7 August 2001

See contents of full IRS Handbook of Criminal Investigation: http://cryptome.org/irs-ci/irs-ci.htm

## Handbook 9.5 The Investigative Process Chapter 3 Tax Crimes-General
### Contents [9.5] 3.1 Overview [9.5] 3.2 Tax Crime Sub-Programs of the Fraud Program [9.5] 3.2.1 Bankruptcy [9.5] 3.2.1.1 Bankruptcy Investigation Selection [9.5] 3.2.2 Excise Tax [9.5] 3.2.2.1 Fuel Excise Tax [9.5] 3.2.2.2 Wagering Excise Tax [9.5] 3.2.3 Financial Institution Fraud [9.5] 3.2.4 Foreign and Domestic Trusts [9.5] 3.2.5 Gaming [9.5] 3.2.5.1 Gaming Investigations [9.5] 3.2.5.2 Information Available From State Regulatory Agencies On Gaming [9.5] 3.2.6 General Fraud [9.5] 3.2.7 Health Care Fraud [9.5] 3.2.7.1 Issues in Health Care Fraud [9.5] 3.2.7.2 Types of Health Care and Insurance Programs [9.5] 3.2.7.2.1 Health Care Entitlement Programs [9.5] 3.2.7.2.2 Fee for Service and Capitated (HMO) Plans [9.5] 3.2.8 Insurance Fraud [9.5] 3.2.9 Public Corruption [9.5] 3.2.10 Questionable Refunds (QRP) [9.5] 3.2.11 Return Preparers [9.5] 3.2.12 Telemarketing Fraud [9.5] 3.3 Initiatives and Emerging Issues [9.5] 3.3.1 Employment Tax Initiative [9.5] 3.3.1.1 Employment Tax Schemes [9.5] 3.3.1.1.1 The Employment Tax Criminal Investigation [9.5] 3.3.1.1.1.1 Collection and CI Interaction in Employment Tax Investigations [9.5] 3.3.1.1.2 Criminal Investigation Procedures in Employment Tax Investigations [9.5] 3.3.1.2 Nonfiler Initiative [9.5] 3.3.1.2.1 Voluntary Disclosure Policy [9.5] 3.3.1.3 Organized Crime Initiative [9.5] 3.3.2 Pension and Exempt Organization Fraud-Former Emerging Issue [9.5] 3.3.2.1 Pension and Exempt Organization Criminal Case Selection [9.5] 3.3.2.2 Forwarding Pension or Exempt Organization Items to the IRS Civil Functions [9.5] 3.3.2.3 Pension Fraud Schemes [9.5] 3.3.2.4 The Pension Fraud Investigation [9.5] 3.4 Schemes [9.5] 3.5 Other [9.5] 3.5.1 Terrorism [9.5] 3.5.2 Embezzled Funds [9.5] 3.5.3 Sensitive Investigations Exhibit [9.5] 3-1 Pattern Letter 2527(P)
### [9.5] 3.1 (04-09-1999) Overview
Tax crimes are those which are in violation of the criminal statutes of the Internal Revenue Code (IRC) and/or Title 18 of the Code of Federal Regulations as applicable to the IRC. Although violations of narcotics statutes or money laundering statutes usually do have tax ramifications, those types of violations, as well as refund fraud and organized crime investigations will be discussed in separate chapters. This chapter addresses the various programs, initiatives, and to a lesser extent schemes used in the tax crime area. This chapter relates to tax crimes classified in terms of; Sub-Programs of the Fraud Program. Initiatives in which CI participates. Schemes used in the criminal violation of tax statutes. Other situations to which the Special Agent should be sensitive when conducting an investigation.
### [9.5] 3.2 (04-09-1999) Tax Crime Sub-Programs of the Fraud Program
The CI Fraud Program encompasses a broad range of illegal activity, primarily within legal industries (exclusive of those investigations meeting the criteria of the narcotics program). Within the Fraud Program there are sub-programs as follows: Bankruptcy--Investigations where bankruptcy fraud is an intrinsic part of a tax evasion scheme. Excise Tax--Investigations involving violations of the excise tax laws. Financial Institution Fraud--Investigations wherein income is generated as a result of fraud against or related to a bank, credit union, savings and loan, check cashing business, thrift, stockbroker, or related regulatory agency, possibly even placing the solvency of the institution at risk. Foreign and Domestic Trusts--Investigations involving fraudulent trusts used either to evade taxes or evade the payment of taxes. Gaming--Investigations relating to the income generated from the gaming industry (either legal and illegal forms of gaming). General Fraud--Investigations relating to income that does not fall within any of the other sub-programs. Health Care Fraud--Investigations relating to income generated from health care fraud. All investigations of insurance fraud involving health care will be included in this program. Insurance Fraud--Investigations involving income generated from or by the insurance industry that is not related to health care insurance. Public Corruption--Investigations of income wherein there is a violation of the public trust of or by a government official or employee. Questionable Refunds (QRP)--Investigations involving fraudulent tax refund schemes. (See CI Handbook 9.5 Chapter 4, Refund Fraud) Return Preparers--Investigations involving preparers of false and/or fraudulent tax returns. Telemarketing Fraud--Investigations of income wherein telephonic or wire communications are a major element used to promote, solicit, or market products or services. All criminal statutes within the jurisdiction of CI, including money laundering charges may be involved as integral part of any of the aforementioned investigations. (Additional information concerning these sub-programs can be found in CI Handbook 9.9, Criminal Investigation Management Information System or a copy of the current National Operations Annual Report.)
