SEP is a specialized compliance program within the Small Business/Self-Employed Operating Division (SB/SE) directed toward that segment of the population which derives substantial income from either legal or illegal activities and intentionally understate their tax liability.

SEP evolved from a "Strike Force" Program focused on organized crime and illegal activity into a Compliance Program with emphasis on identifying, developing, and investigating fraudulent income and expense issues of both legal and illegal entities.

SEP cases normally involve in-depth income examinations. IRC 7602(e), Limitation on Examination on Unreported Income, states that the IRS is not to use financial status or economic reality examination techniques, such as indirect methods, to determine the unreported income of any taxpayer unless there is a reasonable indication that there is a likelihood of such unreported income.

The examination of income is a mandatory audit issue for SEP cases. The depth of the examination of income and the types of investigative techniques used are dependent on the facts and circumstances of the case. To determine whether unreported income exists, the SEP agent should:

If the SEP agent has established that there is a reasonable likelihood of unreported income, a more in-depth examination of income is warranted. Any technique or procedure used to determine the amount of unreported income could be labeled a FSAT. A FSAT is, therefore, defined by its purpose which is a technique, analysis or procedure used to determine the specific amount of unreported income. See IRM 4.10.4.5.2, In-Depth Examinations of Income: Individual Taxpayer.

In some instances, the SEP agent may have reasonable indications that the likelihood of unreported income exists prior to the start of the actual examination. Examples of such sources could include: Information from informants/ whistleblowers; Criminal Investigation (CI); federal, state or local law enforcement; or Information Reporting Program (IRP).

The SEP agent should document in workpapers the sources of information/evidence secured, the analysis of the information/evidence and the conclusions. Dates those events and actions occurred should also be documented. This step should always take place regardless of the methods used or the information made available to reach the determination that the likelihood of unreported income exists.

Authority -

The Director, Examination Headquarters , is the executive responsible for providing policy and guidance for Field employees and ensuring consistent application of policy, procedures, and tax law to effect tax administration while protecting taxpayers’ rights.

The Director, Examination Field and Campus Policy, reports to the Director, Examination Headquarters, and is responsible for the delivery of policy and guidance that impacts the Field examination process.

Field Examination Special Processes, which is under the Director, Examination - Field and Campus Policy, is the group responsible for providing oversight and policy and procedural guidance on specialized examination processes to SB/SE Field examiners and group managers.

Revenue agents in SEP are financial investigative specialists and forensic accountants. In addition to general tax law knowledge and auditing skills, SEP agents are experts in the identification and development of cases with fraud potential.

SEP group managers are responsible for completion of the SEP Cooperating Agent and Trial Summary Report, (SCATS). The SCATS report captures non-ERCS inventory resulting from the SEP agent’s assistance to CI. SCATS also captures the status of grand jury and administrative cases.

Periodic program reviews are conducted to:

The following table contains related manuals which cover additional processes and procedures that examiners may use and are referenced throughout this manual.

The following table lists common acronyms and their definitions as used throughout this IRM.

The following table contains terms and definitions as applied throughout this IRM:

The core roles and responsibilities of SEP agents include but are not limited to the following:

SEP agents who serve as the Subject Matter Experts (SME) are resource persons for SB/SE Examination and other IRS functions in the following areas:

SEP group manager and SEP agent position descriptions are as follows:

Implementation of SEP measures will allow all levels of leadership to fully understand SEP’s contributions to SB/SE Examination with transparency and increased accountability at the group level.

There are three new reports being implemented for data gathering and monitoring in SEP groups:

Differences between General Program and SEP create challenges when measuring the compliance efforts resulting from the uniqueness of SEP work. To allow for the development of complex and challenging examinations, in-process SE/SE SEP cases are considered overage when they have been in status 12 (started) in excess of 390 days. SEP managers should be actively involved in case actions, and SEP agents should be making timely actions for successful case management.

An in-depth interview is one of the most important aspects of a SEP examination. Interviews are used to obtain leads, develop information and establish evidence. The testimony of witnesses and the admissions of alleged violators are major factors in resolving tax cases.

In an initial interview, the SEP agent should obtain as much information as possible to evaluate the taxpayer's complete financial situation, since this may be the only contact with the taxpayer.

SEP agents should interview the taxpayer and every pertinent witness connected with the case. See IRM 4.10.3.3.1, Who To Interview.

As additional information and facts are uncovered, follow-up interviews may be critical to issue development. The use of a Summons to secure testimony should be considered as appropriate.

