This section provides policies and procedures relating to estate and gift tax program specific penalty analysis, managerial approval, assessment and abatement.

Every function in the IRS has a role in proper penalty administration. It is essential that each function conducts its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with Policy Statement 20-1. IRM 1.2.1.12.1, Policy Statement 20-1 (Formerly P-1-18), provides guidance relating to the use of penalties to encourage voluntary compliance.

Estate and gift tax examiners and managers assigned to examine and oversee the examination of estate and gift tax returns and issues are responsible for complying with servicewide policies and authorities set forth in IRM 1.2.1.5, Policy Statements for the Examining Process.

Examination of estate and gift tax returns should be conducted in a manner that will promote public confidence as stated in the Mission of the IRS. See IRM 1.2.1.2.1, Policy Statement 1-1, Mission of the IRS.

Section 3504 of P.L. 106-206 requires the IRS to include an explanation of the examination and collection process, as well as information about assistance from the Taxpayer Advocate with any first report/notice of proposed deficiency. Pub 3498, The Examination Process, will be used for this purpose.

The following Internal Revenue Code sections authorize the penalties most frequently assessed and abated by Estate and Gift tax examiners:

The National Quality Review System (NQRS) is a web-based review system used by Estate and Gift Tax Policy, Estate and Gift Tax Examination Management and Estate and Gift Tax Quality Measures and Analysis (QMA) to generate and review reports analyzing national quality performance based upon standardized quality attributes set forth in Document 12499, Estate and Gift Tax Examination Embedded Quality Job Aid. NQRS report data is compiled by QMA on a quarterly basis, but ad hoc reports may be obtained monthly. The use of NQRS is explained in additional detail in IRM 4.25.1.11, Manager Embedded Quality Review and Specialty Exam National Embedded Quality Review Programs.

Operational Reviews and related NQRS reports are conducted by Territory Managers and the Chief of Estate and Gift to measure national adherence to quality standards and managerial performance and/or oversight.

Customer (i.e. taxpayer) satisfaction reports are generated by SB/SE Operation Support Research on a quarterly basis. These reports provide masked taxpayer narratives that are responsive to a pre-defined set of survey questions. The quarterly survey reports are to be used to identify areas for examination quality improvement.

Frequent Front-line manager reviews are conducted under the Examination Quality Review System (EQRS), with the frequency based on annual personnel requirements.

The following table sets forth acronyms used in this IRM:

The Estate and Gift Tax program is required to follow all servicewide examination procedures and those set forth in SB/SE examining process IRM. The following IRM subsections provide additional information relating to the processing, classification and examination of Estate and Gift Tax program returns and claims:

Document 12499, Estate and Gift Tax Examination Embedded Quality Job Aid, is issued by Estate and Gift Tax Policy, and is relied upon for the application and interpretation of the quality attributes. The job aid includes complete instructions, definitions, and examples of how cases should be evaluated.

The Penalties Knowledge Management Base is owned and maintained by the Office of Servicewide Penalties, and provides guidance, resources and information for all employees that consider the assessment and/or abatement of civil penalties.

While not all penalty abatement is based on reasonable cause, it is a commonly raised defense in estate and gift tax cases. The taxpayer may raise several other defenses to the assertion of penalties including, but not limited to statutory and regulatory exceptions, administrative waivers, or corrections of Service error. See IRM 20.1.1.3.3.1, Statutory and Regulatory Exceptions, IRM 20.1.1.3.3.2, Administrative Waivers, and IRM 20.1.1.3.4, Corrections of Service Error for additional information. Examiners may use the Reasonable Cause Lead Sheet to document their analysis of the reasonable cause defense.

Reliance on a preparer's advice may satisfy the IRC 6664(c) reasonable cause exception to any accuracy-related penalty. See 26 CFR 1.664-4(c). Advice includes any communication setting forth an analysis or conclusion by a person other than the taxpayer, and on which the taxpayer relied in preparing the return. Advice does not have to be in any particular form. The reasonable cause and good faith exception may be satisfied if the taxpayer reasonably relied on advice that was based upon an objectively reasonable, factual or legal assumption. The Penalty Handbook provides additional information relating to a finding of reasonable cause. See IRM 20.1.5.7.1, Reasonable Cause and IRM 20.1.1.3.2, Reasonable Cause.

Reasonable cause criteria include but are not limited to the following:

When penalties are not asserted due to reliance on a third party, the examiner should document the case file by updating their workpapers or the Reasonable Cause Lead Sheet with the additional facts, analysis, and conclusions reached regarding the reasonable cause exception.

The LDC LDC website, acts as the national clearing house to identify and deter individuals from promoting abusive tax schemes and/or preparing abusive returns. The LDC evaluates and develops information from both internal and external referral sources.