### [9.5] 3.2.1 (04-09-1999) Bankruptcy
The Bankruptcy Reform Act of 1978 restructured the bankruptcy court system and overhauled the nation's bankruptcy laws in an attempt to bring them into conformity with modern commercial transactions. Since the IRS is often a major creditor in many bankruptcy proceedings, it is paramount that we protect our interests. The goals of the bankruptcy program are to: Increase voluntary compliance with federal tax laws through the prosecution of those committing significant tax crimes involving bankruptcy fraud. Enhance the IRS' presence among bankruptcy fraud professionals and practitioners for the dual purpose of increasing compliance and providing contact points for persons to report allegations of criminal conduct. Foster closer cooperation between Criminal Investigation (CI) and Collection in attaining mutual compliance goals by establishing a contact point in CI for the Collection bankruptcy fraud coordinators in each district.
### [9.5] 3.2.1.1 (04-09-1999) Bankruptcy Investigation Selection
Investigations should be selected on the basis of the following priorities: Instances where the bankruptcy is an intrinsic part of a tax fraud scheme and operates as an instrument of the evasion scheme. Instances involving the pyramiding of payroll and withholding taxes, particularly where the responsible party fraudulently claims withholding credits on his or her individual return. Instances involving official misconduct, such as embezzlement on the part of the bankruptcy panel trustee. This is especially true when the embezzlement or defalcation subsequently goes unreported on the subject's individual return. Instances where the bankruptcy fraud is committed for its own sake but where the Service is also defrauded because we are a major creditor.
### [9.5] 3.2.2 (04-09-1999) Excise Tax
An excise tax is a duty or impost levied upon the manufacture or sale of goods and services or upon certain occupations. While income taxes are based on net income or net profits and are graduated, excise taxes are not. They can be based upon any of the following factors: Selling price of merchandise or facilities. Services sold or used. Number. Weight. Volume of units sold. Nature of occupation. Civil excise tax cases cannot be appealed to the Tax Court. All court appeals by excise tax litigants must be made to either the U.S. Court of Claims or to the U.S. District Court, and then only upon prepayment of the taxes. Certain excise tax returns are required to be filed on either a fiscal-year or calendar-year basis. In general, excise tax returns are filed on a calendar quarter-year basis. The excise tax categories of most frequent interest to CI include: Manufacturers' excise taxes : Automotive and related items (gasoline, gasohol sales, gasoline sales used for gasohol, and tires); coal from underground mines and from surface mines; recreational equipment such as firearms (pistols, revolvers, other firearms, shells and cartridges); and sporting goods (fishing equipment, hunting, and related equipment). Occupational taxes : Wagering; brewers; retail liquor dealers; retail dealers in beer; wholesale liquor dealers; wholesale dealers in beer; and limited other retail dealers. Facilities and services : Communications (local and toll telephone service and teletypewriter service) and transportation (transportation of persons by air, inland waterway users) fuel and transportation of property. Heavy trucks and trailers retailers taxes : Truck parts and accessory installations; truck chassis or body; truck trailer or semitrailer chassis or body. Miscellaneous excise taxes : Seabed mining; environmental taxes; highway motor vehicle use tax; foreign insurance policies; wagering taxes; liquor taxes; and tobacco taxes. Information concerning the investigation of these types of excise taxes can be found in IRM-CI Handbook 9.5 Chapter 11, Other Specialized Investigations, Section 6. NOTE: The preceding excise taxes on alcohol, tobacco, and firearms are not under the jurisdiction of CI. Those items are taxed under Subtitle E of the Internal Revenue Code (IRC). Responsibility for the enforcement of excise taxes on alcohol, tobacco, machine guns and certain other firearms is vested exclusively with the Alcohol, Tobacco and Firearms (ATF) Bureau of Treasury.
### [9.5] 3.2.2.1 (04-09-1999) Fuel Excise Tax
Since the mid-1980s, organized criminal elements have devised elaborate schemes to steal federal and state motor fuel excise tax revenue. The impact of these evasion schemes went far beyond being just a substantial revenue loss. These criminal enterprises adversely affected the fuel industry as well, eroding the market share of legitimate dealers and forcing some out of business. Since 1991, CI has made a concerted effort to disrupt those organized criminal elements responsible for perpetrating motor fuel evasion schemes across the country. These enforcement efforts have provided the impetus for the enactment of important legislative changes to reduce evasion, and materially contributed to dramatic and sustained increases in federal and state motor fuel tax revenue.
### [9.5] 3.2.2.2 (04-09-1999) Wagering Excise Tax
A wagering excise tax is imposed on wagers and is a percentage of the wager. The tax is assessed on the individual who accepts wagers. A special wagering tax also exists and is a flat fee to be paid by each person who is engaged in receiving wagers or employed by such person. For additional information concerning CI's involvement in the enforcement of the wagering taxes see Handbook 9.5 Chapter 11, Other Specialized Investigations, Section 5.
### [9.5] 3.2.3 (04-09-1999) Financial Institution Fraud
CI's Financial Institution Fraud Program is the compliance effort designed to address criminal violations involving fraud relative to banks, savings and loan associations, credit unions, and other financial institutions such as check-cashing businesses, stockbrokers, and thrifts. Criminal tax and money laundering investigations make major contributions to the federal government's effort to combat the various fraudulent schemes being committed against financial institutions. For CI, these investigations focus on unreported income or the illegal laundering of income obtained by violators operating inside and outside the financial institution. CI is a member of the Interagency Bank Fraud Working Group (IBFWG). This group is comprised of regulatory and law enforcement agencies that either regulate financial institutions or investigate frauds committed against these institutions. This group also seeks to improve the coordination and exchange of information between agencies involved in the investigation and prosecution of financial institution fraud cases.
### [9.5] 3.2.4 (04-09-1999) Foreign and Domestic Trusts
This area addresses fraudulent foreign and domestic trusts that are promoted as a means to protect assets and avoid the payment of taxes. When in reality they are nothing more than elaborate tax evasion schemes set up to give the appearance of legitimacy. Frequently promoters use "tax haven" countries to set up offshore trusts. due to their stringent bank secrecy laws.
