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Part 4. Examining Process

Chapter 16. Special Enforcement Program (SEP)

Section 1. SEP Responsibilities and Case Development

4.16.1  SEP Responsibilities and Case Development

4.16.1.1  (01-01-2003)
Overview

  1. This chapter provides an overview and outlines the purpose and goals of the Special Enforcement Program (SEP). SEP is a specialized compliance program within the Small Business/Self- Employed Operating Division (SB/SE) directed toward that segment of the population which derives substantial income from either legal or illegal activities and intentionally understate their tax liability.

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

  3. The goal of SEP is to enhance voluntary compliance and to promote public confidence in the tax system. This maximum deterrence is generated by examining those cases which significantly impact the public and assisting in the investigation and prosecution of prominent or notorious individuals who attempt to evade or defeat the tax system.

  4. SEP cases normally involve in-depth examinations. Section 7602(e) of the Internal Revenue Code (IRC) provides that the Service is not to use financial status or economic reality examination techniques, such as indirect methods, to determine the unreported income of any taxpayer unless thee is a reasonable indication that there is a likelihood of such unreported income.

  5. The examination of income is a mandatory audit issue. The depth of the examination of income and the techniques used are dependent on the facts and circumstances of the case. To determine whether unreported income exists, the SEP agent should: conduct the minimum income probes; resolve Large, Unusual and Questionable (LUQ) income items; perform a financial status analysis; and evaluate internal controls in the case of a business return. If the likelihood of unreported income has been established, the use of Financial Status Audit Techniques (FSAT's) would be appropriate and are not prohibited by IRC section 7602(e).

  6. If the SEP agent has established that there is a reasonable likelihood of unreported income, a more in-depth examination of income is warranted. Any technique or procedure used to determine the amount of unreported income could be labeled a FSAT. A FSAT is, therefore, defined by its purpose which is a technique, analysis or procedure used to determine the specific amount of unreported income. See IRM 4.16.1.2.6.

  7. In some instances the SEP agent may have reasonable indications that the likelihood of unreported income exists prior to the start of the actual examination. Examples of such instances could include: informant information; CI information; information from other federal, state or local law enforcement; or IRP income information on non-filers.

  8. The SEP agent should always document their workpapers on why they reached their conclusion along with the date that the conclusion was reached. This step should always take place regardless of the methods used or the information made available to reach the determination that the likelihood of unreported income exists.

4.16.1.2  (01-01-2003)
Introduction

  1. The primary purpose of SEP is to:

    1. Identify and develop those issues which have significant fraud potential;

    2. Assist in financial investigations of taxpayers who derive legal and illegal income, but choose to evade their tax liability through one or more violations of the tax law;

    3. To support Criminal Investigation (CI); and

    4. Assist Area Counsel in trial preparation.

  2. The objective of SEP is to:

    1. To perform timely and effectively planned and managed examinations of returns filed notwithstanding obstacles created by complexity, diversification, scarcity of audit records and evidence, or geographic dispersion of operations.

    2. To accumulated at the Headquarters' level and disseminate novel examination techniques, issues unique to legal or illegal income sources, avoidance and evasion schemes, and all other information useful in planning and executing examinations.

    3. To encourage and promote communications and exchange of techniques and procedures between compliance officers as an aid in achieving the most effective examination.

  3. SEP cases include, but are not limited to:

    1. Unreported income

    2. False expenses/credits

    3. Questionable return preparers (i.e., ELF and/or EITC cases)

    4. Frivolous filers/non-filers

    5. Abusive trusts/abusive trust schemes

    6. Tax Shelters

    7. Fraudulent specialty tax investigations (i.e., Employment Tax and/or Excise Tax Investigations)

    8. Health care fraud

    9. Racketeering/organized crime

    10. Narcotic trafficking

    11. Illegal gambling operations

    12. Prostitution

    13. Pornography

    14. Embezzlement and theft

    15. Political corruption

    16. Credit card fraud

    17. Bank fraud

    18. Currency violations

    19. Offshore activities

    20. Internet fraud

4.16.1.3  (01-01-2003)
SEP Agent Duties and Responsibilities

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

4.16.1.3.1  (01-01-2003)
General

  1. SEP agents:

    1. Identify fraud issues and recognize indicators of fraudulent activity.

    2. Conduct in-depth examinations of cases with fraud potential.

    3. Conduct detailed interviews of taxpayers and third party witnesses.

    4. Secure evidence, with a summons if necessary, to determine taxable income.

    5. Submit referrals to CI on cases meeting criminal criteria.

    6. Participate as a tax law expert in joint investigations and assist in computing the criminal tax liability.

    7. Balance civil and criminal aspects in joint investigation cases, including the protection of the statute of limitations.

