IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 15. Jeopardy/Termination Assessments

Section 2. Examination Procedures

4.15.2  Examination Procedures

4.15.2.1  (06-30-1999)
Overview

  1. This section provides guidelines for the identification, assignment, development and recommendation of jeopardy/termination assessments.

4.15.2.2  (06-30-1999)
Jeopardy/Termination Coordinator

  1. Each area director will appoint a Jeopardy/Termination Coordinator to control jeopardy/termination assessments.

  2. The Coordinator will be responsible for the following:

    1. Reviewing possible jeopardy/termination assessment cases to determine if a case meets jeopardy/termination criteria;

    2. Contacting and coordinating with other functions regarding the possible jeopardy/termination;

    3. Assigning an examiner to prepare a jeopardy/termination case;

    4. Controlling a jeopardy/termination; and

    5. Following-up on jeopardy/termination cases.

     

4.15.2.2.1  (06-30-1999)
Reviewing Cases

  1. The coordinator will review all cases that are forwarded to him/her to determine if the case meets the criteria for a jeopardy/termination assessment.

4.15.2.2.2  (06-30-1999)
Contact and Coordination

  1. The coordinator will contact and coordinate with other functions regarding jeopardy/terminations under Exam responsibility.

    Note:

    Technical Support Manager has overall responsibility for liaison between Exam, Collection, Cl, TE/GE, Appeals, and Counsel. Responsible Service employees must keep Technical Support informed of the status of a jeopardy/termination case. The Technical Support Manager's responsibility is strictly liaison; the responsibility for taking necessary actions on any jeopardy/termination assessment cases remains with the function having jurisdiction for taking the required actions.

     

  2. The coordinator will contact other functions to determine if the taxpayer is under active consideration by another function or operating division.

  3. The coordinator will inform other functions that a possible jeopardy/termination is in progress.

    1. Contact Counsel to discuss the possible jeopardy/termination assessment. Counsel must approve in writing whether there should be a jeopardy/termination.

    2. Notify the Case Processing Support Manager that a potential jeopardy/termination assessment case is underway. Provide Case Processing Support Manager with a tentative target date for assessment purposes and with the number of entities and tax periods involved.

    3. Inform the Field Territory Manager of the possible jeopardy/termination.

     

4.15.2.2.3  (06-30-1999)
Assignment of Examiner

  1. The coordinator will arrange to have an examiner assigned to prepare the jeopardy/termination case. The coordinator will contact the group manager to request an examiner. The group manager will assign the examiner. The group manager will provide the coordinator with the name of the examiner who will prepare the jeopardy/termination case.

4.15.2.2.4  (06-30-1999)
Control of the Case

  1. The coordinator will control the jeopardy/termination in order to make sure that the case is developed, prepared, and processed as quickly as possible. The coordinator will make a quarterly review of outstanding Transaction Code (TC) 914 accounts to determine if they are still needed. See IRM 4.15.2.4.1.3.6(2)d for further explanation concerning TC 914s placed on jeopardy/termination assessment cases. Because of the urgency usually involved in jeopardy/termination cases, the case will be given the highest priority of handling within and between the various functions.

4.15.2.2.5  (06-30-1999)
Follow-Up

  1. The coordinator will follow-up on jeopardy/terminations to ensure that the assessment is made promptly and correctly and that all the necessary actions have been taken.

4.15.2.2.5.1  (06-30-1999)
Request for Review

  1. If the taxpayer who is subject of the jeopardy/termination assessment files a request for an administrative review, the coordinator will forward the request to Technical Support. The request is made by the taxpayer after the assessment is made.

4.15.2.2.5.2  (06-30-1999)
Abatement of Assessment

  1. If an abatement is needed, the coordinator will take the appropriate action to have the abatement made. See IRM 4.15.5.2 for abatement procedures.

4.15.2.2.5.3  (06-30-1999)
Notice of Deficiency

  1. The coordinator will ensure that an examination is completed in order for a notice of deficiency to be issued, as required by the jeopardy/termination provisions. The examination file, which includes the jeopardy/termination assessment file, is completed and assembled according to case file assembly procedures in the former IRM 4237(15)00. The completed case will be forwarded to Technical Support for issuance of the required notice of deficiency.

  2. Jeopardy — A notice of deficiency is required to be mailed to the last known address of the taxpayer within 60 days of the date of the assessment. See IRM 4.15.5.5 and IRM 4.15.6.5 for notice of deficiency procedures. An examination of the taxpayer, preparation of the notice of deficiency, and review of the notice by Counsel, will be completed within the 60-day period.

