TE/GE consists of two functions - Exempt Organizations/Government Entities (EO/GE) and Employee Plans (EP).

Issues with certain types of tax liabilities require coordination with another BOD’s Examination function.

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.

TE/GE has the authority to conduct examinations under Title 26, Internal Revenue Code, Subtitle F - Procedure and Administrations and to respond to determination requests for matters relating to qualified plans, exempt organizations, and governmental entities, which includes but is not limited to:

The Director, Office of Fraud Enforcement, is the executive responsible for providing fraud policy and guidance for civil compliance employees and ensuring consistent application of policies and procedures in this IRM.

The fraud enforcement advisor (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.

Employees who work potential fraud cases are responsible for following the procedures in this IRM. All examiners and their managers working potential fraud cases should familiarize themselves with the information contained in this IRM.

The OFE Policy staff prepares and issues three-year reports to TE/GE prepared using Fraud Information Tracking System (FITS) data.

OFE Policy staff can create reports by area, territory or group. These reports help manage fraud inventory and provide review information for managerial use:

Operational reviews of the FEA group managers are completed by the OFE program manager twice a year. These reviews measure program consistency, effectiveness in case actions, and compliance with fraud policy and procedures.

FEA managers utilize reports generated from FITS to monitor and track FEA inventory assignments.

FEA managers verify program and procedural compliance by conducting case consultations, case reviews, performance reviews and security reviews with all FEAs.

FEAs are required to follow-up on all cases in fraud development status at least every 60 days as required by IRM 25.1.2.2(6)(e), Fraud Development Procedures.

FEAs are required to monitor accepted criminal referrals each quarter to ensure that CI and compliance are holding productive quarterly meetings as required under IRM 25.1.4.4.3, Required Communications.

The following table defines acronyms commonly used throughout this IRM:

Compliance employees must be familiar with the following legal terms to understand the requirements of proof. The following table defines terms commonly used throughout this IRM:

The Fraud Development Knowledge Base is located at: https://portal.ds.irsnet.gov/sites/vl019/pages/default.aspx

Procedural guidance on potential fraud development cases can be found throughout IRM 25.1.

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see https://www.irs.gov/taxpayer-bill-of-rights

Coordinates and supports TE/GE Fraud Program-related processes across TE/GE.

Serves as the point of contact for the TE/GE Fraud Program.

Monitors and supports TE/GE fraud/promoter/abusive transactions (AT) inventory.

Coordinates development and delivery of TE/GE-wide program-related training and supports functional-specific program training, as requested.

Coordinates and supports maintenance of TE/GE fraud, promoter, and AT IRM and knowledge management site data.

Support Servicewide and TE/GE risk process as it pertains to fraud, promoter and AT items.

Maintains awareness of fraud program-related processes within their function.

Serves as the point of contact for technical / functional fraud questions.

Supports TE/GE fraud reporting.

Supports TE/GE Fraud Program training.

Contributes functional-specific fraud information to TE/GE fraud IRMs and knowledge management site data.

Contributes to Servicewide and TE/GE risk process as it pertains to fraud items.

Maintains awareness of TE/GE fraud suspense activities within their function.

Serves as the point of contact for functional fraud suspense questions.

Supports TE/GE fraud suspense inventory reporting.

Supports TE/GE Fraud Suspense Program Training.

Contributes functional-specific fraud suspense information to TE/GE fraud IRMs and knowledge management site data.

Support Servicewide and TE/GE risk process as it pertains to fraud suspense items.

Maintains awareness of TE/GE promoter activities within their function.

Serves as the point of contact for functional promoter questions.

Supports TE/GE promoter inventory reporting.

Supports TE/GE Promoter Program Training.

Contributes functional-specific information to promoter IRMs and knowledge management site data.

Support Servicewide and TE/GE risk process as it pertains to promoter items.

The term taxpayer, for TE/GE purposes, is anyone who:

The Tax Reform Act of 1969 imposed new and stringent requirements with respect to exempt organizations. Originally, only private foundations and certain trusts received restrictions. Subsequent legislation imposed restrictions and reporting requirements on public charities, social welfare organizations and other exempt organizations. The Act established penalties for:

IRC 6033 governs the Form 990, Return of Organization Exempt from Income Tax, information return filing requirements of EOs. IRC 6012 governs the Form 990-T unrelated business income tax return filing requirements of EOs. IRC 6011 governs the Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the IRC, excise tax return filing requirements of EOs and other persons.