    8. Prepare examination reports, compute tax liability and propose applicable civil penalties.

    9. Act as technical advisor and assist the U. S. Attorney's office with grand jury investigations.

    10. Assist U. S. Attorney's office and Area Counsel in preparing tax computations and special schedules for trial.

    11. Testify as expert or summary witnesses in criminal and civil tax cases.

    12. Develop leads by networking with local, state and federal agencies.

  2. SEP agents also serve as experts and resource persons for other Service functions in the following areas:

    1. Indirect methods of reconstructing income.

    2. Preparation, use and enforcement of summonses (Form 2039).

    3. Development and application of civil fraud penalty, IRC section 6663, and fraudulent failure to file penalty, IRC section 6651(f). See Fraud chapter, IRM 25.1.6 and the Penalty chapter, IRM 20.1.

    4. Recommendation of jeopardy and termination assessments. See Jeopardy/Termination Assessments chapter, IRM 4.15.1.

    5. Expert witness and trial preparation.

4.16.1.3.2  (01-01-2003)
Interviews

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

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

  3. SEP agents should interview the taxpayer and every pertinent witness connected with the case. See IRM 4.10.3.2.1.

  4. Interviewing taxpayers in custody:

    1. Before interviewing a taxpayer confined in prison or otherwise detained by federal, state or local authorities, the SEP agent will first evaluate the case for fraud potential.

    2. If the case has no fraud potential, the SEP agent may conduct the interview without the assistance of a Special Agent (SA).

    3. If the case has firm indications of criminal fraud, the SEP agent will refer the case to CI without interviewing the taxpayer in custody.

    4. If the evaluation of fraud potential is not possible without interviewing the taxpayer in custody, the SEP agent will prepare a memorandum to the Special Agent in Charge (SSA), CI. This memorandum will request the assignment of a SA to assist in the interview and to inform the taxpayer in custody of their constitutional rights in accordance with the decision of Miranda v. Arizona, 86 S. Ct. 1602 (1966).

    5. After the interview, the assigned SA may assist the SEP agent in evaluating any possible fraud implications. If firm indications of criminal fraud are not present, the SEP agent will continue to work the case.

    6. It is not necessary for a SA to be present when interviewing a third party witness in custody.

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

    1. Memorandum of interview;

    2. Transcript of interview or Question and Answer Statement;

    3. Affidavit; or

    4. Audio recording.

  6. Interviews of members of a federally recognized Indian tribe should be in accordance with protocols set forth by relevant Presidential Executive Orders. See IRM 5.1 Chapter 12.

4.16.1.3.2.1  (01-01-2003)
Securing Affidavits

  1. One of the principal responsibilities of a SEP agent is to obtain early and accurate information.

  2. SEP agents must initiate and proceed with in-depth examinations on the assumption that cases will result in litigation. It is, therefore, incumbent upon the SEP agent to obtain as much documentation as possible.

  3. During the examination, the SEP agent may obtain oral testimony which may significantly affect the outcome of the case. The SEP agent should have the individual attest to the accuracy of their statements by preparing and signing an affidavit or statement.

  4. The average individual is not familiar with the law, therefore, the SEP agent should advise them that preparing or the giving of a false statement is a criminal offense. Therefore, an attested statement has greater validity when properly prepared and voluntarily given.

  5. Affidavits and statements are used to:

    1. Record the testimony of a witness;

    2. Refresh the memory of a witness;

    3. Deter a witness from becoming hostile and changing their testimony;

    4. Impeach a hostile witness;

    5. Be used as evidence; and/or

    6. Help accumulate complete and accurate information.

  6. Some of the methods to record statements by a SEP agent are as follows:

    1. Affidavit (Form 2311);

    2. Narrative Affidavit - Primarily is used by SEP agents. Variations are accepted as long as the basic elements remain unchanged. If feasible, the subject should be requested to examine and sign the document. If they refuse to sign, the following legend should be inserted at the end of the statement: "This statement was read by [subject's name] on [date], who stated that it is true and correct, but refused to sign it" .