  3. Termination — A notice of deficiency is required to be mailed to the last known address of the taxpayer, for the taxpayer’s full taxable year, within 60 days after the later of:

    1. The due date of the taxpayer’s return for the taxable year, determined with regard to extensions; or

    2. The date the taxpayer files a return for the taxable year.

     

  4. If the taxpayer does not file a return, the notice of deficiency must be sent within 60 days after the due date of the return. See IRM 4.15.5.5 and IRM 4.15.6.5 for notice of deficiency procedures.

  5. An examination of the taxpayer for the full year, preparation of the notice of deficiency, and review of the notice by Counsel, will be completed within the 60-day period.

  6. The coordinator should receive a termination follow-up file from PSP Support. See IRM 4.15.7.7.

4.15.2.2.5.4  (06-30-1999)
Area Report

  1. The coordinator will prepare the Area Report on Jeopardy and Area Report Termination Assessments for the Field Territory Manager. See IRM 4.15.5.6.

4.15.2.3  (06-30-1999)
Identifying Cases

  1. Employees should be aware of the criteria for jeopardy/termination cases and identify situations where a possible jeopardy/termination may exist.

4.15.2.3.1  (06-30-1999)
Receiving Information

  1. An employee can receive information from many sources, inside the U.S. Government and outside. The employee should try to obtain the necessary information and contact the coordinator.

  2. When an employee receives, from any source, information indicating that a jeopardy/termination situation may exist, the following information should be obtained, if applicable:

    1. Name, including any aliases;

    2. Date of birth, if available;

    3. Address(es);

    4. Taxpayer identification number (TIN); generally, a social security number (SSN) or employer identification number (EIN);

    5. Arrest record; and

    6. Filing history. (Secure AMDISAs, IDRS transcripts, or similar documents such as BMFOLs or IMFOLs, for the last three years.)

     

  3. If a recommendation for a jeopardy/termination assessment is received from another organizational unit of the Service, the Treasury Department, or Justice Department, the recommendation will be transmitted to the Field Territory Manager or Director, Compliance, who will ascertain the status of the case. If the information shown on the recommendation is too general and vague to support a jeopardy/termination assessment, the recommendation will be assigned to a revenue agent to develop, as expeditiously as possible, the facts necessary for approval or disapproval. Any such oral recommendation received must be confirmed in writing prior to referral to the area director.

  4. The employee receiving the information indicating a possible jeopardy/termination situation, with group manager approval, will contact the coordinator.

4.15.2.4  (06-30-1999)
Assignment of Cases

  1. An examiner will be assigned to prepare the jeopardy/termination case.

4.15.2.4.1  (06-30-1999)
Examiner Responsibilities

  1. The following sections address examiner responsibilities and give detailed instructions. Examiner responsibilities include:

    1. Documenting evidence concerning the conditions making a jeopardy/termination assessment applicable;

    2. Developing the facts to support the jeopardy/termination;

    3. Preparing the report for assessment of the jeopardy/termination;

    4. Preparing the package for approval by the area director;

    5. Securing approval of the jeopardy/termination package by Counsel and the area director; and

    6. Processing the approved jeopardy/termination.

     

4.15.2.4.1.1  (06-30-1999)
Documenting Conditions

  1. Evidence of meeting conditions for a jeopardy/termination assessment should be developed and documented to the maximum extent. Include indications that collection of tax will be endangered if regular assessment and collection procedures are followed. Include information regarding the taxpayer’s financial condition. All evidence and information should be available for review to determine if the jeopardy/termination is proper under the circumstances.

  2. Flight, concealment/transfer of assets and insolvency should be considered in establishing whether any of the conditions exist for making a jeopardy/termination assessment. Factors listed below, although not all inclusive, should be explored to the extent practicable.

4.15.2.4.1.1.1  (06-30-1999)
Flight

  1. Factors establishing flight include the following considerations.

    1. Is there evidence which would indicate that, if the taxpayer were free on bond, he/she would flee the United States or conceal himself/herself?

    2. What is the taxpayer’s citizenship status? A resident alien? A non-resident alien temporarily in the United States? An illegal alien? If the taxpayer is an alien legally in the United States, would his/her conviction on a specific offense result in his/her deportation?

    3. Does the taxpayer have a passport? If so, is it in his/her name or the name of an alias?

    4. Does the taxpayer have any previous convictions for offenses that would indicate that he/she would flee?

    5. Is the taxpayer wanted by the police as a fugitive from another jurisdiction?

    6. Is there any indication that the taxpayer was about to leave the country, such as airline tickets seized from his/her possession at the time of arrest?