The LDC also evaluates leads on appraisers who may have contributed to valuation misstatements or who may have participated in a scheme involving valuation issues. In certain cases, appraisers may be subject to the aiding and abetting penalty under IRC 6701. A referral must be prepared and submitted to the SBSE Lead Development Center if, in making determinations regarding the appropriate value of assets for estate and gift tax purposes, the appraiser’s methodology and accuracy of appraisal(s) suggests aiding and abetting under IRC 6701.

If an examiner identifies a new or unique abusive promotion or transaction during an examination, the case will be discussed with the group manager and a decision by the group manager should be made regarding whether a LDC referral is warranted.

LDC Referrals are made by sending Form 14242, Report Suspected Abusive Tax Promotions or Preparers. See LDC website.

Examiners should not take any action that would begin the actual promoter investigation prior to the authorization of the investigation by the LDC. Examiners preparing referrals are allowed to conduct only enough research to submit the referral to the LDC.

Examiners making referrals to the LDC should charge time to activity code 593000 for activity under IRC 6701 or activity code 594000 for activity under IRC 6700.

SBSE Lead Development has an extensive abusive tax website which was created to assist employees conducting promoter investigations and the related participant examinations. Its web pages describe specific tax schemes, provide job aids, and include contact information for further assistance. IRM 4.32, Abusive Transactions, discusses procedures for cross-functional development of abusive tax schemes and promoter cases. IRM 5.20.1, Abusive Tax Avoidance Transaction Program, discusses SB/SE Collection’s cross-functional role working abusive tax avoidance collection issues.

OPR is responsible for reviewing, investigating, and resolving alleged violations of the professional standards of competence, conduct, and integrity by tax practitioners who represent taxpayers before the IRS. OPR identifies and resolves alleged violations of the applicable professional standards enumerated by Treasury Department Circular 230, Regulations Governing Practice before the Internal Revenue Service.

Please see IRM 4.11.55.5, Referrals, for information on the procedures for referrals of practitioner or appraiser misconduct.

First indications of fraud serve as a sign that a taxpayer may have taken actions for the purpose(s) of deceit, subterfuge, camouflage, concealment, attempting to color or obscure events, or to make things seem other than they are. First indications alone do not establish fraud.

First indications of fraud, also known as "badges of fraud," are mere suspicions of fraud. When discrepancies are identified, examiners must ask the taxpayer, the preparer, the representative, or any other involved party for explanations to resolve them. The discovery and development of fraud are the result of effective investigative techniques. Techniques employed by compliance employees should be designed to disclose not only errors in accounting and application of tax law, but also irregularities that indicate the possibility of fraud and taxpayer intent. Examples of fraud indicators can be found in IRM 25.1.2.3, Indicators of Fraud. Some common indicators of fraud in estate and gift tax cases include but are not limited to:

At the first indication of possible fraud, the examiner should follow IRM 25.1.2.2, Fraud Development Procedures.

Firm indications of fraud, or affirmative acts, establish that a taxpayer deliberately took actions with the purpose of deceit, subterfuge, camouflage, concealment, attempting to color or obscure events, or to make things seem other than what they are. See IRM 25.1.1.4, Indicators of Fraud vs. Affirmative Acts of Fraud.

A "firm indication" of fraud must be distinguished from a "first indication" of fraud. A firm indication of fraud is a factual determination that can only be made on a case-by-case basis. Discussions with the group manager and the FTA will help the examiner determine when they have firm indications of fraud warranting development for a civil fraud penalty or a referral to Criminal Investigation (CI) for criminal fraud development. However, under no circumstances shall examiners or managers obtain advice and/or direction from CI for a specific case that is under examination. In addition, if a referral is being considered, an examiner must not solicit an agreement or solicit and receive delinquent returns prior to the submission of a fraud referral.

When the group manager, FTA, and examiner agree firm indications of fraud are present, a decision must be made regarding whether the case will be referred for criminal prosecution or will be developed for the assertion of the civil fraud penalty. Until this decision is made, the examination should immediately be suspended without disclosing to the taxpayer the reason for such suspension. Examiners are cautioned not to carry the investigation beyond the point where a valid indication of fraud is adequately supported by the workpapers.

If the case does not meet the guidelines for a criminal referral, the examiner will document the reasons in the case file and proceed with development of the case and the civil fraud penalty. The examiner will continue to work with the FTA to ensure complete development of the facts to support assertion of the civil fraud penalty.

If the case warrants a criminal referral, the examiner will prepare Form 2797, Referral Report of Potential Criminal Fraud Cases.

A criminal fraud referral to Criminal Investigation is warranted if firm indicators of fraud/willfulness exist, and criminal criteria are met. If affirmative acts of fraud/willfulness exist, then the examiner will refer the case through the Fraud Technical Advisor (FTA) to Criminal Investigation (CI) using Form 2797. The FTA is available to assist in determining if firm indications of fraud/willfulness are present, criminal criteria have been met, etc. See IRM 25.1.3, Criminal Referrals.

