Can’t Wait?

This section discusses the fact that a fraud case begins with the compliance employee's recognition of affirmative indications and acts of fraud by the taxpayer. Further development of these " indicators" (a sign or symptom, for example, an unexplained increase in net worth) assists the employee in establishing the firm indications (affirmative acts) necessary for a successful fraud case.

When initial indications (signs or symptoms) of fraud are uncovered, the compliance employee should initiate a discussion with his/her group manager and the FRS. Service Center Examination employees should refer to their designated Fraud Coordinator who will act as liaison to the FRS. A plan of action should be developed jointly as early as possible to document firm indications (affirmative acts) of fraud. An integral part of the plan is establishing that sufficient affirmative acts exist to confirm fraud. The plan should be a joint effort of the compliance employee, manager and the FRS.

The compliance employee, with assistance of the FRS, must know when to suspend action on the case and prepare a criminal referral. If the compliance employee stops too soon all the information necessary to document firm indications (affirmative acts) of fraud may not be developed sufficiently for CI.

The minimum plan of development should include following up on all leads indicated as fraud indicators (signs or symptoms), securing copies of all relevant data relating to indicators of fraud (signs or symptoms) and noting from whom and when obtained. Documents obtained from the taxpayer or other third parties should not be annotated with any comments by the compliance employee. It is critical for the employee to secure the taxpayer’s explanations for any discrepancies.

An understatement of the tax liability alone is not fraud. In order to sustain the civil fraud penalty or make a criminal referral, the compliance employee must establish the intent was to defraud.

For area compliance employees, when it is agreed by the examiner, group manager and FRS that potential for fraud exists, the case will be updated to Status Code 17 (Fraud Development Status). This decision is an important event in the examination and should be documented in the case file. Form 11661, Fraud Development Status, may be utilized to document FRS involvement as well as the decision to update the case to Status Code 17. While in Status Code 17 (Fraud Development Status) and Status Code 18 (Accepted by CI), cycle time will be excluded from monthly "aging" reports to management (Month At a Glance Report). AIMS and ERCS data, however, will include all cases. In order to reconcile to the Month At a Glance Report, Status 17 and 18 cases must be excluded from the overage category and the overage percentage manually computed. Cases should be returned to Status Code 12 if it is later determined that fraud potential no longer exists. Service Center Examination employees will coordinate potential fraud case development and preparation of Form 11661 with their manager, designated Fraud Coordinator and the FRS. At this writing, Status 17 is not valid for potential fraud cases at the service centers.

When it is agreed by the revenue officer, group manager and FRS that potential for fraud exists, the case will be updated to ICS sub code 910. Form 11661 may be utilized to document this decision and input of ICS sub code 910. ICS sub code 910 will remain on the case either until the group manager and FRS concur the case no longer has fraud potential or CI declines referral of the case.

The compliance employee or group manager should not obtain advice and/or direction from CI for a specific case under examination. The FRS is available for consultation.