### [9.5] 3.2.5 (04-09-1999) Gaming
The Gaming Program was initiated in response to unprecedented growth which occurred in the legalized gaming industry. CI has increased its attention to this industry in the enforcement of tax, money laundering, and other criminal statutes within our jurisdiction. CI also recognizes that traditional gaming investigations involving Illegal bookmaking and illegal numbers operations are still areas of concern. The Gaming Program consists of two primary initiatives. First, our traditional investigative effort directed at persons suspected of violating laws within our jurisdiction. Second, our important liaison activity in cooperation with various federal and state gaming boards, commissions, and other regulators. This liaison activity includes participation in writing state gaming regulations, assisting in licensing activities, and developing investigations through contacts with federal and state regulators and other law enforcement agencies. We consider our liaison activity as an essential element of a strong Gaming Program. To address concerns regarding the rapid expansion of domestic gaming. Congress passed the National Gaming Impact Study Commission Act, Public Law 104-169, which requires a comprehensive legal and factual study of the social and economic impacts of gambling in the U.S. on: Federal, state, local, and Native American tribal governments. Communities and social institutions, generally. The recent growth of Internet gaming is one area of concern that was addressed in Congressional hearings. Regulations implementing the Bank Secrecy Act (BSA) have been amended to include casinos operated by or on behalf of Indian tribes within the definition of a financial institution set forth in those regulations. The amendments effective August 1, 1996 extended the reporting and record-keeping requirements and anti-money laundering safeguards of the BSA to tribal casinos.
### [9.5] 3.2.5.1 (04-09-1999) Gaming Investigations
Gaming investigations differ from wagering excise tax investigations. In a gaming investigation a subject is typically under investigation for income tax or money-laundering violations. Title 18, Section 1955 (Prohibition of Illegal Gambling Businesses) is not one of the charges for which CI should recommend prosecution, but it is one of the specified unlawful activities in 18 U.S.C. 1956, money-laundering violation.
### [9.5] 3.2.5.2 (04-09-1999) Information Available From State Regulatory Agencies On Gaming
A number of states gather and maintain substantial information relating to individuals and/or entities associated with the gaming industry. Much of the information is readily available to law enforcement and may be quite helpful when conducting an investigation. As an example of the type of information available from local or state regulatory agencies, The State of New Jersey, Department of Law and Public Safety, Division of Gaming Enforcement, completes a financial investigation on all individuals associated with casino operations (e.g. casino developers/investors, employees, vendors, contractors, etc.). Information available from such investigations include: Gaming license applications for all casinos and employees, and ancillary businesses of the casinos, including any investigation reports. Investigative reports of crimes committed by casinos, casino employees, or ancillary businesses. Investigative reports of crimes committed against casinos, casino employees or ancillary businesses. All requests for information from the New Jersey Division of Gaming Enforcement should be submitted as a collateral request to the Chief, CI, Newark District. State of New Jersey regulations restrict the release of information specified above to a duly authorized law enforcement agency. Thus, such information is only available to CI personnel and is not to be available to personnel from either the Examination or the Collection functions.
### [9.5] 3.2.6 (04-09-1999) General Fraud
The Sixteenth Amendment to the Constitution established the Federal Income Tax. Since its inception, there have been many court cases which affirmed and reaffirmed the responsibility of citizens to file tax returns and pay their tax obligations. Associate Justice Oliver Wendell Holmes stated, "Taxes are the price we pay for a civilized society." CI's most important duties are to foster voluntary compliance and act as a deterrent to persons who knowingly disregard this duty. All citizens have the right to express criticism of the tax system and government policies related to it as well as to join groups which express such criticisms. However, once an individual or a group moves from expressing dissatisfaction to employing schemes with the intention of evading taxes, the Service should take action to insure that the tax laws are enforced and the tax system preserved. General Tax Fraud is CI's largest single program and encompasses many types of investigations. The majority of these investigations involve white collar financial crimes with emphasis on individuals who earn income from legal industries. General Tax Fraud investigations are the main component of CI's efforts to foster voluntary compliance. These investigations encompass the broadest base of taxpayers and involve individuals from all facets of our economy. This program is also where CI identifies emerging areas of noncompliance, thereby allowing CI to focus resources to these areas.
### [9.5] 3.2.7 (04-09-1999) Health Care Fraud
Congressional and media attention on the amount of money being spent on health care, especially Medicare and Medicaid, highlighted the fact that fraud and abuse in the health care industry has reached unacceptable proportions. Most health care insurers operate independently of one another and without compatible data processing systems. These factors limit cooperative efforts among insurers and contribute to the problem of health care fraud; thus, a fraudulent scheme discovered in one jurisdiction may well continue to operate undetected in other jurisdictions. CI has given health care fraud a high investigative priority. While most of these frauds are investigated by the Federal Bureau of Investigation, Health and Human Services, and the U.S. Postal Service as mail fraud violations, CI frequently investigates them as tax violations if income is not reported, income is underreported, or if expenses are overstated. In addition, CI frequently investigates these frauds as money laundering violations. Headquarters keeps apprised of changes in the health care industry and of significant investigations through participation in the National Health Care Anti-Fraud Association and various fraud working groups. On the district level, many investigations are developed with our continued participation in the Department of Justice's (DOJ) mandated Health Care Task Forces established throughout the country.
