Handbook 9.5
The Investigative Process
Chapter 3
Tax Crimes-General
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Contents
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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.
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This chapter addresses the various programs, initiatives, and to a lesser
extent schemes used in the tax crime area.
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This chapter relates to tax crimes classified in terms of;
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Sub-Programs of the Fraud Program.
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Initiatives in which CI participates.
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Schemes used in the criminal violation of tax statutes.
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Other situations to which the Special Agent should be sensitive when conducting
an investigation.
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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).
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Within the Fraud Program there are sub-programs as follows:
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Bankruptcy--Investigations where bankruptcy fraud is an intrinsic part of
a tax evasion scheme.
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Excise Tax--Investigations involving violations of the excise tax laws.
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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.
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Foreign and Domestic Trusts--Investigations involving fraudulent trusts used
either to evade taxes or evade the payment of taxes.
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Gaming--Investigations relating to the income generated from the gaming industry
(either legal and illegal forms of gaming).
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General Fraud--Investigations relating to income that does not fall within
any of the other sub-programs.
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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.
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Insurance Fraud--Investigations involving income generated from or by the
insurance industry that is not related to health care insurance.
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Public Corruption--Investigations of income wherein there is a violation
of the public trust of or by a government official or employee.
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Questionable Refunds (QRP)--Investigations involving fraudulent tax refund
schemes. (See CI Handbook 9.5 Chapter 4, Refund Fraud)
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Return Preparers--Investigations involving preparers of false and/or fraudulent
tax returns.
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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.)
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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.
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The goals of the bankruptcy program are to:
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Increase voluntary compliance with federal tax laws through the prosecution
of those committing significant tax crimes involving bankruptcy fraud.
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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.
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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.
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Investigations should be selected on the basis of the following priorities:
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Instances where the bankruptcy is an intrinsic part of a tax fraud scheme
and operates as an instrument of the evasion scheme.
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Instances involving the pyramiding of payroll and withholding taxes, particularly
where the responsible party fraudulently claims withholding credits on his
or her individual return.
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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.
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Instances where the bankruptcy fraud is committed for its own sake but where
the Service is also defrauded because we are a major creditor.
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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:
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Selling price of merchandise or facilities.
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Services sold or used.
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Number.
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Weight.
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Volume of units sold.
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Nature of occupation.
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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.
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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.
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The excise tax categories of most frequent interest to CI include:
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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).
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Occupational taxes : Wagering; brewers; retail liquor dealers;
retail dealers in beer; wholesale liquor dealers; wholesale dealers in beer;
and limited other retail dealers.
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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.
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Heavy trucks and trailers retailers taxes : Truck parts and accessory
installations; truck chassis or body; truck trailer or semitrailer chassis
or body.
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Miscellaneous excise taxes : Seabed mining; environmental taxes;
highway motor vehicle use tax; foreign insurance policies; wagering taxes;
liquor taxes; and tobacco taxes.
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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.
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NOTE:
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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:
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Federal, state, local, and Native American tribal governments.
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Communities and social institutions, generally.
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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.
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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.
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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.
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[9.5]
3.2.5.2 (04-09-1999)
Information Available From State Regulatory Agencies On Gaming
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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:
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Gaming license applications for all casinos and employees, and ancillary
businesses of the casinos, including any investigation reports.
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Investigative reports of crimes committed by casinos, casino employees, or
ancillary businesses.
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Investigative reports of crimes committed against casinos, casino employees
or ancillary businesses.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Health care expenses are generally paid by:
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Government entitlement programs.
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Insurance plans such as plans sponsored by employers through private insurance
companies or plans purchased by individuals.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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This sub-program is discussed in detail in CI Handbook 9.5 Chapter 4 entitled
Refund Fraud.
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All investigations involving Electronic Refund Originators should initially
be classified as QRP investigations until the true nature of the scheme can
be determined.
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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.
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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:
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Diverting a portion of the refund to himself or herself.
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Increasing clientele by developing a reputation for obtaining large refunds.
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Charging excessive fees.
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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.
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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.
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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.
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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.
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These initiatives can be part of a larger IRS strategy or an ongoing commitment
by the Service. Currently CI is monitoring three initiatives:
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Employment tax.
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Nonfilers.
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Organized Crime.
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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;
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Foreign and Domestic Trusts.
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Health Care Fraud.
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Insurance Fraud.
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Entitlement and Subsidy Fraud.
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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.
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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.
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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.
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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.
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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.
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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.)
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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.
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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. . .
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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.
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[9.5]
3.3.1.1.1.1 (04-09-1999)
Collection and CI Interaction in Employment Tax Investigations
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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.
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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.
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-
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.
|
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-
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.
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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.
|
|
|
-
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.
|
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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).
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-
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.
|
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-
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.
|
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-
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.
|
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-
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.
|
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|
-
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)
|
|
|