7 August 2001

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## Handbook 5 THE INVESTIGATIVE PROCESS Chapter 14 CIVIL ACTIVITY AT THE CLOSE OF THE SUBJECT CRIMINAL INVESTIGATION
### Contents [5] 14.1 OVERVIEW [5] 14.2 CIVIL PENALTIES [5] 14.3 INFORMATION TO BE USED IN CIVIL ASSESSMENT [5] 14.3.1 Information Available For Civil Assessment From An Administrative Investigation [5] 14.3.1.1 Information Developed After The Investigation Is Submitted For Prosecution [5] 14.3.2 Information Available For Civil Assessment From A Grand Jury Investigation [5] 14.3.2.1 Rule 6(e) Order Obtained [5] 14.3.2.2 No Rule 6(e) Order Obtained [5] 14.3.2.2.1 Records Not Transmitted to Examination or Collection Upon Closing a Grand Jury Investigation [5] 14.4 CRIMINAL INVESTIGATIVE FILES FOR CIVIL ACTIONS ON CASES THAT HAVE BEEN PROSECUTED [5] 14.5 PAYMENT OF CIVIL TAX LIABILITIES AS A CONDITION OF PROBATION [5] 14.6 OFFERS IN CLOSED CRIMINAL INVESTIGATIONS [5] 14.7 CIVIL RESTITUTION FOR QUESTIONABLE REFUND INVESTIGATIONS [5] 14.8 DISPUTED CIVIL ASSESSMENTS AND COLLECTIONS [5] 14.8.1 Tax Court [5] 14.8.2 Coordination of Answers in Investigations Docketed in the Tax Court [5] 14.9 REPORTS FOR CIVIL PENALTY RECOMMENDATIONS FOR TITLE 31
### [5] 14.1 (12-14-1998) OVERVIEW
When the criminal aspects of a criminal investigation have concluded, the tax information should be forwarded to the appropriate civil function of Internal Revenue Service (IRS) for assessment or collection. Some violations of the Internal Revenue laws that are punishable as crimes also subject the violators to civil penalties and ad valorem additions to the tax. Other violations of the Internal Revenue laws are enforced primarily through civil penalties; but, in particular instances, the investigation of such violations may be inseparable from the investigation of alleged or suspected criminal acts. This chapter deals with these post-closing civil and administrative activities as follows: Civil penalties. Information to be used in civil assessments. Criminal investigative files for civil actions on cases that have been prosecuted. Payment of civil tax liabilities as a condition of probation. Offers in closed subject criminal investigations. Civil restitution in questionable refund investigations. Disputed civil assessments and collections.
### [5] 14.2 (12-14-1998) CIVIL PENALTIES
CI may recommend, if appropriate, ad valorem additions to the tax in completed investigations. See Handbook 9.5 Chapter 13 Exhibit 13-1 for a listing of the most frequently assessed ad valorem additions.
### [5] 14.3 (12-14-1998) INFORMATION TO BE USED IN CIVIL ASSESSMENT
The information used by the IRS civil functions in the assessment or collection of tax following a criminal investigation is dependent on whether such investigation was conducted administratively or through the grand jury process.
### [5] 14.3.1 (12-14-1998) Information Available For Civil Assessment From An Administrative Investigation
Information developed in the course of an administrative criminal tax investigation can be used by IRS civil functions in the assessment and collection of a tax liability.
### [5] 14.3.1.1 (12-14-1998) Information Developed After The Investigation Is Submitted For Prosecution
Information that may have a substantial effect on the civil settlement of a case may be developed after a Special Agent's Report (SAR) has been submitted, possibly while preparing for trial or during the trial for the criminal offense. Such information may consist of admissions of liability, or relate to the existence of additional records or witnesses, which may have an important bearing on the determination of the civil liability. In this respect, an effort will be made by the special agent to obtain copies of any exhibits introduced during the trial that contain information not obtained during the investigation and may have a significant bearing on the civil liability. Special agents will submit a report summarizing such information as soon as it is received (original and three copies). Copies of any documents obtained will be attached to the original report. The report and attachments will be distributed as follows: If the Examination function still has control over the civil settlement, the original and one copy of the report will be forwarded to the Chief, Examination, for association with the administrative file. If the case has passed to Appeals, the report will be forwarded to the Director of Investigations (DI) for transmittal to the Regional Director of Appeals for his or her information. One copy of the report will be forwarded to the DI for his or her files. One copy will be retained by the Chief, CI. The report in cases that have been prosecuted will include a descriptive list of all exhibits introduced on behalf of the defendant.