### [9.5] 3.2.7.1 (04-09-1999) Issues in Health Care Fraud
Traditionally, processing health care claims and disbursing funds to health care providers were both cumbersome and paper intensive. In the 1990s, innovative methods to process and pay claims were introduced and procedures began to be performed electronically in order to reduce costs and increase productivity at the federal, state, and private insurance levels. Unfortunately, electronic processing and immediate payment can facilitate fraud; thus, making it difficult for federal law enforcement officials to detect the scheme and identify the perpetrators involved. Health care providers are accepting payments electronically and using computers to store records. For investigative purposes, this is a complication when the use of a search warrant is being considered. Vital evidence may be maintained on a computerized system. In many instances, the entire computer system must be seized with accompanying disks and manuals. During the course of an investigation involving health care, patient records are often sought by special agents. The physician-patient privilege must be addressed in these situations; however, there is no general privilege in this area. The privilege may apply to patient records for psychotherapy-related matters. The privilege is determined on a case-by-case basis, depending on the judicial district and circuit involved.
### [9.5] 3.2.7.2 (04-09-1999) Types of Health Care and Insurance Programs
Health care expenses are generally paid by: Government entitlement programs. Insurance plans such as plans sponsored by employers through private insurance companies or plans purchased by individuals.
### [9.5] 3.2.7.2.1 (04-09-1999) Health Care Entitlement Programs
Medicare and Medicaid account for nearly one-third of the nation's health care spending. Medicare is the federally funded program designed to provide health care insurance to the aged, blind, and disabled. Medicaid is a joint federal and state-funded health care program that provides subsidized payments for medical services for persons unable to afford them. The states administer the Medicaid program, even though it is funded on a 50-50 basis between the federal government and the states. Oversight of Medicare and the federally funded portion of Medicaid comes within the jurisdiction of the Health Care Financing Administration (HCFA), which is an agency within the Department of Health and Human Services.
### [9.5] 3.2.7.2.2 (04-09-1999) Fee for Service and Capitated (HMO) Plans
The medical insurance plans make payments to the medical providers on a fee-for-service basis, a capitated basis, or a blend of fee-for-service and capitated basis. The major difference between a fee-for-service and a capitated plan (managed care usually by a health maintenance organization, known as the HMO) is the delivery of and payment for services. In a fee-for-service, profits increase with increased submission of billings for services. Capitated payments are based on a per-patient rate. The medical provider in a capitated (HMO) type reaps profits if the cost of services for a patient is less than the allocated payment per patient. The under utilization of services is a significant consideration in the capitated system, while over utilization of services (i.e., over billings) is a concern in the fee-for-service system. There has been a trend toward managed care, or HMOs, in the health care industry. Healthy patients have been selecting less costly HMOs versus the traditional fee for service. Investigators have to concentrate on vulnerable areas of fraud, particularly with the knowledge that the under utilization of services is a concern in this particular industry and provides many pay kickbacks to keep referrals for service to a minimum.
### [9.5] 3.2.8 (04-09-1999) Insurance Fraud
CI's Insurance Fraud Program is the compliance effort to address criminal tax and money laundering violations relative to insurance claims and fraud perpetrated against insurance companies. The principle CI focus in this area concerns the insurance industry, exclusive of medical or health care fraud cases. Specifically, investigations in this program involve property or casualty insurance, staged or caused accident insurance claims, reinsurance, premium diversion (including Multiple Employer Welfare Arrangements), and worker's compensation insurance. The McCarran-Ferguson Act of 1945 reserves regulation of the insurance industry to the states. As a result, there is almost no federal role in the oversight of the insurance industry. Also, there is an escalating solvency problem among the companies in this industry. There are essentially no specific federal agencies or laws regulating the insurance industry. Regulation of solvency requirements; licensing of insurance companies, agents and brokers; setting policy forms and rates; resolving consumer complaints; and imposing administrative sanctions are just some of the responsibilities of the state authority in the insurance industry. Regulation is generally handled by a state insurance commissioner or department. Since most states have limited resources, they lack jurisdiction to effectively confront and prosecute some of the sophisticated fraudulent schemes that have multi-state or international off-shore operations. Over the last few years, there have been reports by Congress, private organizations, and industry groups stating that insurance company insolvencies are a growing threat to the health of the insurance industry and that fraud is a contributing factor. Essentially there are no federal agencies or laws regulating the insurance industry. CI continues to play a major role in the investigation of tax and money laundering violations associated with insurance frauds and has designated this as a high priority area. The primary federal statutes currently available to federal prosecutors to combat insurance fraud are mail and wire fraud statutes, interstate transportation violations, money laundering, and federal tax violations. CI can utilize the database of the National Association of Insurance Commissioners (NAIC) as a source of information in fraud investigations. In a state-regulated industry such as insurance, there are requirements for reserves of assets that are actuarially determined to ensure that funds are available to cover the claims that occur relative to the types of policies written. In this industry, this means that once policies are written that encumber the current level of reserves, additional policies can only be written if additional assets are obtained from operating profits, returns on investments, or the amount of liability against current reserves is reduced. The reinsurance industry has emerged as a method for insurance companies to write more insurance policies when current reserves have reached their limit. Reinsurance treaties are simply insurance policies taken out by an insurance company that will pay the principal insurance company for a certain type of claim. Reinsurance problems have grown significantly with the increased number of reinsurers involved. Also, some unscrupulous reinsurance companies have used phony letters of credit or other fraudulent assets to qualify for business. In addition, foreign reinsurers have, for the most part, been beyond the effective reach of state regulators, especially if the reinsurers are domiciled in countries where regulation is weak. Reinsurance frauds are surfacing in many parts of the country. These frauds usually have international implications and often involve foreign and domestic trusts.
### [9.5] 3.2.9 (04-09-1999) Public Corruption
CI participates in numerous investigations involving individuals who have violated the public trust. The subjects of these investigations are persons from all levels of government--local, county, state, federal, and foreign. Public corruption investigations involve a variety of offenses including bribery, extortion, embezzlement, kickbacks, money laundering, and tax fraud. CI generally investigates the tax and money-laundering aspects in conjunction with other law enforcement agencies.