    3. Summarized Narrative - A summary of a conversation or statement made by a taxpayer or witness who should be requested to sign the document. The SEP agents present at the interview should always sign the statement.

    4. Question and Answer - The witness should attest to its accuracy.

    5. Reports of Interview - A summary of an interview that is not signed by the taxpayer or witness, but attested to by the SEP agent.

  7. The SEP agent may decide to administer an oath to the taxpayer and/or witness at the start of the interview. The authority to administer oaths and affirmations, whether pursuant to the issuance of a summons or a request for information, is in IRC sections 7602 and 7622. While CI may normally administer oaths on a regular basis, it is recommended that SEP agents seek Area Counsel guidance prior to the creation of an oath to record statements.

  8. For additional information on oaths and the waiver of constitutional rights, see IRM 9.4.5.11.3.2.2 and related exhibits.

4.16.1.3.2.2  (01-26-2004)
Electronic or Verbatim Recording of Interviews

  1. Requests to make audio tape, audio disk, stenographic or other verbatim recordings of interviews will ordinarily be allowed except where the taxpayer or representative's behavior is disruptive. Requests to make video recordings will not be permitted.

  2. A request to record an interview requires:

    1. Ten (10) calendar day advance notice;

    2. Group manager approval;

    3. The taxpayer or representative to furnish their own equipment and allow the Service to produce its own recording; and

    4. The recording takes place in a suitable location, ordinarily in an IRS office.

  3. If the ten (10) calendar day advance notice is not given and/or Service equipment is not available, a new appointment will be scheduled.

  4. When the SEP agent has concerns that testimony may later change, the Service can record an interview of a taxpayer or witness. In instances where the Service initiates the recording, the provision to record at an IRS office is not required.

  5. The Service must notify the individual ten (10) calendar days in advance of the interview using Pattern Letter 2156. The Territory Manager must approve all Service initiated recordings. See Exhibit 4.10.3-1 for a copy of the pattern letter.

  6. At the outset of the recording the SEP agent must identify themselves, provide the taxpayer's name and SSN/EIN, the date, time, place and purpose of the proceeding. Each participant in the proceeding also must identify themselves, their role in the proceeding, and their acknowledgement to the making of a verbatim recording.

  7. The arrival or departure of a participant must be noted on the recording.

  8. Written records presented to the taxpayer or witness must be clearly identified on the recording.

  9. At the conclusion, the SEP agent should state the interview has been completed, the recording has ended and the time.

  10. Immediately after the interview, the recording should be labeled with the date and a brief description of the contents.

  11. Upon request, the Service will provide the taxpayer with a transcript or copy of the recording if the taxpayer provides reimbursement for the cost of the transcription or reproduction.

  12. IRC section 7521(a)(2) requires that the Service notify the taxpayers of its intent to record an interview. The code section does not require that the taxpayer must consent to the audio recording. Cumulative Bulletin Notice 89-51 (1989-1 CB 691) does specify that the taxpayer must be given prior notice of the intent to record an interview and provide a transcript upon request. See also IRM 4.10.3.2.5 (Examination of Returns chapter) for further guidance on audio recordings.

4.16.1.3.3  (01-01-2003)
Evidence

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

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

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

    1. Best evidence rule (FRE 1001 through 1006);

    2. Hearsay rule and exceptions (FRE 801 through 806); and

    3. Attorney client and accountant client privilege rules (FRE 501).

  4. SEP agents should also be familiar with case law interpretations of evidential principles and the law of privileges, e.g., the attorney-client privilege and the practitioner privileges of IRC section 7525.

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

4.16.1.3.3.1  (01-01-2003)
Search Warrant Secured Evidence

  1. SEP agents can utilize evidence secured by federal, state or local law enforcement agencies in securing leads and developing cases.

  2. SEP agents should obtain a copy of the search warrant and/or inventory to document how the evidence was obtained.

  3. Consult Area Counsel if there is a motion to suppress the search warrant or other technical problems with the search warrant evidence. In U.S. v. Janis, 76-2 USTC 16,299, 428 U.S. 433, 96 S. Ct. 3021, the Service was allowed to use evidence for civil purposes that was suppressed from criminal usage by the local authorities.