### [5] 14.3.2 (12-14-1998) Information Available For Civil Assessment From A Grand Jury Investigation
Grand jury information may not be used for civil purposes unless the Service obtains the information independent of the grand jury or through a Rule 6(e) order. See the Handbook 9.3, Chapter 1, in the section entitled Grand Jury Information and Civil Matters. The Group Manager should ensure the segregation of grand jury information and non grand jury information. After the initiation of a grand jury investigation, any information obtained independent of the grand jury process should be kept separately and clearly identified by its source. Service personnel who have received grand jury information subject to the secrecy provisions of Rule 6(e) will exclude themselves from involvement in non-grand jury matters concerning the individuals, entities, and subject matter that was before the grand jury. The District Director will appoint a management official in the district to make determinations on civil matters involving the subject of a grand jury investigation. This official will not have access to any grand jury information. The Chief and other CI managers may not use grand jury information to direct a non-grand jury investigation, unless a Rule 6 (e) order is obtained At the end of the grand jury investigation, the special agent will prepare a final report similar to the final report in an administrative investigation. The special agent should prepare separate exhibit folders for documents governed by Rule 6(e) and clearly identify them as grand jury information. Special care should be taken to document sources of information, since the Service may have to prove that evidence used for civil purposes was properly obtained under a Rule 6(e) order or was obtained independent of the grand jury process. The non--grand jury information, even if exactly the same as the grand jury information, is not governed by Rule 6(e) and may be disclosed in accordance with IRC 6103.
### [5] 14.3.2.1 (12-14-1998) Rule 6(e) Order Obtained
After all criminal matters have been concluded on a case investigated in a grand jury setting, CI will confer with the attorney for the government for the purpose of pursuing any civil action. If the attorney for the government agrees that civil action should be pursued, CI will seek Counsel's assistance in reviewing the information gathered for the purpose of pursuing civil action. If Counsel determines that civil action is warranted, an attorney for the government may apply for a Rule 6(e) order to allow use of the grand jury information by the appropriate civil function(s). If the court grants a Rule 6(e) order authorizing disclosure for civil purposes, the Chief will forward a copy of the authorized materials to the appropriate IRS civil function.
### [5] 14.3.2.2 (12-14-1998) No Rule 6(e) Order Obtained
If a Rule 6(e) order cannot be obtained and the investigation has civil potential solely on the basis of non-grand jury information, the special agent will consult with the attorney for the government for his or her concurrence that the information under consideration is non-grand jury information and can be disclosed. The special agent will then confer with Counsel to determine whether Service policy allows the information to be given to the appropriate civil function. If Counsel concurs, the Chief, CI, will transmit the non-grand jury information to the Chief of the affected civil function by memorandum, but will not refer in his or her correspondence to the grand jury investigation nor draw conclusions based on grand jury information.
### [5] 14.3.2.2.1 (12-14-1998) Records Not Transmitted to Examination or Collection Upon Closing a Grand Jury Investigation
As a general rule, any third-party records not subject to 6(e) limitations should be returned to their owners, but before doing so, the approval of the attorney for the government should be obtained. The remaining records are to be retained and should be stored in accordance with existing Service guidelines. (See Handbook 9.12, Chapter 2, Record Retention.)
### [5] 14.4 (12-14-1998) CRIMINAL INVESTIGATIVE FILES FOR CIVIL ACTIONS ON CASES THAT HAVE BEEN PROSECUTED
The SAR should make recommendations relative to the application of any appropriate civil sanctions within the jurisdiction of the IRS, including the particular sections of law and the tax period involved. If the case involves tax periods where prosecution is not recommended, the special agent should identify the evidence relied upon to support the penalty recommendations relating to such periods and set forth the reasons for recommending against prosecution. The report should contain details of the revenue agent's recommendation. A copy of the Revenue Agent's Report should be included as an exhibit to the SAR. The SAR should state where the evidence in support of the fraud penalty is maintained. A narrative should be in the SAR relating to the revenue agent's recommendations, and the report should also schedule the corrected taxable income and tax for use in civil proceedings. When the special agent recommends the Civil Fraud Penalty in willful failure to file cases or with respect to tax periods not included in the prosecution recommendation, consideration should be given to including in the report the facts and evidence used to support the Civil Fraud Penalty. This may be accomplished by creating a separate heading or sub-section in the report. The copy of the SAR prepared for the district Examination or Collection function will be retained by the Chief until final disposition of the criminal aspects. The Chief, Examination, in the district or Chief, Collection, will be responsible for taking security measures necessary to protect the confidential nature of the retained copy of the report of the Internal Revenue agent or revenue officer in the matter and work papers and other documents involved until all criminal aspects have been resolved.