### [9.5] 3.2.10 (04-09-1999) Questionable Refunds (QRP)
This sub-program is discussed in detail in CI Handbook 9.5 Chapter 4 entitled Refund Fraud. All investigations involving Electronic Refund Originators should initially be classified as QRP investigations until the true nature of the scheme can be determined.
### [9.5] 3.2.11 (04-09-1999) Return Preparers
The primary purpose of the Return Preparer Fraud Program is to protect revenue by identifying and pursuing investigations of abusive return preparers. This program will enhance compliance among return preparers by engaging in enforcement actions and asserting appropriate civil penalties against unscrupulous and incompetent paid return preparers. Preparer fraud generally involves the orchestrated preparation and filing of false federal income tax returns by return preparers who claim excessive expenses, deductions, credits, or exemptions on returns prepared for clients. Preparers also manipulate income figures to obtain fraudulent tax credits. The clients may or may not have had knowledge of the excessive amounts claimed. The return preparer derives financial benefit from the fraud by: Diverting a portion of the refund to himself or herself. Increasing clientele by developing a reputation for obtaining large refunds. Charging excessive fees.
### [9.5] 3.2.12 (04-09-1999) Telemarketing Fraud
Telemarketing fraud has been around since the 1930s and is one of the largest segments of consumer fraud. The development of advanced telecommunication networks has expanded the abilities of the telemarketers, and a sharp rise in complaints alleging fraudulent schemes has been reported in all 50 states. Statistical data from the Federal Trade Commission and American Association of Retired Persons (AARP) shows that 56 percent of telemarketing victims surveyed were age 50 or older. CI is currently combating telemarketing fraud by conducting criminal investigations of the major schemes in conjunction with multi-agency task forces. CI brings a financial expertise to these investigations which is critical to the success of these investigations. CI has been granted access to the Federal Trade Commission (FTC) fraudulent complaint system. The computer software for obtaining access to the FTC database is on the Agent Suite packages to facilitate availability of the database to the field. Sometimes, Title 26, Section 7211, proves to be an effective tool in plea bargain negotiations to obtain the cooperation of minor players in illegal telemarketing operations. This statute may be utilized where a prize is promised upon payment of the related tax. Title 26, Section 7211, makes it a crime for anyone to solicit payment for the sale or lease of an article and falsely state, orally or in writing, that any part of the payment, both sale or lease, is to pay federal tax.
### [9.5] 3.3 (04-09-1999) Initiatives and Emerging Issues
These initiatives can be part of a larger IRS strategy or an ongoing commitment by the Service. Currently CI is monitoring three initiatives: Employment tax. Nonfilers. Organized Crime. CI attempts to identify emerging areas of non-compliance so that appropriate Service resources can be redirected if deemed necessary. It is hoped that early identification and intervention will keep these "emerging issues" from becoming full blown Service and compliance problems. In the past emerging issues have included; Foreign and Domestic Trusts. Health Care Fraud. Insurance Fraud. Entitlement and Subsidy Fraud. Pension and Exempt Organization Fraud. Several of these have become sub-program areas. (Foreign and Domestic Trusts, Health Care Fraud, and Insurance Fraud). Some emerging issues are only tracked for a one fiscal year and others continue to be tracked, such as Pension and Exempt Organization Fraud). The only emerging issue that will be discussed in this section is Pension and Exempt Organization Fraud.
### [9.5] 3.3.1 (04-09-1999) Employment Tax Initiative
The purpose of the Trust Fund Compliance Initiative is to identify those taxpayers who routinely fail to report and pay over employment taxes and bring them into compliance.
### [9.5] 3.3.1.1 (04-09-1999) Employment Tax Schemes
A growing concern in the employment tax area is the emergence of employee leasing companies that are failing to pay over taxes withheld from employees to the IRS. Employee leasing is an industry where companies contract with a business to handle all of their administrative duties and to hire all of the companies' employees, leasing back the employees to work in the original company. Another concern in the employment tax area is businesses that are pyramiding employment taxes. This situation occurs when companies retain the taxes withheld from employees, then liquidate the company whenever they encounter any financial difficulties. CI is also actively pursuing bankruptcy cases where companies are pyramiding employment taxes, then filing bankruptcy to avoid payment of these liabilities. Indications of fraud in this program area are typically discovered by examiners or officers in the performance of their duties, are referred to CI, and evaluated in accordance with the Fraud Referral Handbook.
