This section discusses criminal referrals and prosecutions. Criminal prosecutions serve to enhance voluntary compliance. The identification of potential criminal cases by compliance employees is an important part of this process. When firm indications of fraud exist and criminal criteria are met, the compliance employee should prepare Form 2797, Referral Report of Potential Criminal Fraud Cases. The fraud referral specialist (FRS) is available to assist (determine if firm indications of fraud are present, criminal criteria has been met, etc.).

If after consultation with the fraud referral specialist (FRS), it is determined a potential fraud case has firm indications (affirmative acts) of fraud and meets criminal criteria, the compliance employee will suspend the examination or collection efforts without disclosing to the taxpayer or representative the reason for the suspension. A referral to CI will be prepared using Form 2797.

The referral will be a detailed factual presentation of those factors used to establish firm indications of fraud, including, but not limited to:

No workpapers or attachments are required with the referral. The initial conference allows the compliance employee the opportunity to explain the case in detail and address any questions regarding the potential criminal violations. Cl will be provided access to all workpapers and documents needed to effectively evaluate the referral during the initial meeting.

Form 2797 should be prepared for the principal individual or legal entity involved in the fraud. Only one Form 2797 is prepared despite having multiple entities involved, i.e., individual, corporate, partnership, employment tax, etc. Only one Form 2797 is prepared for a husband and wife who filed a joint return. A separate Form 2797 is no longer prepared for each type of tax involved. Related entities should be identified and discussed in the body of the referral. Related returns will be associated with the referral if they are false as to a material item.

Only one Form 2797 is prepared covering an allegation of failure to comply with a notice issued as provided in IRC 7512, even though withheld income, social security tax, or collected excise taxes may be involved.

Form 2797 is prepared in triplicate, and must be approved by the compliance employee's group manager. One copy of the report is to be retained with the case file. The original and one copy are forwarded to the FRS for concurrence. Form 2797 will be prepared in quadruplicate for referrals of return preparers, see IRM 25.1.3.3.

The FRS will review Form 2797 to ensure the quality of the referral. The FRS will forward the original and two copies of reviewed Forms 2797 via Form 3210, Document Transmittal to their group manager (FRS G/M) for review and approval and retain a copy for his/her referral pending file.

The FRS G/M will forward via Form 3210, Document Transmittal, the approved Form 2797 containing the criminal referral to the appropriate CI Lead Development Center (LDC). A copy of Form 3210 transmitting each approved fraud referral to the LDC will be provided to the FRS. The LDC will make the initial determination if the referral is fully developed, meets CI’s criminal criteria and is in concert with CI’s workplan (Strategic Performance Plan (SPP) and Annual Compliance Guidance ACG). If so, the referral will be forwarded to the appropriate field office for evaluation.

Within 10 workdays of the receipt of the referral by the evaluating field office from the LDC, an initial conference will be arranged by the evaluating field office. At the initial conference the referring compliance employee, his/her group manager, the evaluating CI special agent, his/her supervisory special agent and the FRS, if available, will meet to discuss the referral, review tax returns, evidence, etc. Within 30 workdays of receipt of the referral by the evaluating field from the LDC, the same parties will meet again at a disposition conference to discuss CI’s decisions to accept or decline the referral. CI will provide feedback to the referring compliance employees and the FRS as to their decision. Area Counsel will be invited to offer legal advice, if deemed necessary.

The final decision as to whether the referral meets or does not meet the criminal criteria should be made no later than the 30 workday disposition conference. Any further extensions must be granted by written agreement of the appropriate field territory managers. The agreement should specify the reason for the request (such as a delay in receiving signed tax returns or an opinion from Counsel) and the date the referring office may expect a final determination.

The FRS will monitor the conference dates to ensure that all dates and response schedules are followed.

The following information should be discussed no later than the initial conference:

Additional factors considered during the evaluation of the referral include additional tax due to fraud, flagrancy, significance, public interest and possible deterrent effect.

If CI evaluates the referral as meeting the criminal criteria and no obvious barriers to prosecution exist, the existing primary investigation will be numbered as a subject investigation and assigned to a special agent.

Cl will complete the original Form 2797 and return it to the referring group manager with a copy to the FRS. Area compliance employees will then update the case to Status Code 18. Cl will initiate the input of TC 914 controls in the Master File. When the TC 914 is posted to the module on collection function cases, the file may be forwarded to the closed file, if no further action is required (see IRM 25.1.8.6).