Information about the source or details of evidence relating to a potential criminal case must be safeguarded and withheld to the extent necessary to avoid prejudice to a case. This general rule is applicable not only during the investigation of a case, but also in any action taken with respect to the civil portions of a case having open criminal aspects. When appropriate, examiners are expected to coordinate proposed disclosure of information through established channels.

The following code sections are the most common used by estate and gift tax examiners when developing criminal fraud cases:

Full cooperation among all levels of operations in the IRS must be maintained to ensure that there is neither duplication in investigations nor unnecessary inconvenience to the taxpayer. The examiner will review IDRS to determine if any "-Z" freeze (Transaction Code (TC) 914) conditions exist and if other functions are assigned to the taxpayer case. CI or the FTA should be contacted prior to beginning case action whenever an un-reversed TC 914 (or other CI code) is present in any module.

If an examiner learns that an assigned case involves a taxpayer who is the subject of a criminal investigation, all activity on the case will be immediately suspended. The examiner’s manager will consult with the Supervisory Special Agent in CI relative to the continuance of examination activity on the case. If agreement to either continue the suspension or to resume the examination activity on the case cannot be reached at the group or territory level, the issue will be decided at the Chief level. Where more than one area is involved, the Director of Field Operations having jurisdiction over the criminal investigation will resolve the question.

In income, estate, and gift tax cases in which criminal prosecution has been recommended (except potential jeopardy cases), the IRS generally does not authorize assessment of additional taxes and penalties during the time the recommendation for criminal prosecution is under consideration or during the period such cases may be awaiting trial or pending an appeal.

Threat of criminal prosecution shall never be made in any case. If a question concerning civil action arises in a case with open criminal aspects, it will be resolved on the basis of whether the criminal case will be prejudiced by the proposed civil action. IRM 1.2.1.5.11, Policy Statement 4-26 (Formerly P-4-84), Criminal and Civil Aspects in Enforcement, provides that the consequences of civil enforcement actions on criminal investigations for the same taxable periods and same types of taxes must be carefully weighed. Any discussion or negotiation regarding settlement of civil enforcement actions must be guided by this policy and input from the FTA.

A civil fraud penalty case may be developed based on facts and circumstances of a civil examination or result from a Criminal Investigation (CI) initiated case. Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Specific guidance on fraud indicators and the development of fraud may be found in IRM 25.1.1, Overview/Definitions IRM 25.1.2, Recognizing and Developing Fraud and IRM 25.1.6, Civil Fraud.

An assertion of the civil fraud penalty may be made on the development of facts and circumstances of a civil examination or result from a completed criminal prosecution (case returned for civil resolution).

Assertion of the civil fraud penalty on a case does not require a referral to CI. Determination of the civil fraud penalty is the shared responsibility of the examiner, the group manager, and the FTA. See IRM 25.1.6.2, Procedures.

Recommendations for imposing the civil fraud penalty must receive careful scrutiny to make certain that such penalties are asserted only in appropriate cases. The IRS bears the burden of proving civil fraud by clear and convincing evidence in Tax Court. See IRC 7454, Burden of Proof in Fraud, Foundation Manager and Transferee Cases.

The following code sections are the most common used by estate and gift tax examiners when developing civil fraud cases:

IRM 25.1.1, Fraud Handbook - Overview/Definitions, notes several elements that may be indicative of fraud. Examiners should remain continually alert for these and other "badges of fraud."

When the group manager, FTA, and examiner agree to pursue the civil fraud penalty on a civil examination, the case will remain in SC "17" . If a decision is made that civil fraud is no longer applicable, the examiner will document this decision in the case file, update the case to SC "12" , and complete the examination.

The final examination report will reflect the civil fraud penalties applied to the appropriate adjustments.

Cases returned from CI after criminal prosecution or discontinuance of the criminal investigation will be completed as a civil resolution by the referring examiner. However, if the examiner participated in the grand jury investigation and had access to grand jury information, the case cannot be assigned to the cooperating examiner. See IRM 25.1.5.6, Civil Case Resolution.

Update the case to source code "17" after the determination is made that the case will be developed for either the civil fraud penalty or for potential criminal referral to CI. If the civil fraud penalty is not pursued, the case will be returned to source code "12" for the completion of the examination.

Update the case to source code "18" when a case is accepted by CI after a criminal fraud referral is made. The accepted criminal referral case will remain in source code "18" until the criminal investigation is concluded or until the case is referred to DOJ.

While in source code "17" or source code "18" , cycle time will be excluded from monthly "aging" reports to management. As AIMS and ERCS include data from all cases, a manual reconciliation to the aging reports will exclude source code "17" and "18" cases from both the overage category and the overage percentage.

When closing a civil fraud case, the examiner will enter on the appropriate line of Form 5344, Examination Closing Record, (see IRM 4.38.1.7.3.1.45, Organization and Responsibilities, Item 38: Fraud) to ensure capture of the penalty on AIMS the following: