Friday, September 21, 2012

TIGTA Report on Collection Function Fraud Referrals (9/21/12)

TIGTA Report 2012-30-083 (7/27/12), titled The Collection Function Develops  Quality Fraud Referrals but Can Improve  the Identification and Development of Additional Fraud Cases, here.

Key excerpts:
Tax fraud is a deliberate and purposeful violation of Internal Revenue laws by those who do not file and properly report their income and expenses. When criminal fraud or civil fraud penalties are not adequately pursued, the IRS's efforts to reduce the Tax Gap and the noncompliance that contributes to it can be undermined. Taxpayers who do not voluntarily pay their share of taxes create unfair burden on taxpayers who timely and fully pay their taxes and can diminish the public's respect for the tax system. 
The Fraud Office reported that declined fraud referrals from Fiscal Year 2007 to mid-Fiscal Year 2009 exhibited common weaknesses. In addition, a Fiscal Year 2009 Fraud Customer Survey of the Collection function revealed many respondents do not look for fraud in every case, and many revenue officers (RO) responded that they would not contact a Fraud Technical Advisor for assistance in the future This audit was initiated to assess the effectiveness of the Collection Fraud Referral Program, and whether the Collection Field function is adequately considering, identifying, and developing fraud cases for referral to Criminal Investigation (CI). 
The Collection Fraud Referral Program has been successful in developing quality criminal fraud referrals. However, there are opportunities to improve the identification and development of Collection function fraud referrals.
ROs may be deterred from looking for fraud because fraud cases are more complex, require extensive additional work, and often do not result in accepted referrals. In addition, technical assistance was not always available to ROs, and management efforts to support fraud development varied. 
Civil fraud penalties should be considered on criminal cases declined by CI. TIGTA reviewed all of the 53 Fiscal Year 2010 Collection function fraud referrals declined by CI. There was no documentation showing that civil fraud penalties were considered in 44 (83 percent) of the cases. 
The RO, group manager, and Fraud Technical Advisor should review each case for common rejection reasons prior to initiating a lengthy fraud development case. However, 22 (42 percent) of 53 declined referrals were rejected for common rejection reasons. There was no evidence that these common issues were identified. TIGTA also determined that the overage clock was not always properly stopped or restarted in Collection function fraud cases. 
TIGTA recommended that the Director, Collection Policy, issue guidance to emphasize potential adjustments of RO inventory levels when cases are in fraud development; revise guidance to require the post-declination meeting include a discussion about the potential for a civil fraud referral; and emphasize that possible barriers to a criminal fraud referral need to be discussed and documented during the case development. 
In their response to the report, IRS officials agreed with the recommendations and plan to emphasize inventory control strategies for the development of potential fraud cases and update procedures to include information to be discussed during post-declination and case development meetings.
Other Interesting Excerpts:
Civil Fraud Penalties Were Not Always Considered 
Even when a potential fraud referral is declined by CI or the taxpayer is not convicted of criminal tax evasion, civil fraud penalties may be imposed because there is a lower standard of proof. Civil fraud penalties, which can be as much as 75 percent of the additional tax due to fraud, can be assessed for fraudulently omitting income on a filed tax return or failing to file a tax return. 
The responsibility for assessing civil penalties lies with the Examination function. Therefore, when an RO identifies fraud, he or she must discuss with the group manager and the FTA the possibility of referring the case to the Examination function. In addition, Fraud Standard Operating Procedures8 require that after CI declines a referral, the FTA should conduct a post-declination meeting with the RO and the group manager to discuss the declined criminal referral and alternative means of civil closure. This meeting would be an opportune time to discuss the possibility of referring the case to the Examination function. However, the procedures do not specifically require a discussion about the potential for referring the case to the Examination function during the post-declination meetings. 
We reviewed all of the 53 FY 2010 Collection function fraud referrals declined by CI and determined: 
In 44 (83 percent) of the 53 cases, there was no documentation showing that civil fraud penalties were considered. 
In 45 (85 percent) of the 53 cases, there was no evidence that post-declination meetings were held. 
IRS management stated that the ROs, group managers, and FTAs are not expected to be knowledgeable about when civil fraud penalties are warranted. All three FTAs that we interviewed indicated that they do not discuss the possibility of civil fraud penalties. * * * 3(d) * * *. In addition, one of the FY 2008 Collection function area fraud operational reviews identified the need to establish a formal process for involving the Examination function in Collection function fraud cases. 
Because the potential for civil fraud penalties is not always addressed, the cases are not always referred to Examination for consideration of the penalty. We determined that 10 of the 53 FY 2010 Collection function fraud referral cases declined by CI had potential for development of civil fraud penalties, but there was no evidence that the cases were referred to the Examination function or that the potential for civil fraud penalties was discussed. While all of these cases warranted discussion of the penalty, * * * 1 * * *.9 
Recommendation 2: The Director, Collection Policy, SB/SE Division and the Director, Fraud/Bank Secrecy Act, SB/SE Division, should revise guidance to require post-declination meetings include a discussion about the potential for referring the case to Examination function for consideration of civil fraud penalties, if applicable to the case. This discussion should be documented appropriately.

Management's Response: IRS management agreed with this recommendation and plans to update the relevant IRM section and Fraud Standard Operating Procedures to include information to be discussed during the post-declination meeting. 

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