4.16.1.3.3.2  (01-01-2003)
Electronic Communications Monitoring (Wire Tap) Evidence

  1. Evidence developed from a court ordered electronic monitoring can be an important source of information in SEP cases. The evidence may support a computation of income for a period of time in cases such as wagering or narcotics as well as links to assets, expenditures, associates of a taxpayer or other leads. Generally, the evidence will consist of tapes of actual telephone conversations, listing of telephone numbers called (Pen Register) and places from which calls were received (Trap and Trace).

  2. Title 18 USC section 2517 sets forth a statutory theme under which disclosure and use of intercepted oral and wire communications are permitted. Section 2517(1) permits law enforcement officers who obtain wiretap evidence to turn such evidence over to other law enforcement officers for the latter's use. Section 2517(2) permits the receiving law enforcement officer to use wiretap evidence in their official duties, such as issuing summonses; obtaining jeopardy assessments; investigating tax offenses or preparing a Special Agent's Report (SAR).

  3. Caution -Title 18 USC section 2515 prohibits the use of evidence derived from intercepted wire communications, if that information is in violation of the law. Before receiving such evidence, SEP agents must obtain the subsequent court order releasing the evidence to the IRS for use in an income tax examination. Follow the procedures set forth below to preserve the IRS's right to use this evidence.

  4. The SEP agent is responsible for initiating an application for disclosure. On a U.S. District Court approved case the application should be made through Area Counsel to the U.S. Attorney's office. On a state court approved case, the application will be made through Area Counsel to either the District Attorney's office or the U.S. Attorney's office. When the order is obtained through the District Attorney's office, the final order should be forwarded to Area Counsel after receipt for its approval of the order.

  5. Once approval of the court and/or Area Counsel is secured, the SEP agent will make arrangements for a SA to be assigned to accompany the SEP agent to secure the evidence. The SA will make a determination about the criminal aspects of the evidence received. If none is found or prosecution is declined due to dual prosecution or other reasons, the SA will refer the evidence to the SEP agent for civil purposes.

  6. Disclosure by the SEP agent should be limited to those named on the order. Title 18 USC section 2517(3) allows disclosure of such evidence while giving testimony under oath in any proceeding held under the authority of the United States.

  7. When closing an unagreed case, the electronic communications evidence must be removed from the case file and stored in a secured access storage area within an IRS office to prevent unauthorized disclosure. The workpapers should indicate that additional evidence is under the control of the SEP agent and would be available for litigation. On an unagreed case, the evidence should be held in the secured area until the statutes for any claims have expired at which time the evidence should be destroyed.

  8. See IRM 31.7.5 (Electronic Surveillance) for further information on electronic surveillance.

4.16.1.3.4  (01-01-2003)
Summons

  1. The summons is an important tool for obtaining financial data to complete in-depth examinations. Frequently SEP cases involve uncooperative taxpayers who do not have records or will not make records available. The SEP agent may find it necessary to summons information from taxpayers and/or third parties.

  2. SEP agents should be familiar be familiar with provisions of the law relating to the use and enforcement of a summons. SEP agents should use good judgement when considering the issuance of a summons, including the potential legal problems associated with summons enforcement.

  3. A summons should be prepared and issued in accordance with the Summons chapter contained in IRM 25.5.

4.16.1.3.5  (01-01-2003)
Specific Item and Indirect Methods

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

    1. Specific item method; and

    2. Indirect method.

  2. The specific item method uses specific items to identify unreported income from both legal and illegal sources. These preferred methods limit the taxpayer's ability to challenge the government's determination since the methods are based on information personal to the taxpayer.

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

  4. The court tested methods of reconstructing income include:

    1. Bank deposit;

    2. Source and application of funds

    3. Net worth;

    4. Percentage of mark-up; and

    5. Unit Volume.

  5. The indirect method used must include evidence of a likely source of taxable income. In addition, the SEP agent must be able to refute defenses such as nontaxable sources of income and cash hoards.