EOs receive favorable tax treatment on the premise that they are both organized and operated in accordance with their exempt purpose. The majority of EOs are organized as nonprofit organizations. Given their tax-favored status for exemption from federal income tax and in some cases for deductibility of charitable contributions to them, EOs may be used as vehicles to conduct inappropriate schemes, scams and fraud.

While EOs may conduct fraud directly, usually individuals using the EO as a shield to hide their true activities perpetrate the fraud. It is imperative that the EO examiner is cognizant of these types of misuse and identify and consider all related individuals and entities to ascertain whether the EO is being used for tax evasion purposes.

Restrictions on church tax inquiries and examination under IRC 7611, shall not apply to:

CI investigations cover a wide range of fraud, many involving tax exempt entities. For example, the health care industry has been subject to fraudulent schemes such as false claims, kickbacks, bribes, schemes involving durable medical equipment, staged/caused accidents, clinic mills, drug diversion, rolling labs, and psychiatric mills. Often, these schemes involve tax exempt organizations. Many hospitals, clinics, and health care related entities are tax exempt organizations.

There are historical accounts of the use of EOs to fund terrorism, which is both illegal and a fraudulent misuse of an EO's exempt status.

While examining an exempt organization, sometimes known as non-governmental organizations (NGOs) in the international context, the examiner may find evidence of involvement in terrorism, such as dealings with another NGO suspected of funding terrorism. NGO cases involved in potential terrorism-funding may be subject to a JTTF GJ investigation. As such, these sensitive cases are subject to additional security measures and may require a National Top-Secret Security Clearance.

When an examiner encounters an EO that appears to be potentially involved in funding or supporting terrorism the examiner should review the Specially Designated Nationals List (SDN List), maintained by the Office of Foreign Asset Control (OFAC), to determine if the organization or any related entity or key individual is identified on that list. If there is a positive OFAC hit or if the examiner continues to have concerns as to the organization's involvement in supporting terrorism, the examiner should suspend all examination work and contact with the EO Fraud SME through their group manager.

The Employee Retirement Income Security Act of 1974 (ERISA) provides criminal and civil penalties for specified violations. The IRS (under Title II) and the Department of Labor (under Title I) generally share jurisdiction over ERISA.

The Secretary of Labor also has authority to investigate Title 29 offenses. These offenses relate to reporting, disclosure, participation, vesting, funding and fiduciary responsibilities for employee plans. Consequently, the Secretary of Labor and the Secretary of Treasury may be seeking to prosecute the same case.

Qualified employee plans receive favored tax treatment through a deduction for contributions by the employer, tax exemption for the related trust, and deferral of income by the participating employees. These tax advantages can be used to establish criminal criteria (criteria used by CI for criminal investigation consideration) by identifying a proper tax due and owing, as prescribed in IRC 7201, Attempt to Evade or Defeat Tax.

IRC 6058 governs the filing of Form 5500, Annual Return/Report of Employee Benefit Plan. CI has criminal jurisdiction over Form 5500 violations. IRC 6012 governs the Form 990-T unrelated business income tax return filing requirement of qualified plans. IRC 6011 governs Form 5300, Return of Excise Taxes Related to Employee Benefit Plans, excise tax return filing requirements of qualified plans and other persons.

Established in 2000 by Presidential Order 13175. ITG is responsible for administering federal tax administration issues applicable to ITG. ITG is a business unit in EO/GE section of TE/GE.

ITG examiners have specialized training in the administration of tax law and protocols unique to Indian tribes. Federally recognized Indian tribes and their chartered corporations are not subject to federal income taxes at the entity level. However, tribes that are incorporated under state law may be subject to federal income taxes. Indian tribes are subject to other federal taxes including excise, employment and backup withholding.

Tribal members are subject to federal income taxes with few statutory exceptions.

TEB is responsible for ensuring compliance with the provisions of IRC 54, IRC 54A-F, IRC 103, IRC 141-150, IRC 1394 and IRC 7871 applicable to tax-advantaged bonds, including tax exempt bonds and tax credit bonds.

Although bondholders may ultimately be liable for federal taxes upon completion of an examination, for purposes of conducting the TEB examination and to determine the tax status of a bond issuance, the issuer of the debt is deemed the taxpayer.

Consult the TEB Fraud SME when the examiner and group manager identify potential indicators of fraud in a TEB examination or arbitrage claim review and follow the procedures listed in IRM 4.81.5.18.1, Fraud Procedures.

The FSL/ET section of TE/GE is responsible for federal tax administration, information reporting and compliance issues relative to the government entities in their role as a taxpayer/employer. Examiner responsibilities are outlined in IRM 4.75.10, Exempt Organizations Examination Procedures, Exempt Organization Pre-contact Procedures, specifically with IRM 4.75.10.1.2.