### [9.5] 3.3.1.1.1 (04-09-1999) The Employment Tax Criminal Investigation
IRC 7512 and IRC 7215 are criminal provisions which may be useful in the employment tax area and especially in bankruptcy-related tax crimes. (See Handbook 9.1, Chapter 3, Criminal Statutory Provisions and Common Law for the text of this provision.) The competition for prosecutorial resources nationwide has made it difficult to get IRC Section 7215 cases prosecuted in some districts. Some United States Attorneys are reluctant to prosecute misdemeanor violations of this type because the possibility of the defendant receiving a meaningful sentence is slight. This raises the concern that instead of achieving deterrence, we are reinforcing the impression that there are no meaningful sanctions which can be imposed relative to this Code section. The Congressional intent of section 7215, Internal Revenue Code of 1954, is contained in the Senate Committee on Finance Report (No. 1182, 85th Congress): . . . The features of the penalty provided by the new section 7215 is that it is not limited to the 'willful' failure cases to which these other penalties are applicable. Subsection (b) of the new section 7215 provides that the penalty provided by subsection (a) is not to be applicable in two types of situations. First, it is not to be applicable if the person in question shows that there is reasonable doubt as to whether the law required the collection of the tax or if he shows that there is reasonable doubt that he was the one who was required by law to collect the tax. Thus, the penalty would not apply, for example, in the case of the employment taxes where the person whose status is questioned shows that there was reasonable doubt as to whether he was an employer or engaged in a contract with an independent contractor. The penalty also would not apply, for example, in the case of the excise taxes described in chapter 33, where the person in question can show that there is reasonable doubt as to whether he is the proper collection agent. The second exception to the penalty in subsection (a) is provided in those cases where the person involved can show that the failure to collect, to deposit and keep the taxes in the separate account was due to circumstances beyond his control. For this purpose, however, a lack of funds immediately after the payment of wages (whether or not resulting from the payment of the wages) is not to be considered circumstances beyond a person's control. This can be illustrated by an employer subject to the requirement of section 7512(b) who has gross payroll requirements of $1,000, with respect to which he is required to withhold $100 of income taxes. If such an employer had on hand only $900 and paid out this entire amount in wages, withholding nothing, the fact that the net wages due equal this amount would not relieve him of the penalty imposed by section 7215(a). A lack of funds occurring after the payment of wages (so long as it was not immediately after) would, however, qualify under this exception if it were due to circumstances beyond the person's control. Examples of factors which might result in a lack of funds constituting circumstances beyond the control of the persons after (but not immediately after) the payment of wages and within the period before the person was required to deposit the funds are theft, embezzlement, destruction of the business as the result of fire, flood, or other casualty, or the failure of a bank in which the person had deposited the funds prior to transferring them to the trust account for the Government. However, lack of funds arising after payment of wages, resulting, for example, from the payment of creditors will not be considered circumstances beyond the person's control. . . An appropriate investigation will be made in each situation to determine whether either of the statutory exceptions explained enumerated above is applicable, and the final report will show the results of such investigation.
### [9.5] 3.3.1.1.1.1 (04-09-1999) Collection and CI Interaction in Employment Tax Investigations
From the time of a referral to CI until the criminal aspects of the investigation have been concluded, the Collection function will not contact the taxpayer, his or her representative or employees about the collection of amounts due under the notice or take action to enforce collection of those amounts without the prior concurrence of the Chief, CI. No part payment nor installment agreement covering prior delinquencies will be entered into with the taxpayer after it has been referred to the Chief, CI. Voluntary payments (after the referral) by the taxpayer will be reported to the Chief, CI. This does not preclude issuance of Collection first notices, acceptance of voluntary payments, or the filing of notices of lien, if required to adequately protect the Government's interests. Enforced collection action may be taken on delinquencies for periods prior to the time the taxpayer received the notice. In some instances, such action will include the filing of proof of claim in a pending insolvency proceeding because all or substantially all assets of the taxpayer will be under the jurisdiction of a court and will not be subject to levy. However, the Chief, CI, will be informed of any such proposed enforcement action to ensure that it does not jeopardize a potential criminal investigation. Concurrence may be given by the Chief, CI, to proposed enforced collection action relating to the amounts due under a referred notice, when it appears that such action will result in substantially full payment of the liability covered by such notice. Concurrence will not be given if the proposed action will result in only a small part payment. The probable effect of the proposed action that will likely result in obtaining more than a small part of the liability but less than full payment will be determined in the light of its likelihood of jeopardizing successful prosecution. Proposed enforced collection action involving participation in an insolvency proceeding will be considered as likely to result in obtaining more than a small part of the liability but less than full payment.
### [9.5] 3.3.1.1.2 (04-09-1999) Criminal Investigation Procedures in Employment Tax Investigations
Concurrence to proposed enforced collection action, relating to the liability due under the notice, will not be given by the Chief, CI, in those instances when the investigation has been transmitted to the District Counsel, without the approval of the office having jurisdiction over the investigation. Requests may be oral or written from Collection for concurrence in proposed enforced collection action relating to liabilities due under a referred notice. The Chief, CI, may also reply orally; however, it should be confirmed in writing as soon as practical. Reporting procedures will be followed for "Discontinued" investigations returned to the Collection activity. Information concerning payments made by a taxpayer whose investigation has been referred to District Counsel, or of enforced collection action relating to prior delinquencies, will be transmitted to Counsel. If the investigation has been referred to the United States Attorney, he or she will also be informed. Trust fund penalty investigations will be processed in accordance with established procedure for income tax investigations, including transmission of prosecution reports to District Counsel. The Chief, CI, will notify the Collection function promptly of the disposition of the criminal aspects of an investigation. He or she may furnish suggestions to the Collection function for future collection action in: Any referral which was declined for CI. An investigation which CI declined prosecution where the actions might result in more favorable circumstances for a prosecution recommendation at a later date. District Counsel will review trust fund penalty investigations within 15 days of receipt. Trust fund penalty investigations are referred directly to the United States Attorney by District Counsel.
### [9.5] 3.3.1.2 (04-09-1999) Nonfiler Initiative
In 1991, the IRS adopted a nonfiler strategy. Initial efforts focused primarily on individual income tax nonfilers and emphasized both outreach and enforcement programs. CI is an active participant in national projects aimed at identifying and prosecuting the most flagrant nonfilers. CI is also active in the development of criteria for identifying potential fraud referrals from the Repeat Nonfilers Project. This initiative examines the specific market segments of repeat nonfilers and establishes a tracking system to better evaluate subsequent compliance efforts.