  6. IRM 4.10.4.6 provides guidance on the use of various indirect methods.

4.16.1.3.6  (01-01-2003)
Joint Investigations

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

  2. Joint investigations are comprehensive investigations conducted jointly by CI and Examination. The primary purpose of a joint investigation is to determine if criminal tax fraud is involved and whether criminal prosecution should be recommended. In addition to assisting with the criminal tax computation, SEP agents are responsible for the civil aspects of the case including:

    • Statute protection (see Fraud chapter, IRM 25.1.4.3.5)

    • Consideration of subsequent year and related returns

    • Preparation of the Revenue Agent workpapers and examination report of adjustments for prosecution and non-prosecution years

    • Civil closing.

  3. Joint investigations can originate from the following:

    1. Referral Report of Potential Criminal Fraud Cases (Form 2797) or

    2. Request for Cooperating Examiner (Form 6544).

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

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

  6. SEP agent responsibilities and detailed procedures regarding joint investigations can be found in the Fraud chapter, IRM 25.1.4.

4.16.1.3.7  (01-01-2003)
Grand Jury Investigations

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

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

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

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

  5. SEP agents may use their credentials for identification, but must make it clear that they are assisting in a grand jury investigation as a grand jury agent.

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

  7. The grand jury SEP agent is considered tainted and is prohibited from participating in any civil aspects of the case resulting from the grand jury.

  8. Guidance for grand jury investigations can be found in IRM 25.1.4 of the Fraud chapter.

4.16.1.3.8  (01-01-2003)
Expert Witness and Trial Preparation

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

    1. Criminal tax trials;

    2. Tax court cases;

    3. Grand jury proceedings;

    4. Bankruptcy hearings;

    5. Summons enforcement hearings; and

    6. Judicial reviews of jeopardy and termination assessment cases.

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

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

  4. The SEP agent should contact the local Disclosure Office to determine whether a testimony authorization is required pursuant to 26 CFR section 301.9000-1 and Delegation Order 156. In general, a testimony authorization is not required in a case referred by the Service to the government where the government is calling the SEP agent as a witness.

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

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

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

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

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

4.16.1.3.9  (01-01-2003)
Ex Parte Orders for Disclosure of Tax Returns and Tax Return Information

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

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

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

  4. For disclosure of Currency Transaction Report Information (Title 31), refer to IRM 11.3.28.5.1 (Disclosure of Currency Transaction Report Information). Information will not be released through an ex parte order if it is determined by the Service that disclosure would identify a confidential informant or seriously impair a civil or criminal investigation. See IRM 11.3.28.1.(11).

  5. The SEP agent should consult with the Disclosure Office as to whether material developed subsequent to the ex parte order may be disclosed on a continuing basis. Such subsequent disclosure may be made only if the ex parte order provides for further disclosures and designates a specific cutoff date. See IRM 11.3.28.5(19).

  6. State and local law enforcement agencies cannot obtain an order.

4.16.1.4  (01-01-2003)
Sources and Development of SEP Cases

  1. The following overview reflects the restrictions on SEP agents in identifying and developing their casework.

4.16.1.4.1  (01-01-2003)
Overview

  1. This section provides guidelines for the identification and development of leads for SEP cases. The leads can be obtained from internal and/or external sources. These leads can then be developed into potential fraud cases using all available resources.

  2. To properly develop a case, SEP agents must go beyond examining and interpreting taxpayer records. It is often necessary to go to third parties to obtain and/or verify information to determine the correct tax liability.

  3. SEP agents must always follow the third party contact provisions of IRC section 7602(c) when identifying and developing cases.

  4. SEP agents must follow current Service guidelines relating to case development and case assignment. SEP agents may not develop their own cases from leads received from internal or external sources. All leads should be forwarded to the local PSP via Form 5346 (Examination Information Report). See the PSP chapter, IRM 4.1, for an expanded explanation on case development, case assignment and workload delivery.