     

4.15.2.4.1.1.2  (06-30-1999)
Transfer/Concealment of Assets

  1. Factors establishing concealment/transfer of assets include the following considerations.

    1. Does the taxpayer own any fixed assets, or deal solely in cash?

    2. If the taxpayer drives a car, is the car registered in his/her name or is he/she using a nominee?

    3. What are the circumstances concerning the taxpayer’s residence? Is the title in his/her name, or the name of a nominee? If the taxpayer leases, is the lease in his/her name, or that of a nominee?

    4. If the taxpayer was arrested with a large sum of money on his/her person, what are the circumstances concerning the money? Did the money belong to him/her, or to someone else?

    5. Has the taxpayer ever used an alias to conceal his/her identity?

    6. Was there an attempt by the taxpayer, at the time of his/her arrest, to destroy evidence?

     

4.15.2.4.1.1.3  (06-30-1999)
Insolvency

  1. Factors establishing insolvency include the following considerations.

    1. Are there any Balance Due Accounts (BAL DUEs) open with respect to the taxpayer under his/her name, or any alias he/she may have used in the past?

    2. Did a search of the local court records reveal outstanding judgements against the taxpayer?

    3. Has the taxpayer ever been adjudicated as bankrupt?

     

  2. Financial solvency of the taxpayer must be threatened or there can be no jeopardy/termination.

4.15.2.4.1.2  (06-30-1999)
Developing the Facts

  1. The examiner should establish, as thoroughly and sufficiently as circumstances permit, a reasonable belief that income has been earned, a tax is or will become due, and the tax will not be collected unless immediate action is taken.

  2. Exclude unlawful wiretap evidence entirely and other tainted or illegally obtained evidence if possible. Consult Counsel if there are doubts as to legality.

  3. When possible, and applicable, the examiner should interview the taxpayer, the arresting officer(s), and other knowledgeable persons such as associates, employers, etc.

    Note:

    If the case has fraud potential, or if the taxpayer is interviewed while in custody, the examiner should not interview the taxpayer without the presence of a special agent. The special agent will advise the taxpayer of his/her constitutional rights.

     

4.15.2.4.1.2.1  (06-30-1999)
Taxpayer Interview

  1. Interview the taxpayer to afford the taxpayer an opportunity to explain his/her situation and to obtain as much information as possible about the taxpayer. The interview should cover, at a minimum, the following:

    1. Taxpayer’s name, address, taxpayer identification number, and telephone number;

    2. Sources of taxable income;

    3. Taxpayer’s assets (date purchased and cost);

    4. Extent of taxpayer’s liabilities;

    5. Sources of non-taxable income;

    6. Gifts and/or loans made by the taxpayer;

    7. Personal living expenses of the taxpayer (rent, food, etc.);

    8. Amount of money or other assets seized;

    9. Dependents, marital status;

    10. Date of birth; and

    11. Education.

     

4.15.2.4.1.2.2  (06-30-1999)
Arresting Officer Interview

  1. Interview the arresting officer(s) to obtain the following information.

    1. Specific charges giving rise to the arrest;

    2. Copy of the arrest report, warrant, and all other records seized by the police;

    3. Detailed facts with respect to the money and other assets seized and whether any other party is claiming ownership of the assets seized;

    4. Probability of the taxpayer leaving the country; and

    5. How long the assets will be held by the arresting agency. (Who has possession, his/her telephone number, contact address, etc.)

     

    Note:

    The examiner should leave his/her name and telephone number and request to be notified if anyone files a claim for the seized assets.

     

4.15.2.4.1.2.3  (06-30-1999)
Interview of Others

  1. Interview other knowledgeable persons to develop the facts to determine if a jeopardy/termination exists. Such persons include:

    1. Narcotics agents;

    2. Business associates;

    3. Coworkers;

    4. Employers; or

    5. Any other individuals who may have information about the taxpayer or can assist in developing the case.

     

4.15.2.4.1.2.4  (06-30-1999)
Documenting the Facts

  1. Income from illegal activities, such as narcotics or gambling, should be evidenced by documents. It should also be supported by a professional opinion of a law enforcement officer or other expert with knowledge of the taxpayer’s activity.

  2. The underlying taxable income must be determined in a reasonable manner which does not produce an arbitrary, capricious, or excessive amount under the particular circumstances. The facts must be developed to support the determination that the taxpayer received income as well as the periods when the income was received.