FSL/ET is also responsible for ensuring compliance with and assisting in the administration of Federal Insurance Contributions Act (FICA) coverage agreements under the provisions of Section 218 of the Social Security Act. Procedural guidance on employment tax issues can be found in IRM 4.23, Employment Tax.

It is important to consider, develop and document completely the usual indicators of fraud in every fraud case. Generally, in those cases in which the court does not sustain the fraud penalty, it is because the court felt that the IRS did not provide enough proof that a sufficient number of the badges of fraud exist, or the court believes the taxpayer has a plausible alternative explanation for their actions or underpayment of tax.

Examiners should ask taxpayers to provide an explanation for their actions (or why they underpaid their taxes) and document these explanations verbatim and thoroughly. This documentation assists Counsel in rebutting a taxpayer’s explanations at trial, if those explanations are inconsistent with what the taxpayer told the compliance employee. Also, if the taxpayer’s explanations do not make sense, look for documents or other evidence that rebuts the taxpayer’s explanations. Counsel needs this evidence to show the Tax Court that the taxpayer’s explanation for their actions is not credible.

A properly developed case must address and document potential indicators of fraud (a.k.a., badges of fraud). Fully develop and document leads when indicators of fraud are present.

Send copies of Form 11661 and Form 2797 to the TFS for retention.

The civil fraud penalty may be based on facts and circumstances of a civil examination or result from the civil settlement of a criminal prosecution case. Often, civil fraud is decided by analyzing the same evidence of intent necessary to support a criminal conviction for tax evasion.

The penalty for failure to file a tax return, if such failure is fraudulent, is 15 percent per month, or fraction thereof, up to a maximum of 75 percent of the net amount of tax due (IRC 6651(f)). This penalty may be applied in cases involving tax returns such as Form 990-T.

A criminal conviction for tax evasion under IRC 7201 usually establishes liability for the civil fraud penalty. However, the civil fraud penalty may be imposed even when the taxpayer is acquitted in a criminal fraud prosecution. The burden of proof shifts to the government to prove civil fraud as well as criminal fraud.

Once the FEA, examiner, their group manager and FFS concur sufficient affirmative acts of fraud exist to support the civil fraud penalty, the case should be forwarded to TEGEDC for its concurrence and recommendation prior to proposing the civil fraud penalty in an examination report.

The civil fraud penalty and/or fraudulent failure to file penalty must be asserted if a taxpayer was successfully prosecuted by the Department of Justice under Title 26 (e.g., Sections 7201, 7203, 7206(1)) and the prosecution involved additional tax assessment(s) as opposed to payment of existing assessment(s). TEGEDC must approve any exceptions to this rule. See IRM 25.1.6.3, Procedures.

There is no statute of limitations in civil fraud cases if fraud can be established. TEGEDC must approve the fraud statute and the tax and penalty may be assessed at any time (IRC 6501(c)(1)).

Collateral Estoppel: A taxpayer convicted under IRC 7201 cannot dispute the fraud penalty in a civil case for the same tax year(s) involved in the conviction. The taxpayer can dispute the amount of the underpayment in the year of conviction, and dispute the underpayment and civil fraud penalties in other tax years.

When the examiner establishes that an affirmative act of fraud exists, (see IRM 25.1.1.4, Indicators of Fraud vs. Affirmative Acts of Fraud, for a list of examples), they should suspend the examination, including any contact with the taxpayer and/or representative. As soon as possible the examiner should discuss the examination finding with their group manager, the FEA and the FFS.

If the FEA and FFS agree that the case meets criminal criteria the examiner prepares Form 2797 and forwards the form via secure email to their group manager for approval with a courtesy copy to the TFS. The FEA and the FFS are available to assist with the preparation of Form 2797 as needed.

See IRM 25.1.3.4, Referral Evaluation, through IRM 25.1.3.6, Declined Criminal Referrals, for a description of the CI evaluation process. The examiner forwards a copy of the Form 2797 accepted or declined by CI to the FFS and the TFS via secure email.

If CI declines the referral, the examiner should consider the civil fraud penalty and/or fraudulent failure to file penalty. The FEA signs Form 11661, section 16d or 16e to recommend asserting the penalty(ies). The FEA assists with the development and/or write up of the penalty if necessary.

If a criminal referral is declined for criminal investigation or if the criminal investigation is subsequently discontinued and the FEA and the examiner determine that fraud (civil or criminal) no longer exists, the FEA recommends return of the case to AIMS status code 12 via Form 11661. Send a copy of the FEA-signed Form 11661 to the TFS.