4.16.1.4.2  (01-01-2003)
Sources for Obtaining Leads

  1. Internal sources include:

    1. CI referrals (Form 3949);

    2. Collection referrals (Form 3449);

    3. EP/EO referrals (Form 5666);

    4. Information pertaining to illegal income or jeopardy and termination assessments;

    5. Compliance Initiative Project (CIP) information;

    6. Title 31 and Form 8300 leads; and

    7. Closing Agreements and Revenue Agent Reports on closed criminal cases.

  2. External sources include:

    1. Informant information;

    2. Information received from federal, state and local law enforcement agencies; and

    3. Court documents, public databases, newspaper articles, internet, etc.

4.16.1.4.3  (01-01-2003)
Internal Resources for Case Development

  1. Prior year Revenue Agent Reports (RAR) and workpapers.

  2. Prior year Special Agent Reports (SAR) and exhibits.

  3. CI information and case development files.

  4. Collection files containing financial information.

  5. Transcript of accounts (IDRS).

  6. Information Return Processing (IRP) transcripts.

  7. Currency Banking Retrieval System (CBRS) information.

  8. International Revenue Agent Reports.

  9. Treasury Enforcement Communication System (TECS).

4.16.1.4.4  (01-01-2003)
External Resources for Case Development

  1. Research databases (i.e., Lexis-Nexis, Choicepoint, etc.).

  2. Asset locator services.

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

  4. Records of parole and from probation officers.

  5. Bankruptcy filings.

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

  7. Drug Enforcement Administration (DEA).

  8. Federal Bureau of Investigation (FBI).

  9. U.S. Customs.

  10. U.S. Secret Service.

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

  12. National Crime Investigation Center (NCIC) through CI.

  13. Immigration and Naturalization Service (INS).

  14. Department of State.

  15. Treasurer of the United States.

  16. Federal Aviation Agency (FAA).

  17. Securities and Exchange Commission (SEC).

  18. U.S. Postal Service.

  19. State and local law enforcement agencies.

  20. Department of Motor Vehicles (DMV).

  21. Department of Agriculture.

  22. Health and Human Services.

4.16.1.4.5  (01-01-2003)
Third Party Contacts

  1. When obtaining information from outside sources, SEP agents must follow third party contact procedures in accordance with IRC section 7602(c) and IRM 4.10.1.6.12.

  2. Before making a third party contact, SEP agents must determine which advance notification letter is appropriate. Because of the nature of their cases, SEP agents are authorized to use Letter 3164E except for non-filers. When examining non-filers, SEP agents must use Letter 3164C(DO). See IRM 5.1.17.3.

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

  4. Advance taxpayer notification requirements do not apply when:

    1. The taxpayer authorizes the third party contact;

    2. Such notice would jeopardize collection of any tax; or

    3. There is a pending criminal investigation.

  5. In jeopardy/termination assessment cases no advance notification is required. However, Form 12175 (Third Party Contact Report Form) must be prepared for each contact and submitted to the Third Party Coordinator when the jeopardy situation no longer exists. If additional contacts will be made, the SEP agent will also prepare and send the appropriate Letter 3164 if one has not already been provided to the taxpayer.

  6. Advance notification requirements do not apply when the third party has a reprisal concern. Therefore, it is important to make a reprisal determination during the initial contact with third parties. Form 12175 is submitted with the reprisal block marked rather than listing the name of the third party.

  7. Advance notification requirements do not apply to any general, primary, subject criminal or subject seizure investigation initiated by CI. Form 12175 is not required in these cases.

  8. For additional guidance, see IRM 4.10.3.2.1.4. See also IRM 4.10.1.6.12 for full details relating to third party contact impact relating to the changes brought forth by the Restructuring and Reform Act of 1998 (RRA'98).

4.16.1.5  (01-01-2003)
AIMS

  1. The following overview should be used in conjunction with the material located in the AIMS portion of the IRM.

4.16.1.5.1  (01-01-2003)
Overview

  1. This section identifies the various source codes, status codes, activity codes and project codes unique to SEP.

4.16.1.5.2  (01-01-2003)
Source Codes

  1. Source Code 88 (Special Enforcement) is used to request returns and/or AIMS control on case(s) involving illegal activity.

  2. Source Code 90 (Fraud Regular) is used to request returns and AIMS/or AIMS control on case(s) for a joint investigation or for the purpose of referring such returns to CI. In general, returns already open on AIMS with another source code should not be updated to Source Code 90. A fraud project code should be used to identify the case.

4.16.1.5.3  (01-01-2003)
Status Codes

  1. Status Code 17 is used when the revenue agent, the group manager and the Fraud Referral Specialist (FRS) agree that fraud potential exists.