The special agent assigned the referral that has been elevated to a subject investigation will promptly meet with the referring compliance employee and determine whether a detailed memorandum is required concerning contacts with the taxpayer, the taxpayer’s representative, or the preparer of the taxpayer’s return. If a memorandum is needed, the following areas should be included:

Within 30 calendar days of numbering the referral as a subject investigation, CI will, if necessary, request a cooperating compliance employee from the referring territory.

IRM 25.1.4 provides specific guidance to compliance employees assigned to a joint investigation case as a cooperating examiner/officer.

If CI evaluates the referral as not meeting the criminal criteria or if there is an obvious barrier to prosecution, the referral will be declined. If the declination determination is made at the LDC, the LDC manager will prepare a declination memorandum explaining the reason(s) the referral is being declined. The declination memorandum will be directed to the FRS manager and will be transmitted to that manager along with the original Form 2797. If the declination determination is made at the evaluating field office level, the Special Agent in Charge (SAC) will send a declination memorandum explaining the reason(s) the referral is not being accepted. The SAC declination memorandum will be directed to the FRS manager and will be transmitted to that manager along with the original Form 2797. A copy of the SAC declination memorandum will be provided to the LDC manager.

If there is a disagreement between CI and the referring operating division (OD) as to whether the referral should be accepted or declined, the area director and the CI Director of Field Operations will intervene to settle the disagreement at their management level.

The compliance employee will continue to be alert for new indications of fraud in declined referrals. If new indications of fraud develop, the case will again be referred to Cl as outlined above.

Groups of cases involving similar examination issues declined by Cl will be afforded special attention. Area Counsel will be consulted in such cases before an agreement is obtained for the deficiency in tax and penalty in any one case. This will permit Area Counsel to advise of the litigation possibilities in the event subsequent cases are unagreed.

When initial indications of fraud are uncovered, the Estate and Gift Tax examiner should initiate a discussion with his/her group manager and the fraud referral specialist.

Present procedures call for preparing a report utilizing Form 2797 (Referral Report for Potential Criminal Fraud Cases). This form was designed primarily for income tax cases. It should be adapted as necessary to refer the case. Instructions for the preparation of Form 2797 are contained in IRM 25.1.3.4.

A separate report should be prepared for each principal involved. For example, if there are coexecutors, cotrustees, collusion with heirs, or donees, or split gifts involved, an evasion of tax may result in more than one fraud prosecution.

All potential criminal referrals regarding preparers should be discussed with the return preparer coordinator and the fraud referral specialist (FRS). When revenue agents examine clients of a promoter (a person subject to penalty under 6700 - relating to penalty for promoting abusive tax shelters, etc.) or preparer under criminal investigation, they should assert the appropriate tax and penalties against the clients based on the facts in each case, regardless of whether the clients may testify for the government against the preparer or promoter or become a defendant.

When the group manager concurs a return preparer is involved in fraud, Form 2797 will be prepared as described in IRM 25.1.3.4, except four copies are made. The original and two copies of Form 2797 will be forwarded to the FRS. One copy will be retained in the preparer case file in the group. The FRS will forward a copy to the compliance return preparer coordinator (RPC) or TEGE returns classifying officer (RCO) for appropriate action.

The RPC/RCO will notify all group managers, in writing, to assure that all civil actions with regard to the subject preparer are suspended. The coordinator should continue to monitor Form 5808 (Return Preparer-Penalty Follow-up) and Form 5809 (Preparer Penalty Case Control Card) files to assure that no new civil penalties are asserted on the subject preparer until the criminal case is resolved.

Form 2797 should be prepared for the principal individual or legal entity involved in the fraud. Only one Form 2797 is prepared despite having multiple entities involved, i.e., individual, corporate, partnership, employment tax, etc. Only one Form 2797 is prepared for a husband and wife who filed a joint return. A separate Form 2797 is no longer prepared for each type of tax involved nor when there are dissimilar fraudulent acts by the same return preparer. Related entities should be identified and discussed in the body of the referral. Related returns will be associated with the referral if they are false as to a material item. Form 2797 should give specific details relating to the apparent fraudulent act(s) including:

The compliance employee should retain a copy of each taxpayer’s report of examination and relevant workpapers so that after disposition of the criminal case, the civil preparer penalty under IRC Section 6694(b) can be pursued.

If Cl declines a referral of a return preparer or an investigation is discontinued, Cl may provide advice and assistance concerning application of IRC 6694(b), willfulness penalty.