This subsection contains the Internal Revenue Code (IRC) sections that apply to TE/GE cases. See IRM 25.1.1-1 for a list of Criminal Violations and the Elements Necessary for Prosecution.

Use Form 2797, Referral Report of Potential Criminal Fraud Cases, to refer a case to Criminal Investigation (CI) through the FEA.

If a case involving a collateral examination, which is a civil examination jointly worked by two BODs, shows indicia of criminal fraud, the initiating area of TE/GE and the receiving area (TEGE, SBSE, LB&I or W&I) function prepare a joint referral identifying the affirmative acts established during their respective exams. The FEA group manager ensures that the examiner properly identified both the TE/GE and receiving function and accounts for the referral.

The laws that apply to tax exempt entities are complex. The involvement of a TE/GE examiner can be useful in properly developing investigations involving all types of tax exempt entities, related entities, and individuals. All requests for TE/GE assistance are made by CI on Form 6544.

Requests for a TE/GE examiner for CA assignments are sent to TE/GE via the TE/GE Fraud mailbox (*TE/GE-EO-FIU) or through direct contact from CI. The direct contact is generally made as follows:

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.

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. Group 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 25.1.3.5(6), Accepted Criminal Referrals, for more information on quarterly conferences involving a cooperating agent in an administrative joint investigation.

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.

The TE/GE examiner's responsibilities with respect to any civil case under joint investigation may include:

Grand jury investigations can be very complex and involve Federal Rules of Criminal Procedure, Rule 6(e). In the case of any substantive interaction pertaining to fraud matters involving LB&I, the TE/GE group manager will notify and coordinate with the Assistant Deputy Commissioner Compliance Integration (ADCCI) senior program specialist within LB&I, who is responsible for program issues related to fraud. LB&I’s fraud procedures are found within IRM 25.1.10, LB&I Fraud Procedures. See also IRM 25.1.5, Grand Jury Investigations.

TE/GE employees will be assigned to grand jury cases and placed on the Grand Jury list when requested by CI.

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.

If TE/GE 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:

Upon completion of a joint administrative investigation and/or recommendation of criminal prosecution by CI, CI sends a Notice of Department of Justice Referral memorandum (referred by CI as a Prosecution Recommendation case) to SB/SE Technical Services (TS) to initiate suspense action. CI concurrently sends a copy of the memorandum to the TFS via secure e-mail to the TE/GE Fraud mailbox (*TE/GE-EO-FIU). The TFS forwards the memorandum to the appropriate FSC. The functional FSC prepares a memorandum instructing the TE/GE Examination group to close the case to its designated fraud suspense function. The case remains in suspense until completion of the criminal aspects of the case.

See IRM 25.1.4.4.11, Fraud Suspense, for guidance on the information required in the examination case file prior to placing the case in fraud suspense.

If an administrative investigation becomes an approved grand jury (GJ) investigation, CI sends a Notice of Department of Justice Referral memorandum (referred to by CI as a Further Investigation case) to TS to initiate suspense action. CI concurrently sends a copy of the memorandum to the TFS via secure e-mail to the TE/GE Fraud mailbox (*TE/GE-EO-FIU). The TFS forwards the memorandum to the appropriate FSC via secure e-mail. The FSC prepares a memorandum instructing the TE/GE examination group to transfer the case to its designated fraud suspense function. The case remains in suspense until the criminal aspects of the case are completed.

See IRM 25.1.5.3, Grand Jury Suspense, for guidance on the information required in the examination case file prior to placing the case in grand jury suspense.

See IRM 25.1.5.3(7) for guidance on Audit Information Management Systems (AIMS) controls for prior and subsequent periods.

See IRM 25.1.5.3(9) for guidance on AIMS controls and statute protection if the target of the grand jury investigation is not currently under examination.

If applicable, CI completes and forwards a copy of Form 13308, Criminal Investigation Closing Report (Tax and Tax Related Only), via secure email to the TE/GE Fraud mailbox (*TE/GE-EO-FIU) or the TFS who then forwards it via secure e-mail to the FFS.

SB/SE Examination TS is responsible for assessing any court-ordered restitution. See IRM 4.8.6, Technical Services, Criminal Restitution and Restitution-Based Assessments.

When the criminal prosecution aspects have been completed (i.e., criminal prosecution has concluded or the criminal investigation is discontinued), CI notifies TS of the formal closing of the criminal case via a closing package that includes Form 13308 and advises that civil actions on the case should resume.