  2. Status Code 18 is used when CI accepts a criminal fraud referral.

  3. When returned from CI for civil settlement, Status Code 17 is used for civil fraud development if concurrence was reached by the revenue agent, the group manager and the FRS. If no fraud potential exists, Status Code 12 is used.

4.16.1.5.4  (01-01-2003)
Project Codes

  1. Project Code 135 - CI referrals for civil action.

  2. Project Code 146 - Form 8300 fraud.

  3. Project Code 147 - Title 31 fraud.

  4. Project Code 149 - Non-filer fraud.

  5. Project Code 153 - Informant Claim Reward Program.

  6. Project Code 691 - EITC fraud.

4.16.1.5.5  (01-01-2003)
Activity Codes

  1. SEP Non-Case Time (597) - To develop contacts for potential leads.

  2. Narcotics/Information Gathering Projects (592) - No return examined; to gather information and develop leads.

  3. Grand Jury Non-Narcotics Related (815).

  4. Grand Jury Drug Enforcement Task Force Case (816).

  5. Grand Jury Narcotics Related (817) - Other.

  6. Trial Assistance (821).

4.16.1.6  (01-01-2003)
Illegal Source Income

  1. SEP work now includes legal source income, however, initially SEP was directed only toward illegal income sources. The following subsections provides a background on initial source of SEP work.

4.16.1.6.1  (01-01-2003)
Background

  1. SEP is directed toward that segment of the public who derives substantial income from illegal activities, including High Level Drug Leaders Tax Enforcement Project (DEP). The very nature of these illegal activities require close cooperation with the Department of Justice (DOJ) and other federal, state and local law enforcement agencies.

  2. To further implement SEP, the Commissioner signed a Memorandum of Understanding (MOU) with the Deputy Attorney General of the Department of Justice on January 8, 1976 and with the Administrator of the Drug Enforcement Administration on July 27, 1976. A new Service/DEA Memorandum of Understanding was signed February 11, 1980. These agreements established guidelines regarding investigations conducted by these agencies and the Service.

  3. The DOJ agreement established guidelines which were compatible with the Service's policy of fair and effective administration and enforcement of tax laws and the objective of DOJ to give priority to the investigations and prosecution of organized criminal activity, corruption in government, narcotics trafficking, and all forms of white-collar crimes. Provisions were also made for continued cooperation between the Service and DOJ on Strike Force matters. The document also established a Coordinating Committee to resolve any disagreements that may arise.

  4. The DEA agreement was aimed at high-level drug trafficking and to promote effective enforcement of the tax laws against those individuals who are violating these laws by implementing a tax enforcement project designated as the High Level Leaders Tax Enforcement Project (DEP). Primary liaison between the Service and DEA would be maintained at the Headquarters' level of the Service and at the Headquarters' level of DEA.

4.16.1.6.2  (01-01-2003)
Definitions

  1. IRS Racketeer (SEP-1) - A taxpayer identified as being engaged in organized crime activities; notorious or powerful with respect to local criminal activities; receiving substantial income from illegal activities as a principal, a major subordinate, or an important aider or abettor; or infiltrating legitimate businesses through illegal means or through loaning or investing therein the proceeds from illegal activities.

  2. Wagering (SEP-2) - Taxpayers engaged in an occupation requiring registrations one who is engaged in receiving wagers.

  3. Strike Force (SEP-3) - If DOJ advise the Service that the CI investigation is authorized for inclusion in the DOJ Strike Force, CI and Compliance will promptly reclassify the case as an SEP-3. Otherwise, the case shall continue to retain its original classification.

  4. Illegal Income (SEP-4) - Includes any person who, while not meeting the criteria of SEP-1, SEP-2 or SEP-3, is reasonably believed to be receiving substantial income from an illegal activity that is separate and apart from the alleged tax violations, such as corruption in government, welfare fraud or commercial bribery.

4.16.1.7  (01-01-2003)
Management Responsibilities for Strike Force Activities

  1. The Chief, CI and the Commissioners of the Operating Divisions share responsibility for:

    1. Implementing the objectives for the Service's participation in Strike Forces;

    2. Providing functional guidance to area and field offices;

    3. Maintaining liaison with Department of Justice (DOJ) to ensure full coordination of the Strike Force operations at a national level;

    4. Accumulating and disseminating information on unusual schemes, novel techniques etc. for use in planning and executing investigations and the subsequent examinations or the collection of assessments against individuals involved in illegal activities; and

    5. Ensuring that the dissemination of information is consistent with the provisions of IRM 1.3 (Disclosure of Official Information chapter) and IRM 9.3.1.

