The Fraud Enforcement Advisor: The Person You Never Meet

In most audits, you deal with one person: the examiner. In some audits, there is another person involved who never calls you, never sends a letter, and never shows up at the meeting. That person is the Fraud Enforcement Advisor, usually shortened to FEA.

If an FEA is advising on your case, the IRS is considering fraud. That might lead to a civil fraud penalty. It might lead to a criminal referral. Either way, the stakes are higher than an ordinary adjustment, and you should have a lawyer.

This guide is general information about the FEA role as the Internal Revenue Manual describes it.

Where the FEA sits

FEAs work in the IRS Office of Fraud Enforcement. IRM 25.1.3.1 describes that office's mission as promoting compliance by strengthening the IRS's response to fraud and mitigating emerging threats, including pursuing civil fraud penalties and recommending criminal cases that will lead to prosecutions where appropriate. The same section says the office serves as "the primary civil liaison to IRS-Criminal Investigation."

IRM 25.1.3.2 describes the program as servicewide, with four groups of FEAs made up of revenue agents and revenue officers located strategically throughout the country.

In plain terms, an FEA is an experienced civil employee whose specialty is fraud. The FEA advises examiners and revenue officers in every operating division and acts as the bridge between the civil IRS and Criminal Investigation.

When the FEA gets involved

The trigger is the discovery of indicators of fraud. Under IRM 25.1.2.2, when a compliance employee uncovers indicators, the employee documents them and discusses them with the group manager. If the manager agrees fraud development is warranted, the employee contacts the FEA through the Specialist Referral System.

IRM 25.1.6.3 adds a timeline for examination cases: the FEA assigned to the case contacts the examiner within two business days of the request.

The manual encourages early involvement. IRM 25.1.3.2 says the FEA "will be consulted in all cases involving potential criminal fraud, as well as those cases that have potential for a civil fraud penalty," and that compliance managers "will encourage the early involvement of the FEA in all potential fraud cases."

So the FEA can be advising on your audit well before anyone uses the word fraud in front of you.

What the FEA actually does

The FEA's role in the manual has several parts.

Deciding whether to develop fraud. Under IRM 25.1.2.2, a case is placed in fraud development status when the examiner, the group manager, and the FEA agree the potential for fraud exists. The decision is documented on Form 11661 for examinations or Form 11661-A for collection. The manual says a case must not be placed in or out of fraud development status without consulting the FEA, though if they disagree, the final decision rests with the group manager.

Writing the plan. Fraud development requires a written plan of action to establish affirmative acts of fraud. The manual describes it as a joint effort of the examiner, the manager, and the FEA, with follow-up dates within 60 days of each plan. The FEA's role can be advisory or consultative.

Shaping the referral. If affirmative acts of fraud are established, IRM 25.1.2.2 says the FEA recommends a referral to Criminal Investigation if criminal criteria are met. IRM 25.1.3.3 says the FEA is available to help the examiner prepare Form 2797, reviews and approves the referral, and may add a one-page narrative before it goes up the chain. The FEA also attends the initial conference with CI. See when an audit turns criminal.

Supporting the civil fraud penalty. If the case does not go criminal, or comes back from CI, the civil fraud penalty under IRC 6663 is on the table. Under IRM 25.1.6.3, the FEA works with the examiner to make sure the fraud narrative actually supports the penalty, recommends improvements, and indicates concurrence on Form 11661. For Large Business and International cases, FEA concurrence is mandatory. See the civil fraud penalty.

The FEA's opinion is important, not final

The manual repeatedly puts the final call on the civil side with the examiner's group manager. If the FEA and the manager disagree about fraud development or about asserting the civil fraud penalty, IRM 25.1.6.3 says the disagreement is documented and the final decision rests with the group manager. Area Counsel must also approve the civil fraud penalty before a statutory notice of deficiency is issued.

That layered review is a safeguard. It also means a fraud penalty in a notice of deficiency has been looked at by several people who believe they can prove it. Treat it seriously.

Signs an FEA may be involved

You will not get a letter saying an FEA has joined your case. But some patterns line up with the procedures the manual describes:

• Questions that move from "what is this deduction" to "who deposited these receipts" and "how were gross receipts determined." IRM 25.1.2.4 lists those topics as required items in examination workpapers on fraud cases.
• Requests for original returns. IRM 25.1.2.2 tells the examiner to request the original returns in fraud development.
• A proposed report that was expected but never arrives. IRM 25.1.2.4 says a revenue agent's report must not be sent to the taxpayer or representative until that step is discussed with the FEA.
• A sudden suspension of the audit with no reason given. IRM 25.1.3.3 tells examiners to suspend without disclosing the reason when a referral is being made.

None of these proves anything by itself. Together, they are worth a conversation with a lawyer.

Voluntary disclosures and the FEA

The FEA also appears in the IRS civil framework for voluntary disclosures. Under IRM 4.63.3.18.2, fraud referral procedures are not required for agreed voluntary disclosure cases that close with a Form 906 closing agreement. But if the case will close without a closing agreement, is unagreed, or preliminary acceptance has been revoked, regular referral procedures apply, including FEA involvement and approval on Form 11661. Read the Voluntary Disclosure Practice guide.

What to do if you think fraud is being developed

The worst response is to start explaining. The examiner's job in fraud development, according to IRM 25.1.2.4, includes securing the taxpayer's explanations for discrepancies and recording nonresponsive answers verbatim. Explanations offered without counsel become evidence.

The second worst response is to stop cooperating in a way that looks like obstruction, which is itself a listed indicator of fraud. See badges of fraud.

The right response is to bring in a lawyer who can evaluate the exposure in a privileged setting and decide how the IRS will be dealt with from here. If the case is an eggshell audit, that decision is urgent.

Collection cases are not exempt

People tend to think fraud is an audit issue. The IRS manual does not. The fraud development procedures in IRM 25.1.2 apply to revenue officers as well as examiners, and a revenue officer who finds indicators of fraud follows the same path to the FEA, using Form 11661-A. IRM 25.1.2.2 says the revenue officer requests a fraud code on the collection case through the group manager when the case enters fraud development status.

What does fraud look like in collection? The IRS fraud indicators include transfers of assets for purposes of concealment, asset ownership placed in other names, and transfers made in anticipation of a tax assessment or while an investigation is pending, all listed in IRM 25.1.2.3. Section 7206(5) separately makes it a felony to willfully conceal property or falsify records in connection with an offer in compromise or closing agreement. A collection case with those facts can draw an FEA just as quickly as an audit.

The FEA also keeps cases moving. IRM 25.1.3.4 says the FEA monitors conference dates and response obligations after a referral, and IRM 25.1.3.1.5 requires FEAs to follow up on cases in fraud development status at least every 60 days.

General information only, not legal advice. Reading this page does not create an attorney-client relationship. Laws and IRS procedures change; the sources cited were reviewed on the date shown above.