### [5] 14.5 (12-14-1998) PAYMENT OF CIVIL TAX LIABILITIES AS A CONDITION OF PROBATION
When sentencing a defendant, the court may suspend sentence and place the defendant on probation. A condition of probation may be that the defendant pay or make every effort to pay the tax ultimately determined. Failure to comply with the terms of probation may result in its revocation and imposition of sentence. Even if payment of a civil liability is not part of a criminal sentence, the information concerning the civil tax liability can be made available for civil tax assessment (as specified in subsections 14.3 and 14.4 above) after the final criminal actions on the case have taken place. In order to assist the court in imposing sentence or granting probation, the probation service may make a pre-sentence investigation and report. The investigation and report are concerned with any prior criminal record of the defendant and personal background, individual characteristics, financial condition, and any circumstances that may have affected the defendants behavior. In the course of a pre-sentence investigation, the probation officer will usually consult with the special agent on the case for information about the defendant's cooperation (or lack thereof ) during the investigation, the defendant's mental and physical history, whether he or she has made any payments on the tax deficiencies involved in the criminal case, other tax obligations due the government, and data regarding any other matters that might be helpful to the court in imposing sentence or granting probation. Before imposing sentence the court may disclose to the defendant or his or her counsel all or part of the material contained in the report of the pre-sentence investigation and afford an opportunity to the defendant or his or her counsel to comment thereon. Any material disclosed to the defendant or his/her counsel shall also be disclosed to the attorney for the government (FRCrP Rule 32).
### [5] 14.6 (12-14-1998) OFFERS IN CLOSED CRIMINAL INVESTIGATIONS
Offers involving joint investigations with the district Examination or Collection functions and in which the criminal aspects have been disposed will be examined solely by the district Examination Division. Except as noted in (2) below, the Chief of that division will, after completion of the examination, refer the entire file to the Chief, CI, for concurrence or comment when all of the following conditions exist: The merits of the ad valorem fraud or negligence penalty are involved. The offer involves an investigation in which the special agent has written the final report and recommended the assertion of such a penalty. Examination contemplates recommending acceptance of the offer. If the sole issue presented by the offer in compromise is the ability to pay, referral to CI will not be made. If the Chief, CI, concurs in the recommended disposition of the offer, the concurrence shall be indicated by memorandum and the entire file should be returned to the district Examination Division for processing. If the Chief, CI, does not concur and no agreement can be reached with the Examination Division as to the disposition of the offer, the entire file will be forwarded to the District Director for resolving any difference. Guidelines concerning the disposition of offers in compromise are contained in the Offers in Compromise Handbook also see Criminal Investigation Handbook 9.5 Chapter 13 for more general information.
### [5] 14.7 (12-14-1998) CIVIL RESTITUTION FOR QUESTIONABLE REFUND INVESTIGATIONS
When the court imposes an order of restitution, it can impose a condition requiring the defendant to make payments of restitution or adhere to a court-ordered installment schedule for payment of restitution. See Handbook 9.5 Chapter 13 and Handbook 9.8 Chapter 4 for more information concerning restitution. There is no need to file a civil suit upon non-payment of restitution. Should the defendant fail to meet his or her obligation with regards to the court-ordered restitution, contact should be made with the U.S. Attorney's office which has jurisdiction and authority to enforce the terms of the court order. The Service has no authority to make an assessment against an individual specifically for restitution. Therefore, the restitution (other than tax cases) will be processed as non-rebate fraudulent erroneous refunds.
### [5] 14.8 (12-14-1998) DISPUTED CIVIL ASSESSMENTS AND COLLECTIONS
A taxpayer can file a petition in the United States Tax Court or Federal District Court to dispute civil assessments and penalties resulting from information developed by a special agent in the course of a criminal investigation. In those instances, District Counsel or other government attorneys may request the assistance of the special agent. Special agents are authorized to assist the District, Regional, and Chief Counsels' offices and Appeals in any investigation involving the merits of a civil penalty recommended by CI. Further investigations will be made to obtain additional evidence to help sustain the penalty upon written request from Counsel or the Regional Director of Appeals. Such information shall be forwarded in a supplemental report. Assistance may include participation in any conference with respect to the civil liability in any investigation, upon request of the Appeals office. The extent of the special agent's participation in any conference will be determined by that office.