    1. Income Activity — The taxpayer must be involved in an income producing activity. The specific facts must be developed and recorded in order to support that income was received by the taxpayer.

      Example:

      In Rinieri v. Scanlon, 254 F. Supp. 469 (S.D. N.Y. 1966), a revenue agent testified that his only information was that Rinieri, a French citizen, possessed said cash, that it was believed it came from the sale of narcotics, and that he used a cost of living figure of $53,100 in order to produce a tax liability of about the sum of the seized cash. The court granted summary judgement for the taxpayer in his refund suit noting that the government had no proof of earnings within the United States even some four years later. It brushed aside any presumptive evidence of jeopardy with the observation there can be no jeopardy if no taxes are due. The court concluded the government "acted in a fashion which can only be described as arbitrary, capricious, and unconscionable" .

       

    2. Period(s) Involved — The specific facts must be developed and recorded in order to support that income was received over the period(s) determined. There should be a rational connection between facts known or ascertained and facts presumed or inferred.
      Example 1: In Pizzarello v. United States, 408 F.2d 579 (2nd Cir. 1969), the court concluded that an assessment of some $282,000 in wagering taxes was excessive, arbitrary, and without factual foundation. The amount was determined by projecting the average of waivers received during a 3-day period, over a 5-year period. The government failed to establish that the taxpayer engaged in gambling during the entire 5-year period or that the 3-day average represented average daily business for any other days.
      Example 2: In the refund case of O’Neill v. United States, 198 F. Supp. 367 (E.D. N.Y. 1961), the wagering excise tax for a 16-month period was determined by reference to seized betting slips covering all betting activities during the last month of the period. The agents believed the last month to be the most representative. At trial the fact that the taxpayer engaged in the wagering business throughout the 16-month period was established under collateral estoppel by reference to his conviction, and no evidence controverting the government’s figures was offered.

     

  3. The tax history of the taxpayer should be verified. Determine if returns for prior years were filed, if there are estimated tax payments or withholding for prior years or the current year, whether the taxpayer under-reported for prior years, and if the taxpayer is current or delinquent in tax obligations. Place the information and analysis in the jeopardy/termination file. Include the following:

    1. AMDISAs for the last three years to determine if any years are under examination;

    2. TRANSCRIPTS for the last three years to reveal the filing history of the taxpayer (BMFOLs and IMFOLs can be used in place of transcripts); and

    3. BRTVUs and RTVUEs for the last three years to uncover types of businesses, income, expenses, deductions, types of returns filed, etc. by the taxpayer.

     

  4. Case files recommending jeopardy/termination assessments should contain the following information to the extent practicable:

    1. Name, address, and TIN of the taxpayer;

    2. A complete computation of taxable income with all necessary supporting schedules and computations;

    3. Tax and penalty to be assessed by year, quarter, or period;

    4. The nature of the taxpayer’s business or activity;

    5. The taxpayer’s present financial condition;

    6. Information regarding the taxpayer’s activity giving rise to the jeopardy/termination;

    7. Records with respect to continuing business or personal losses;

    8. The taxpayer’s record for resisting payment of taxes in the past, if known;

    9. The nature and location of the taxpayer’s assets and the source of income;

    10. Identity and location of any retirement plan in which the taxpayer participates and in which benefits may be immediately available.

    11. The taxpayer’s filing record; and

    12. Any other information having a bearing on the taxpayer’s financial condition, future prospects for losses, etc.

     

4.15.2.4.1.3  (06-30-1999)
Preparing the Pre-Approved Report

  1. A pre-approval report will be prepared. If the pre-approval report is accepted, an approval report will be prepared. The approval report is part of the package that is submitted to the area director for personal approval of the jeopardy/termination.

  2. The examiner will prepare a pre-approval report. The coordinator will review the pre-approval report. If the coordinator agrees with the report, the examiner will hand carry the report to the Technical Support Staff for review. If Technical Support concurs, the examiner and/or Technical Support reviewer will hand carry the report to Counsel for review. If Counsel concurs, the pre-approval report will be returned to the examiner for preparation of the approval report.

  3. If the coordinator, Technical Support, or Counsel does not agree with the pre-approval report, the examiner will make the necessary corrections, and resubmit the package for agreement.

  4. If the jeopardy/termination is determined not to exist, a memorandum to the file should be prepared, documenting the reasons for discontinuance. The file, with the memorandum to file, will be returned to the coordinator for recordkeeping.