CI concurrently sends a copy of the Form 13308 to the TFS via secure e-mail to the TE/GE Fraud mailbox (*TE/GE-EO-FIU). The TFS forwards the Form 13308 closing package to the appropriate TE/GE FSC via secure e-mail. The FSC returns the case to the originating TE/GE examination group with a memorandum explaining that civil actions may resume.

Upon completion of a grand jury investigation, do not assign the case to examiners who had access to grand jury information since they are "tainted" for civil case resolution. Likewise, assign the case to another manager for civil case resolution if the group manager had direct or indirect access to grand jury information. See IRM 25.1.5.6, Civil Case Resolution, for additional information.

If the civil fraud penalty under IRC 6663 and/or the fraudulent failure to file penalty under IRC 6651(f) is pursued, the tax years/periods under penalty consideration returns to AIMS status code 17 (Fraud Development Status), and are documented by the FEA on Form 11661.

The court may order probation for the taxpayer as part of the sentence imposed. The Order of Probation may contain special conditions relating to the settlement and/or payment of civil tax liabilities and penalties. The Special Agent in Charge (SAC) notifies TS via Form 13308, of the special conditions of probation.

CI concurrently sends a copy of the Form 13308 to the TFS via secure e-mail to the FIU mailbox (*TE/GE-EO-FIU). The TFS forwards the Form 13308 to the appropriate FSC via secure e-mail. The FSC prepares a memorandum to the TE/GE area manager / equivalent to return the case to the field for civil resolution and to consider the taxpayer’s conditions of probation.

The memorandum instructs the TE/GE area manager / equivalent to provide a response to the SAC regarding the taxpayer’s compliance with the conditions of probation no later than the earlier of the closing of the case or 180 days prior to the probation expiration date.

See IRM 25.1.4.6, Special Conditions of Probation, for additional guidance.

If the Judgment and Commitment Order orders restitution, SB/SE TS has the responsibility of assessing the restitution. See IRM 4.8.6, Criminal Restitution and Restitution-Based Assessments.

To facilitate identification by campuses of closed TE/GE civil fraud cases, attach RCCMS 3198-A Special Handling checksheet to the electronic folder of each TE/GE case file for:

All TE/GE functions use activity code (AC) 155, Fraud/Fraud Related Activities, for WebETS reporting.

See Exhibit 25.1.9-1, for project codes (PCs) compatible with AC 155.

Do not use taxpayer names on WebETS for fraud cases. Instead, use a tracking number based on a naming convention consisting of the following:

The TFS provides the naming convention code to the exam group for use on WebETS. This provides a consistent method for tracking both exam-related and non- exam related cases without disclosing GJ or other protected information.

The TFS maintains a naming convention code log of information for fraud or fraud- related cases worked within TE/GE, and prepares reports based on the tracked information.

The above guidance applies to all examiners. EO and EP Determinations also follow this additional guidance:
EO Determinations:

Specific instructions for examiners, managers, Compliance, Planning and Classification, (CP&C) Planning and Monitoring analysts, FFSs and the TFS follow.

Follow the TE/GE Fraud Development Procedures. See also IRM 25.1.9.4, TE/GE Fraud Development Procedures.

The examiner is responsible for securing a naming convention code from the TFS for all fraud cases to ensure proper time charging in WebETS. If more than one taxpayer is involved in a fraud case, charge all case time to the naming convention code assigned to the key case. Use the one naming convention code for time charged to all related taxpayers.

The examiner adds a new case in WebETS for each naming convention code received from the TFS. Apply all time charged to the case for fraud development to the new naming convention code. Instructions for WebETS input follow and Exhibits 25.1.9-2 through 25.1.9-5 provide examples of WebETS input screens. Contact the TFS with any input questions.

EO Examinations - WebETS input for a discrepancy adjustment, Form 4720, Return of Excise Taxes Related to Employee Benefit Plans, or Form 990-T, Exempt Organization Business Income Tax Return, case:

All case time related to fraud development/activities are recorded on the new line item on WebETS.

AC 155 Hours on RCCMS, WebETS and Case Chronology Record (CCR).

Keep the manager and TFS apprised of:

Follows the TE/GE Fraud Development Procedures. See IRM 25.1.9.5, Procedures that Apply to TE/GE Overall.

Monitors and supports TE/GE fraud, promoter, AT program inventory:

No later than five business days after the close of the monthly WebETS cycle, forward the AC 155 report to the TFS, barring unusual circumstances. This allows the TFS to ensure the naming convention code logs are accurate and reconcile to WebETS and to prepare required management reports. The TFS uses this information to cross- check reporting with the FFSs and provide monthly reports to the TE/GE leadership.