Interviewing taxpayers in custody:

The SEP agent must prepare a permanent record of every interview using one or more of the following:

Interviews of Officials or employees of a federally recognized Indian tribe should be in accordance with protocols set forth by relevant Presidential Executive Orders. See IRM 5.1.12.24, Indian Tribal Governments.

SEP examinations are unique because of the significant potential for fraud and litigation. Many SEP cases result in recommendations for criminal prosecution and an even greater number involve assertions of the civil fraud penalty.

The nature of SEP cases increases the likelihood that the burden of proof will rest with the government. SEP agents must gather the evidence necessary to sufficiently substantiate and prove the facts of the case.

SEP agents should be familiar with the Federal Rules of Evidence (FRE) particularly:

SEP agents should also be familiar with case law interpretations of evidential principles and the law of privileges, such as the attorney-client privilege and the practitioner privileges of IRC 7525, Confidentiality Privileges Relating to Taxpayer Communications. See IRM 5.17.6, Summonses.

When securing evidence, SEP agents must always be aware of the secrecy provisions of Rule 6 (e) of the Rules of Federal Criminal Procedure. SEP agents must always verify the information received was not grand jury information.

The summons is an important tool for obtaining the records and testimony needed to complete in-depth examinations. SEP cases frequently involve uncooperative taxpayers who do not agree to be interviewed or provide available records to which they have access or control. When lack of cooperation occurs, serious consideration should be given to summonsing the taxpayer for relevant testimony and records. Third party summonses should also be used to obtain necessary testimony and records.

SEP agents should be familiar with provisions of the law relating to the use and enforcement of a summons. SEP agents should use good judgment when considering the issuance of a summons. Consult with SBSE Counsel for guidance specific to your individual case.

A summons should be prepared and issued in accordance with the IRM 25.5, Summons.

SEP cases often involve taxpayers who do not maintain adequate books and records. Therefore, SEP agents must be well versed in the various methods of reconstructing income. The two basic approaches in determining correct taxable income are:

The specific item method uses specific items to identify unreported income from both legal and illegal sources. This preferred method limits the taxpayer's ability to challenge the government's determination since this method is based on information personal to the taxpayer.

When specific items are not traceable, it may be necessary to use indirect methods to reconstruct income based on circumstantial evidence. The use of indirect methods is allowed by IRC 446, General Rule for Methods of Accounting, and has been upheld by the courts in civil and criminal tax cases.

The court tested methods of reconstructing income include:

The indirect method used must include evidence of a likely source of taxable income. In addition, the SEP agent must always address and refute possible defenses, such as nontaxable sources of income and cash hoard, regardless of whether the taxpayer raised such defenses.

IRM 4.10.4.6, Formal Indirect Methods of Determining Income, provides guidance on the use of various indirect methods.

SEP agents devote a significant amount of time working joint investigations with CI. Joint investigations are also known as administrative tax cases.

Joint investigations are comprehensive investigations conducted jointly by CI and Examination. The primary purpose of a joint investigation is to determine if criminal tax fraud is involved and whether criminal prosecution should be recommended. In addition to assisting with the criminal tax computation, SEP agents are responsible for the civil aspects of the case including, but not limited to, the following:

Joint investigations can originate from the following:

Upon assignment, the SEP agent should verify the case is an administrative tax case rather than a grand jury case. Different procedures apply for grand jury cases as explained in the following section.

SEP agents and SAs have separate, clearly defined roles in joint investigations. SEP agents must not participate in law enforcement activities nor be placed in situations for which they are not trained and/or which may put them or others at risk.

SEP agent responsibilities and detailed procedures regarding joint investigations can be found in IRM 25.1.4, Administrative Joint Investigation.

Guidance for grand jury investigations may be found in IRM 25.1.5, Grand Jury Investigations.

A grand jury is a powerful investigative tool for the government used to investigate allegations of criminal wrongdoing. SEP agents are frequently involved with grand jury investigations and grand jury material.

Proceedings of a grand jury are secret and are governed by Rule 6(e) of the Federal Rules of Criminal Procedure. The use of grand jury information for civil purposes is further restricted by the decisions in United States v. Baggot, 103 S. Ct. 3164 (1983) and United States v. Sells Engineering, Inc., 103 S. Ct. 3133 (1983).

The group manager (GM) of an agent assigned to a grand jury case should request they be added to the grand jury access list (6(e) list) to effectively participate in discussions involving case actions and provide experienced feedback. The GM should evaluate the employee on current assignments, manage workload and balance grand jury inventory.

