Investigation and Enforcement Referral
This domain tests recognition of fraud and other enforcement indicators, proper referral channels, evidence preservation, and the limits on the TCO's role. The exam expects you to know when to escalate rather than investigate criminally.
Core rules
- Badges of fraud include consistent understatement of income, two sets of books, false or altered documents, implausible explanations, a cash-intensive business with no records, concealment of assets, failure to file while earning income, and false statements to the IRS.
- Affirmative acts such as false invoices, backdated documents, or destroying records are stronger indicators than mere omissions.
- Do not confront, accuse, or warn the taxpayer of a criminal referral. Do not solicit or accept cash. Do not alter, destroy, or take original records without authority. Preserve evidence and document chain of custody.
- Refer suspected fraud through designated internal channels and notify management as required by the Internal Revenue Manual. Continue the normal civil examination where appropriate unless instructed otherwise.
- Other referrals include TIGTA for employee misconduct, identity theft indicators, abusive tax schemes, and threats or assaults. Follow security procedures for imminent danger.
Worked example
A taxpayer provides a profit-and-loss statement and a separate bank book showing much higher deposits. When asked, he says the second book is personal and offers to remove it from the room. The TCO should not accept the removal, should not accuse him, and should document the documents, preserve copies, and escalate through referral procedures. The discrepancy plus an attempt to withhold evidence is a potential fraud indicator. The TCO's duty is to preserve evidence and refer, not to conduct a criminal interrogation or give the taxpayer a warning.
Traps that cost marks
Confronting the taxpayer; telling the taxpayer a referral will be made; accepting cash; destroying or altering documents; ignoring third-party or identity theft indicators; making criminal findings in the case history; and failing to document the referral chain.