### [9.5] 3.3.1.2.1 (04-09-1999) Voluntary Disclosure Policy
It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. Prior IRS voluntary disclosure practices creates no substantive or procedural rights for taxpayers, but rather are a matter of internal IRS practice, provided solely for guidance to IRS personnel. A voluntary disclosure will not guarantee immunity from prosecution, yet a voluntary disclosure may result in no prosecution recommendation. However, since the IRS application of the voluntary disclosure practice does not automatically result in immunity from criminal prosecution, taxpayers should be advised that they cannot rely on the fact that others may not have been prosecuted. A voluntary disclosure occurs when the communication is: Truthful. Timely. Complete. When the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability. A disclosure is timely if it is received before: The IRS has initiated an inquiry that is likely to lead to the taxpayer, and the taxpayer is reasonably thought to be aware of that investigative activity. Some event known by the taxpayer occurred, which event is likely to cause an audit into the taxpayer's liabilities. Special agents are encouraged to consult District Counsel on voluntary disclosure issues. An example of what is not a voluntary disclosure is a letter from an attorney stating his or her client, who wishes to remain anonymous, wants to resolve his or her tax liability in exchange for IRS assurance that the client will not be criminally prosecuted. This is not a voluntary disclosure because the identity of the taxpayer has not been revealed. The conclusion would be the same whether the attorney made or offered payment on behalf of the anonymous client or devised some method to prevent access to the client's correct tax returns, i.e., placing the correct tax returns in a safety deposit box or proposed any similar variation. Pattern Letter 2527(P) Exhibit 3-1 is a sample letter that may be used to respond to a situation where a taxpayer's representative forwards a letter with payment from an anonymous taxpayer.
### [9.5] 3.3.1.3 (04-09-1999) Organized Crime Initiative
Organized crime refers to self-perpetuating, structured, and disciplined associations of individuals who combine for the purpose of obtaining monetary or commercial gains or profits, either wholly or in part, by illegal means. These groups traditionally have a strong leader to whom group members and associates owe loyalty and to whom they pay a percentage of their profits. These groups generally engage in illegal enterprises such as drug trafficking, gambling, loan sharking, extortion, theft, arson, labor racketeering, pornography, prostitution, white collar crimes of all descriptions, and money laundering. They usually employ extortion, bribery, corruption, and violence to achieve their objectives. CI, in conjunction with other federal, state and local law enforcement agencies pursues tax, currency, and money laundering investigations of organized crime groups.
### [9.5] 3.3.2 (04-09-1999) Pension and Exempt Organization Fraud-Former Emerging Issue
The large amount of money involved in employee plan trust funds and tax exempt organizations provides both a temptation and an opportunity for fraud. The traditional criminal and civil provisions of the IRC will apply to violations in these areas. The only significant difference may be that instead of a tax deficiency, the element of damage to the government may be established by showing a tax benefit, such as attempting to make taxable income non-taxable or taxable contributions tax deductible. The Employee Retirement Income Security Act of 1974 (ERISA) made sweeping changes in the way private employee plans are administered. While the Department of Labor (DOL) is primarily responsible for ERISA enforcement, the IRS has significant involvement since qualified employee plans receive favored tax treatment via the deduction of the contribution by the employer, tax exemption for the related trust, and the deferral of income by the employee. These tax advantages can be used in criminal cases to meet the requirements that a tax be due and owing as described in IRS Section 7201 (Attempt to Evade or Defeat Tax) and that damage inures to the government as described in IRC Section 7206 (Fraudulent or False Statement). The Tax Reform Act of 1969 and other tax laws subsequently enacted have established new and more stringent requirements: For recognition as an exempt organization. Expanded information reporting and annual reports. Imposed a new series of excise taxes. Placed substantial restrictions on the permissible activities of an exempt organization. IRC 6033 requires that every exempt organization, with some exceptions, file an annual return stating specifically the items of gross income, receipts and disbursements and such other information as may be prescribed by the Secretary or appropriate delegate. In addition, IRC 6011 requires the filing of certain taxable returns by exempt organizations. These information reports and returns are used to determine whether the submitting organization continues to qualify for favored tax treatment and to report any taxes for which it may be liable. Like the application forms, these reports and returns are subscribed under the penalty of perjury. If an organization ceases to qualify under the provisions of IRC 501 or 521 for which exemption was granted, its exempt status will be revoked.
### [9.5] 3.3.2.1 (04-09-1999) Pension and Exempt Organization Criminal Case Selection
Indications of fraud in this program area are typically discovered by examiners or officers in the performance of their duties, and are referred to CI and evaluated in accordance with the IRM Multifunctional Handbook, 104.2, Fraud Referrals.
### [9.5] 3.3.2.2 (04-09-1999) Forwarding Pension or Exempt Organization Items to the IRS Civil Functions
When a special agent learns of the existence of an open case in the Examination, Collection, or EP/EO functions on the subject of an information item or Primary Investigation, CI will immediately evaluate the information available and place the matter under a Subject Criminal Investigation if there is sufficient information. If not, the information item or Primary Investigation will be closed and all applicable information will be forwarded to the appropriate function. A copy of the Form 3949, along with all pertinent information in CI's possession regarding the subject, will be transmitted by a brief memorandum from the Chief, CI, to the Chief of the other function. CI's transmittal memorandum to the function with the open case should advise the function that information CI obtained is being referred for association with the open case. No suggestions, guidance or direction is to be provided by CI as to actions to be taken by the receiving function. This is a precaution against the use, or perceived use, of this provision for developing a criminal investigation under the guise of a civil proceeding.
### [9.5] 3.3.2.3 (04-09-1999) Pension Fraud Schemes
Some of the more common fraudulent schemes and devices used in employee plan investigations are: Backdating of applications and related documents. Diversion of funds by officials of exempt organizations or by trustees of employee plans. Payment of improper expenses of exempt organization and trust officials. Loans of trust funds disguised as purchases or allowable deductions. Intentional failure to keep proper or accurate financial records. Disguising taxable receipts (interest and dividends) as non-taxable receipts. Making false statements on applications. Providing false receipts to donors by exempt organizations. Willful and intentional failure to exercise plan amendments agreed to during review of the determination letter application. Placing friends, relatives, or associates on a company payroll when they perform no duties. Failure to pay over or deposit payroll deductions or the employer contributions to pension plans. Under funding pension plans or obtaining minimum funding waivers. Excessive tax deductions for pension plan contributions.