The SEP agent assigned to a grand jury assists the U.S. Attorney's office, which controls the investigation. The SEP agent is primarily concerned with the consideration, resolution and review of issues as they relate to the criminal charges being investigated.

Although the SEP agent involved in the grand jury case will not complete the final civil tax liability, they must be aware of the civil ramifications of information received or developed during the grand jury investigation. Only information made a matter of public record or obtained prior to, or independent of, the grand jury can be used in a subsequent civil case.

SEP agents should prepare RARs using an offline RGS account. The RARs are not to be presented to the taxpayer for agreement. They must be clearly marked "For Criminal Tax Computation Purposes Only."

SEP agents may access IDRS or other return information to fulfill a CI request for assistance in a Title 26 investigation under IRC 6103(h)(1), Department of the Treasury, without regard to whether the investigation is currently before a grand jury or at any other stage. Accessing return information for a non-Title 26 investigation, such as a Title 31 structuring investigation, requires an ex parte order under IRC 6103(i)(1) , Disclosure of Returns and Return Information For Use in Criminal Investigations. Before release of this information, contact the Disclosure Office.

SEP agents may use their IRS credentials for identification purposes. When exhibiting their credentials, they should advise those contacted that they are acting as assistants to the attorney for the government in conjunction with an investigation.

IRS summonses are not used in a grand jury investigation. Documents and testimony are obtained by the U.S. Attorney's office using grand jury subpoenas.

The grand jury SEP agent is considered tainted and is prohibited from participating in any civil aspects of the case resulting from the grand jury. Managers on a 6(e) list are also considered tainted and must refer the civil closing to another group.

SEP agents often assist and/or testify in civil and criminal court proceedings. Examples include:

SEP agent responsibilities will vary depending on the issues of the case. The government attorney will determine the role of the SEP agent.

Government prosecution cases require extensive time for preparation and trial. SEP agents should be prepared to spend any additional time necessary to assist the government attorney in the case.

The SEP agent should contact the local Disclosure Office to determine whether a testimony authorization is required pursuant to Treas. Reg. 301.9000-1, Definitions When Used in 301.90000-1 through 301.9000-6 (See 26 CFR 301.9000-1). See IRM 1.2.2.12.2, Delegation Order 11-2 (Rev. 4), Authority to Permit Disclosure of Tax Information and to Permit Testimony or the Production of Documents. In general, a testimony authorization is not required in a case referred by the IRS to the government where the government is calling the SEP agent as a witness.

The most common duty as a SEP agent in courtroom proceedings is testifying during a criminal trial as an expert witness or summary witness.

An expert witness is a person skilled in some area or who has experience or knowledge not generally known to ordinary persons (Federal Rules of Evidence, Rule 702). Under Rule 16(e) of the Federal Rules of Criminal Procedure, the defense can ask for the witness's qualifications. It is imperative SEP agents maintain all professional requirements and a current resume.

Once qualified before the court, the expert witness is called upon to express an opinion based on facts presumably in the record of the case. The expert witness reviews the government's evidence and expresses an opinion as to the issue needing expert assistance. Generally, the expert witness is called to testify immediately prior to the government's final witness and is excluded from hearing testimony during the trial.

A summary witness listens to all evidence presented during the trial and is the final witness called in the government's case to convince the jury there was harm to the government. A summary witness will be qualified as an expert in federal income tax computations. Generally, the summary witness is a SEP agent or a compliance officer with no prior involvement in the investigation.

Occasionally, SEP agents will be used as both the expert witness and the summary witness. In this situation, the SEP agent renders an expert opinion and prepares the tax computation.

SEP agents may obtain information during an income tax investigation indicating that non-tax criminal violations have occurred, or may witness criminal acts falling under the jurisdiction of another federal agency. Except in rare and unusual cases, this information is considered tax return information as defined under IRC 6103, Confidentiality and disclosure of returns and return information. See IRM 11.3.34, Disclosure for Non-tax Criminal Violations, for situations where observing a criminal act would not be tax return information and could be disclosed to local, state or federal law enforcement agencies.

In general, tax returns and tax return information cannot be disclosed to other federal law enforcement agencies. However, other federal law enforcement agencies pursuing potential non-tax federal criminal charges may obtain an ex parte order through the U. S. Attorney's office in accordance with the requirements set forth in IRC 6103(i), Disclosure to Federal offices or employees for administration. See IRM 11.3.28, Disclosure to Federal Agencies for Administration of Non-Tax Criminal Laws, for IRC 6103(i), procedures. The ex parte order is forwarded to the Disclosure Office to obtain the necessary documents.