  5. The pre-approval report will consist of the following:

    1. Pattern letter;

    2. Tax computation;

    3. Narrative;

    4. Copy of return; and

    5. Other information.

     

4.15.2.4.1.3.1  (06-30-1999)
Pattern Letter

  1. The pattern letter is addressed to the taxpayer at his/her last known address.

    IF the assessment is: THEN use:
    A termination, Letter 1583 (Exhibit 4.15.2–1).
    A jeopardy, Letter 1584 (Exhibit 4.15.2–2).
    A termination possessor of cash, Letter 1929 (Exhibit 4.15.2–3). Following the name line in the address, insert another line: "As Possessor of Certain Cash"
    A jeopardy possessor of cash, Letter 1930 (Exhibit 4.15.2–4). Following the name line in the address, insert another line: "As Possessor of Certain Cash"

     

4.15.2.4.1.3.2  (06-30-1999)
Tax Computation

  1. The basis on which the taxable income is computed will be stated. Examples are source and application of funds, net worth computation, specific identification, etc. All known assets, liabilities, income, and expenses will be considered. Assets held under IRC 401(a) qualified retirement plans will not be considered unless such amounts are available to the taxpayer. See Exhibit 4.15.2–5 for examples of income computations.

    1. Expenses — A reasonable estimate of expenses will be made if the facts support the estimate. For example, if the taxpayer is in a business where cost of goods sold (COGS) is involved, a reasonable estimate must be made for COGS.

    2. Deductions/Credits — The standard deduction, exemptions, and credits, without proration, are allowed.

    3. Taxes — Self-employment tax, alternative minimum tax, additions to tax for early distributions from certain retirement plans, prohibited transaction excise tax, etc., if applicable, will be asserted.

    4. Possessor of Cash — For assessment purposes, cash or cash equivalent, as defined in IRC 6867(d), will be treated as taxable income and taxed at the highest rate of tax specified in IRC Section 1.

      Note:

      Usually Form 4549–A, or a similar report, is prepared. Attached to the Form 4549–A are schedules detailing tax computations, such as self-employment tax and alternative minimum tax, other schedules showing the computation of penalties, and a schedule showing the interest computation. Include any other necessary schedules such as a net worth computation, if used.

       

     

4.15.2.4.1.3.3  (06-30-1999)
Narrative

  1. Prepare a narrative explaining the facts, circumstances, and reason for the assessment. See Exhibit 4.15.2–6.

4.15.2.4.1.3.4  (06-30-1999)
Copy of Return

  1. A copy of the return or substitute for return (SFR) is included in the report. If the return has not been filed, follow SFR procedures and process the original to establish the taxpayer on master file or non-master file so an assessment can be made.

  2. For a jeopardy, if a return has been filed, include a copy. If a return has not been filed, follow SFR procedures. Identify the original SFR as a jeopardy SFR. Process the original using Form 3198, Special Handling Notice. Keep a copy of the SFR for the report.

  3. For a termination, follow SFR procedures. Identify the original SFR as a termination SFR. Process the original using Form 3198. Keep a copy for the report. (An SFR may also be necessary for the full year return if the taxpayer fails to file in termination follow-up action.)

  4. For a possessor of cash (either a jeopardy or termination), create a new taxable entity (dummy file) for the individual who is in physical possession of the cash. All documents requiring entity information must use "(Possessor’s Name) as Possessor of Certain Cash" as the name line. Follow SFR procedures and process the original using Form 3198. Keep a copy of the SFR for the report.

    1. A temporary TIN must be obtained for all assessments made under IRC 6867 irrespective of information indicating the possessor’s personal TIN. The use of the temporary TIN enables separate tax liability treatment for the possessed cash and avoids any effect on the possessor’s personal individual tax liability, which remains separate from the IRC 6867 assessment. Contact Case Processing Support to inform them that a possessor of cash jeopardy/termination assessment is in process and to obtain the temporary TIN.

    2. Jeopardy — A jeopardy possessor of cash entity is established on master file (MF).

    3. Termination — A termination possessor of cash entity is established on non-master file (NMF).

     

4.15.2.4.1.3.5  (06-30-1999)
Other Information

  1. Include any notes, memorandums of interview, copies of taxpayer’s books and records, records of filing history, copies of arrest reports, documentation of assets, financial statements, or any other records that were obtained or used to develop the case.

4.15.2.4.1.3.6  (06-30-1999)
Approval Report

  1. After the pre-approval report has been accepted, the examiner will prepare the approval report. The approval report is part of the package that will be