### [9.5] 3.3.2.4 (04-09-1999) The Pension Fraud Investigation
IRC 7206(1) (Declaration under penalties of perjury) is the criminal provision which will probably be the most useful in the employee plans and exempt organizations area. This section makes it a felony for anyone to willfully subscribe to a return or other document made subject to penalties of perjury, which is not believed to be true and correct as to every material matter. This provision also applies to documents other than tax returns, and a prima facie violation of IRC 7206(1) can be proven even in the absence of a probable tax deficiency. Forms filed with the IRS in connection with employee plans and exempt organizations contain a declaration that they are made subject to the penalties of perjury. Additionally, the declaration includes a statement that supporting documents are certified as being true and correct and this certification is subject to the same penalty. Thus, filing an application for a determination letter containing false statements or submitting falsified documents in support of such an application or submitting a falsified annual return for an employee plan or exempt organization would give rise to a potential IRC 7206(1) prosecution if the falsifications are shown to be willful and material. Filing of a false application for a determination letter, minimum funding waiver, annual return, or registration statement can also be an act leading to tax evasion proscribed by IRC 7201 (Attempt to Evade or Defeat Tax). To prove tax evasion, the Government must show a tax deficiency, affirmative acts to evade assessment or payment of tax, and willfulness. Willful failure to file annual returns, registration statements, or actuarial statements can be a criminal violation of IRC 7203 (Willful Failure to File Return, supply information, or pay tax).
### [9.5] 3.4 (04-09-1999) Schemes
A list of the schemes used to illegally circumvent the tax system and also tracked in CI's Management Information System (CIMIS) can be found in CI's Handbook 9.9 Chapter 7. Some of the schemes are also mentioned in this chapter at Sub-Sections 3.3.1.1 and 3.3.2.3.
### [9.5] 3.5 (04-09-1999) Other
Throughout the existence of CI, different circumstances and situations arise that do not need their own program or initiative but need to be known by the special agent. This sub-section deals with a few of them, such as: Terrorism. Embezzled Funds. Sensitive Investigations.
### [9.5] 3.5.1 (04-09-1999) Terrorism
The Comprehensive Antiterrorism Act of 1995 was passed to deter terrorism and to give federal law enforcement agencies the resources they need to combat both domestic and international terrorism. CI has an important role to play in this effort because the expertise of our agents is a valuable commodity in conducting complex financial investigations to choke off sources of funding to terrorist organizations.
### [9.5] 3.5.2 (04-09-1999) Embezzled Funds
The Supreme Court in a 1961 decision determined that embezzled funds are taxable. This settled an issue which had been debated through the court system for decades.
### [9.5] 3.5.3 (04-09-1999) Sensitive Investigations
Chief Counsel and DOJ, Tax Division, must approve the following search warrants that are directed at the offices, structure, or premises owned, controlled, or under the dominion of a subject or target of a CI investigation who is: An accountant. A lawyer. A physician. A local, state, federal, or foreign public official or political candidate. A member of the clergy. A representative of the electronic or printed news media. An official of a labor union. An official of an organization deemed to be exempt under Section 501(c)(3) of the IRC.
Exhibit [9.5] 3-1 (04/09/99)
Pattern Letter 2527(P)

>
| DISTRICT DIRECTOR
| Internal Revenue
| Service
| Anywhere, U.S.A.
Taxpayer's Representative
Address
City, State ZIP Code
Dear [Name] :
We are in receipt of your letter dated [date], wherein you enclosed a check in the amount of [amount of check] and stated that your client, who wishes to remain anonymous, seeks to make a voluntary disclosure concerning his/her tax liability in exchange for the Internal Revenue Service's agreement to not recommend criminal prosecution to the Department of Justice.
Please be advised that it is the position of the Internal Revenue Service that a voluntary disclosure does not bar criminal prosecution, but rather, is a factor to be considered when deciding to recommend prosecution. Thus, the decision whether to investigate your client and to recommend prosecution remains an option available to the Service whether you disclose the identity of your client or the Service learns of your client's identity through its own efforts.
In order for a disclosure to be considered a "voluntary disclosure" the communication must be: truthful; complete; and the taxpayer must show a willingness to cooperate (and does in fact cooperate) with the Internal Revenue Service in determining his/her correct tax liability. Additionally, the disclosure must be timely. In other words, the disclosure must be received before: the Internal Revenue Service has initiated an inquiry that is likely to lead to the taxpayer and the taxpayer is reasonably thought to be aware of that investigative activity; or, some event known by the taxpayer occurred, which event is likely to cause an audit into the taxpayer's liabilities.
Your letter dated [date] is not considered to be a voluntary disclosure for the following reasons:
[Discuss why the communication is not a voluntary disclosure; e.g., the disclosure is not complete because the client/taxpayer is anonymous, and thus, the Service is unable to ascertain on whose behalf the disclosure is being made.]
The check that was enclosed with your letter purporting to be payment of an anonymous taxpayer's tax liability for the years [include the years] was sent to the [Name] Service Center for posting to the "unidentified remittance" amount.
Should additional information be required from the Internal Revenue Service, please contact [Name of District Counsel] at [Telephone Number]. He/she stands willing to provide additional information should you so request.
| Sincerely,
[Name]
DISTRICT DIRECTOR
### Internal Revenue Manual | ### Hndbk. 9.5 Chap. 3 Tax Crimes-General | ### (04-09-1999)

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