The Disclosure Office will only provide the information specified in the ex parte order to the specified parties.

For disclosure of Bank Secrecy Act Information (Title 31), refer to IRM 11.3.28.4.1, Disclosure of Bank Secrecy Act Information. Information will not be released through an ex parte order if it is determined by the IRS that disclosure would identify a confidential informant or seriously impair a civil or criminal investigation. See IRM 11.3.28.3, Procedures for Access to Returns and Return Information, paragraph (1)(c).

The SEP agent should consult with the Disclosure Office as to whether material developed subsequent to the ex parte order may be disclosed on a continuing basis. Such subsequent disclosure may be made only if the ex parte order provides for further disclosures and designates a specific cutoff date. See IRM 11.3.28.4, Disclosures in Conformity with an Ex Parte Court Order, paragraph (19).

State and local law enforcement agencies cannot obtain an ex parte order.

SEP Identifies, develops and investigates those issues which have significant fraud potential and develops appropriate referrals. The SEP agent examines returns that are complex and may have camouflaged fraud indicators. When the SEP agent has determined that fraud indicators are present, IRM 25.1.2.2, Fraud Development Procedures should be adhered to.

The SEP agent will discuss cases that have first indicators of fraud with the group manager. If the group manager agrees there are indicators of fraud, then the examiner should contact the FEA using the Specialist Referral System (SRS). See IRM 25.1.6.3, Procedures for additional information.

If the SEP agent determines that a potential fraud case has firm indications of fraud/willfulness and meets criminal criteria, the SEP agent will then complete Form 2797 in accordance with IRM 25.1.3.3, Preparation of Form 2797 - Referral Report of Potential Criminal Fraud Cases.

Internal sources may include:

External sources may include:

Prior year Revenue Agent Reports (RAR) and workpapers.

Prior year Special Agent Reports (SAR) and exhibits for administrative cases only.

CI information and case development files including prime leads.

Collection files containing financial information.

Transcript of accounts (IDRS).

Information Return Processing (IRP) transcripts.

Bank Secrecy Act Information (Currency Transaction Reports and Suspicious Activity Reports).

International Revenue Agent Reports.

Treasury Enforcement Communication System (TECS) records.

Research databases (for example, Bloomberg Tax, Accurint, Westlaw and others).

Asset locator services.

Records of civil and criminal cases from federal, state and local courts.

Records of parole and from probation officers.

Bankruptcy filings.

U.S. Coast Guard (vessels registered with the Coast Guard may not be registered with a state).

Drug Enforcement Administration (DEA).

Federal Bureau of Investigation (FBI).

U.S. Immigration and Customs Enforcement (USICE).

U.S. Secret Service.

Bureau of Alcohol, Tobacco Firearms, and Explosives (ATF).

National Crime Information Center (NCIC) through CI.

Department of Homeland Security (DHS).

Department of State.

Treasurer of the United States.

Federal Aviation Agency (FAA).

Securities and Exchange Commission (SEC).

U.S. Postal Service.

State and local law enforcement agencies.

Department of Motor Vehicles (DMV).

Department of Agriculture.

Health and Human Services (HHS).

When obtaining information from outside sources, SEP agents must follow third-party contact procedures in accordance with IRC 7602(c), Notice of Contact of Third Parties. See IRM 25.27.1, Third Party Contact Program.

Before making a third-party contact, SEP agents must send Letter 3164-E, (Exam-1) Third Party Contact.

Contact with the IRS, initiated by a third party such as a member of law enforcement or an informant, is not considered a third party contact. However, if the SEP agent contacts a third party regarding a specific taxpayer, the contact requires advance notification to the taxpayer and a recordation of the contact.

IRM 25.27.1.3.2 , Exceptions to IRC 7602(c) Notification Requirements, discusses seven exceptions to the advance taxpayer notification requirements.

In jeopardy/termination assessment cases notification requirements do not apply during the jeopardy period. See IRM 25.27.1.3.7, Jeopardy Situations, for guidance.

Notification requirements do not apply when the third party has a reprisal concern. Reprisal must be addressed in every third-party contact. See IRM 25.27.1.3.3 , Reprisal, for information.

Notification requirements do not apply to pending criminal investigations. See IRM 4.11.57.5.4 , Pending Criminal Investigation, for details.

For additional guidance, see IRM 4.10.3.3, Interviews: Authority and Purpose. See IRM 4.11.57, Third Party Contacts.