to prepare the report.

(1) Consultation with Manager

• Discuss findings and proposed recommendation.

• Discuss difficult problems and questions encountered in the investigation.

• Re-read appropriate earlier sections and other material relevant to the particular case.

• Advisory and Area Counsel may also be consulted for advice.

(1) Reduce material gathered to an outline before preparing the narrative report.

(2) Organize material in a sequential or chronological form.

(3) Focus on significant points.

(4) Form 4478, Civil Suit Checklist, is helpful, but is not a substitute for a well developed narrative report.

(1) All suit recommendation documents are prepared in electronic format using either the individual civil suit forms or the recommended auto populate Form 4477-D, Civil Suit Package. Suit recommendation submissions, including all reviews and approvals are through the eApproval electronic SharePoint platform. Comprehensive content for the Narrative Report is discussed in sub-section IRM 5.17.12.20. The entirety of that section and its sub-sections are devoted to the Narrative Report.

(2) Instructions on preparing the forms in the recommendation package are in IRM 25.3.2, Suits by the United States. Also, from the Knowledge Management Suit Forms page under Other Related Resources, click either option located there to open the page Suits - Resources/Examples. On that page is a webinar walking through the suit forms, power point tutorials for the different form revisions, and examples of the most common suit types.

(3) The suit forms are designed for an electronic presentation of the recommendation package. The recommendation review and approval process is an all-electronic process through eApproval. The platform contains User Guides to assist users. Exhibits should also be electronic and uploaded to eApproval. There may be exceptions where DOJ specifically needs an original return. If a Revenue Agent Report with original returns contain numerous staples and hole-punches, do not exacerbate this by adding additional staples or hole-punches.

(4) The recommendation package contains the forms walking users through the process. A listing of the suit forms is provided below. The auto populate Form 4477-D package contains the forms in one package. The forms remain individually available where an additional form is needed or for circumstances where the auto populate package will not suffice:

1. Auto populate package Form 4477-D, Civil Suit Package, contains all the forms except Form 4481, which is exclusively for Advisory’s use. This package can be accessed from ICS providing a link to the Publishing site. Always download the current version to the computer desktop for ease of use:

2. Individual Form 4477, Civil Suit Recommendation,

3. Form 4477-C, Civil Suit Table of Contents and Contact List, which includes the ability to build an index of exhibits or table of contents,

4. Form 4477-B, Civil Suit Narrative Report,

5. Form 4478, Civil Suit Checklist,

6. Form 4479, Civil Suit Property, Liens, and Claims,

7. Form 4480, Civil Suit Service of Legal Papers, and

8. Form 4481, Civil Suit Transmittal of Legal Action to Counsel.

(1) Purpose — To present in a logical sequence all pertinent facts so that appropriate legal action may be taken. The report must be written so that the reader understands the significance of its contents and is persuaded to act on it.

(2) Qualities of a Good Report:

• Impartiality

• Accuracy

• Completeness

• Conciseness

• Logical arrangement of material

• Each paragraph is limited to one topic sentence or issue

• Coherence

• Proper spelling and grammar

• Important facts are emphasized

(3) Avoid using abbreviations in the narrative report. If acronyms are used, ensure that the words are initially spelled out.

(1) These suits are not initiated by the IRS. However, it may be necessary to prepare a report to assist with the defense of the IRS’s position when they are brought by taxpayers or in the case of a third party brought under IRC 7426(h). Such reports must address and document the following:

1. Date administrative claim for damages was filed, and office where claim was filed.

2. Amount of damages claimed.

3. Name of taxpayer or third party making claim.

4. Description of collection activity upon which the claim is based.

5. Information concerning administrative review of the claim by the IRS.

6. If applicable, date on which request for certificate of release of lien was received, or date on which claimant alleges that lien became fully satisfied or unenforceable.

7. Description of the damages claimed.

8. Statement as to whether you believe that suit was commenced within the 2-year statute of limitations period.

9. Statement as to whether the claimant could have mitigated the damages claimed.

(2) See IRM 25.3.3, Suits Against the United States and Claims for Damages under IRC 7433, IRC 7345, IRC 7426(h), and IRM 5.12.3.13, Civil Cause of Action Under IRC 7432 for Failure to Release Lien, for additional information.