### [5] 14.8.1 (12-14-1998) Tax Court
The Tax Reform Act of 1969 changed the name of the Tax Court of the United States to the United States Tax Court and established it as a court of record under Article I, Section 8, Clause 9, of the Constitution. It is now part of the Judicial Branch of government. In addition to the powers it already possessed, the Court has been given the power to punish contempt of its authority, and to enforce its decisions by issuing any writ, etc., which a District Court of the United States can issue (IRC 7441-7456). In a Tax Court trial evidence is admitted and excluded much as it would be in a civil non-jury trial in the United States District Court. In general, the Commissioner's determination of deficiency is presumed to be correct (Rule 32, Tax Court Rules of Practice). However, if the fraud penalty is asserted, the burden is upon the Commissioner to prove fraud with intent to evade tax (IRC 7454(a)). The evidence in that respect must be "clear and convincing" ; not "beyond a reasonable doubt" as in a criminal case, but more than a mere preponderance. The failure of the Commissioner to prevail on the fraud issue does not relieve the taxpayer of the burden of overcoming the prima facie correctness of the determination of the deficiencies unless the assessment was not made within the applicable period of limitations. Record of the disposition of the criminal case against a taxpayer is admissible in the Tax Court on the issue of fraud. Despite an acquittal in a criminal case, the same evidence may be sufficient to prove fraud in the civil case. A conviction for attempted tax evasion in the district court is conclusive in Tax Court proceedings as to the fraud issue. A plea of guilty can be used in a civil suit for taxes and penalties against the taxpayer based on the same facts. A plea of nolo contendere subjects the defendant to the same punishment as a plea of guilty but does not mean the defendant admits the charges. It cannot be used against him or her as an admission in any civil suit for the same act. A guilty plea in a criminal case will be received by the Tax Court as an admission to be given weight according to the circumstances. Without any explanation of the circumstances, it is sufficient to establish fraud. However, such a plea in a failure-to-file case may constitute only a willful omission and passive neglect to perform a statutory duty and not render the taxpayer liable for the fraud penalty. The Commissioner is not barred from assessing the fraud penalty by: the taxpayer's filing correct amended returns and paying additional taxes due after filing fraudulent returns; or the death of the taxpayer, since the penalty is for an offense against property rights and not personal rights. The responsibility during an investigation for the development of evidence to sustain the ad valorem additions to the tax (except those concerning tax estimations) rests upon the special agent. Consequently, during the trial of a Tax Court case where the fraud penalty is at issue, the special agent is often a principal witness for the government. It is the duty of the special agent in the preparation for trial and the presentation of the case in Tax Court to consult with and assist the attorney assigned to the matter by the District Counsel.
### [5] 14.8.2 (12-14-1998) Coordination of Answers in Investigations Docketed in the Tax Court
In those investigations within the jurisdiction of CI where, as the result of the issuance of a statutory notice of deficiency and the filing by the taxpayer of a petition in the United States Tax Court, an answer is required to be filed by the government, District Counsel normally will request from the Chief, CI, copies of any reports in the investigation which have been prepared by the special agent and supporting data to be used solely in connection with the preparation of the answer and not for the purpose of evaluating the merits of the investigation. The Chief, CI, in forwarding the copies of the reports and supporting data for use of District Counsel, will point out in the transmittal memorandum the items of income regarding which it is believed advisable to withhold as much detailed information in the answer as is permissible under the requirements of the United States Tax Court. Requests relating to grand jury investigations will be referred to Regional Counsel.
### [5] 14.9 (12-14-1998) REPORTS FOR CIVIL PENALTY RECOMMENDATIONS FOR TITLE 31
Reports for civil penalty recommendations for Title 31 investigations resulting in an indictment will consist of: A summary of the charges in the indictment and the charges convicted on. The scope of the Title 31 crime to include the amount of money laundered. The total dollar amount of unreported currency transactions in the indictment. The number of Currency Transaction Reports (CTRs) not properly filed. The number of improperly reported transactions named in the indictment. Copies of any public information such as a copy of the indictment, sentencing memorandum, affidavit for search warrants, arrest warrants, press releases, and news articles.
### Internal Revenue Manual | ### Hndbk. 5 Chap. 14 CIVIL ACTIVITY AT THE CLOSE OF THE SUBJECT CRIMINAL INVESTIGATION | ### (12-14-1998)

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