  2. Each Area Director (Compliance) through the Director, CI Field Operations is responsible for:

    1. Determining whether the Strike Force representative position will be assigned to the area or field office, where it is assigned to the area office and selecting the representative to fill that position;

    2. Implementing objectives in accordance with national objectives for the Service's involvement in a Strike Force for that area;

    3. Maintaining an effective area Strike Force operation through periodic review of field office Strike Force activities to evaluate the effectiveness of those operations in meeting its objectives and the proper utilization of personnel;

    4. Coordinating all Strike Force activities with inter-field office and inter-area aspects as well as with all other area and field office programs;

    5. Exercising supervision and control over, and evaluating, each Strike Force representative assigned to the area office as to their relationship with DOJ and other law enforcement or regulatory agencies involved in the Strike Force;

    6. Evaluating Strike Force inventories to determine that investigations qualify under the established criteria and that resources are being effectively utilized; and

    7. Keeping Headquarters advised of any significant changes or problem area in the Strike Force operation.

  3. Each Special Agent in Charge (SAC), CI along with the corresponding Operating Division manager, is responsible for:

    1. Selecting and exercising supervision and control over the Strike Force representative, when that position has been assigned to the field office, and evaluating their relationship with DOJ and other law enforcement or regulatory agencies involved in the Strike Force;

    2. Gathering, assembling, evaluating and disseminating directly tax related information pertaining to the identification of areas of noncompliance within illegal activities and the principals consistent with the Service's procedures;

    3. Developing, implementing, reviewing and updating Strike Force objectives in conjunction with the Strike Force representative;

    4. Participating in the identification of individuals for investigation and/or examination;

    5. Advising Headquarters, through the area office, about unusual tax avoidance or evasion schemes, novel examination or investigative techniques and other information useful in planning and conducting investigations, examinations or the collection of assessments against individuals involved in illegal activities. Providing access to files, investigations and information for use by the Strike Force representative in liaison work and in the preparation of any reports required of that position. Field offices involved in more than one Strike Force will separately maintain material for each Strike Force;

    6. The respective agents and Supervisory Special Agent (SSA) will update the work plan and evaluate progress made on the investigation assuring that appropriate review of each joint investigation is made. The Strike Force representative will be invited to attend these reviews;

    7. Designating an operating division manager to function, as needed, as a program and technical advisor in civil compliance matters to the Strike Force attorney. The operating division manager will remain under the supervision of the compliance function and will not function as a Strike Force representative;

    8. Ensuring that when the operating division is involved in collection activity in a Strike Force investigation, the compliance officer will check the Strike Force files and cooperating compliance division workpapers for any information that will assist in the collection of the outstanding liabilities;

    9. Ensuring compliance with the requirements of Policy Statement P-4-84;

    10. Ensuring that the dissemination of information is consistent with the disclosure statutes, regulations and with the Service's policies and procedures; and

    11. Meeting with the Strike Force attorney to evaluate the Service's participation and resolve mutual problems as needed.

  4. Each Strike Force representative is responsible for:

    1. Maintaining a working relationship with, and serving as the point of contact, with the Strike Force attorney, other Strike Force members and Service personnel;

    2. Furnishing technical advise to the Strike Force attorney;

    3. Participating with the Strike Force attorney and representatives of other agencies in the identification of areas of organized illegal activities to be investigated;

    4. Coordinating all Service related Strike Force activities with appropriate field office and area office personnel and other Strike Force members;

    5. Liaison between Service field personnel and other federal, state and local law enforcement agencies on Strike Force matters;

    6. Developing directly tax related information through other Strike Force members by personal contacts, reports, etc. and the dissemination of the information to the appropriate Service personnel;

    7. Ensuring compliance with disclosure provisions in disseminating information to the Strike Force attorney and other involved agencies in accordance with IRM 1.3.35;

    8. Soliciting information from Strike Force attorney relating to individuals and entities that may become Strike Force subjects; and

    9. Participating in the identification of individuals for investigation at the field office level.


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