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Part 11. Communications and Liaison

Chapter 3. Disclosure of Official Information

Section 26. Wagering Tax Information

11.3.26  Wagering Tax Information

11.3.26.1  (05-24-2005)
General

  1. IRC 6103(o)(2) provides that wagering tax information may be disclosed only as provided in IRC 4424.

  2. IRC 4424 permits disclosures of wagering tax information only in connection with the administration of civil or criminal enforcement of a tax imposed by the Internal Revenue Code. Further, wagering tax documents and other information derived therefrom through its exploitation, shall not be used against the taxpayer, directly or indirectly, in connection with any nontax proceeding.

11.3.26.2  (05-24-2005)
Background

  1. Prior to 1968, former IRC 6107 required:

    • Each District Director to maintain an alphabetical listing of individuals who had purchased the wagering occupational stamps required by IRC Chapter 35, Taxes on Wagering; and

    • That officers of a State or local government, upon application and the payment of a nominal fee, would be provided with a copy of this list, as well as copies of the returns.

  2. Additionally, the general internal revenue disclosure regulations did not apply to wagering taxes. Disclosures were made at the discretion of the Commissioner.

  3. In 1968, the Supreme Court, in Marchetti v. U.S., 390 U.S. 39, and Grosso v. U.S., 398 U.S. 62, held that the IRS could not criminally prosecute individuals for the failure to file wagering tax returns, as such filing might be tantamount to self-incrimination in violation of the individual's 5th Amendment rights. As a result of these decisions and other factors, IRC 6107 was repealed.

  4. In 1974, Congress enacted IRC 4424 to provide specific restrictions regarding the disclosure and subsequent use of information pertaining to a taxpayer's compliance with Federal wagering tax laws. Thus, the self-incrimination issues raised in Marchetti v. U.S. and Grosso v. U.S. are avoided.

  5. Initially, IRC 4424 did not extend to information similar to what is defined in IRC 6103(b) as return information (other than taxpayer return information) pertaining to non-filers of wagering tax returns. However, the enactment of IRC 6103(o)(2) in 1976 brought all wagering tax return information, whether it pertained to a filer or a non-filer, under the protection of IRC 4424.

11.3.26.3  (02-28-2003)
Tax Information Subject to IRC 4424

  1. Any return or return information relating to a taxpayer's liability for IRC Chapter 35 wagering taxes obtained by or provided to the IRS in connection with the administration of civil or criminal enforcement of IRC Chapter 35 taxes is wagering tax information subject to the disclosure provisions of IRC 4424.

  2. Any information derived by exploitation of IRC Chapter 35 tax returns or return information is also wagering tax information subject to the provisions of IRC 4424.

11.3.26.4  (02-28-2003)
Tax Information Subject to IRC 6103

  1. Any return or return information reflecting wagering transactions subject to IRC Chapter 35 taxes but obtained by or provided to the IRS solely in connection with the administration of taxes other than IRC Chapter 35 taxes (for example, IRC Chapter 1, Income Taxes) is non-wagering tax information and is subject to all applicable provisions of IRC 6103. IRC 6103(o)(2) is not applicable to non-wagering tax information.

11.3.26.5  (05-24-2005)
Maintaining Wagering Tax Information Separate from Non-Wagering Tax Information

  1. All wagering tax information about a taxpayer (including wagering tax information which has become part of an income tax file or other IRS records which relate to Form 11-C, Special Tax Return and Application for Registry-Wagering, and Form 730, Tax on Wagering) should be either maintained separately from non-wagering tax information concerning the taxpayer, or organized in such a fashion that it may be easily identified and removed from other non-wagering tax information, when necessary to comply with IRC 4424.

11.3.26.5.1  (05-24-2005)
Open Wagering Tax Investigation

  1. For example, a wagering excise tax return has not been filed and an occupational stamp has not been purchased. The following is a description of various documents which may have been obtained or developed during a wagering tax investigation as well as the disclosure restrictions for each such document..

    1. Police arrest record of the subject of the wagering tax investigation: Once the police arrest record is obtained in the course of the tax investigation, it becomes wagering tax information and may only be disclosed in accordance with the provisions of IRC 4424. This is because any information compiled during a wagering tax investigation is wagering tax information subject to IRC 4424, unless the information could never conceivably have had a bearing on the wagering tax liability of the taxpayer.

    2. Police surveillance report regarding an alleged numbers drop: As in a) above, if the information is obtained in a wagering tax investigation, it is wagering tax information and is subject to the provisions of IRC 4424.

    3. Memorandum of interview with a witness during which the witness stated that the subject of the wagering tax investigation had threatened to murder another person within the next 48 hours: In this situation, the information regarding the murder threat is not wagering tax information since it has no bearing on the wagering tax liability of the taxpayer. This information also has no bearing on the taxpayer's liability under any other chapter of the Code. As a result, such information may be disclosed to the appropriate law enforcement agency according to the provisions of IRM 11.3.34, Disclosure for Nontax Criminal Violations.

    4. A special agent's surveillance report on the subject of the wagering tax investigation: Since this is clearly evidence developed by the IRS in a wagering tax investigation, it is wagering tax information and may be disclosed only in accordance with the provisions of IRC 4424.

    5. Reports of a criminal investigation undercover agent which detail the layout of the counting room: As in d) above, this is clearly evidence developed by the IRS pursuant to a wagering tax investigation. It is wagering tax information and may only be disclosed in accordance with the provisions of IRC 4424.

    6. A copy of the Schedule C of the Form 1040 of the subject of the wagering tax investigation on which the subject has reported wagering income: In this situation, the copy of the Schedule C becomes wagering tax information when it is associated with the wagering tax investigative file for the purpose of determining possible wagering tax liability of the subject. However, the original Schedule C is non-wagering tax information as it was filed for income tax purposes and not under Chapter 35 of the IRC.

11.3.26.5.2  (05-24-2005)
Open Income Tax Investigation

  1. In this example, a revenue agent is conducting an income tax examination. One of the documents in the examination file is a Form 1040, Schedule C, on which wagering income is reported.

    1. The fact that wagering income is reported on a Schedule C does not in and of itself make it wagering tax information.

    2. Unless the Schedule C is obtained in connection with a Chapter 35 of the IRC investigation, it is non-wagering tax information. However, if adjustments were made to the Schedule C based upon a wagering tax audit, the adjustment information would be wagering tax information.

11.3.26.5.3  (05-24-2005)
Income Tax Investigation Opened Upon Termination of Wagering Tax Investigation

  1. In this example, after a wagering tax investigation has been terminated, an income tax investigation on the same taxpayer is begun.

    1. The information gathered for wagering tax enforcement purposes, is wagering tax information regardless of where it is maintained.

    2. The information may only be disclosed and used for tax administration purposes as provided by IRC 4424.

11.3.26.6  (05-24-2005)
Investigative Disclosures of Wagering Tax Information

  1. IRC 4424 permits disclosures to be made only in connection with the administration or civil or criminal enforcement of Title 26.

  2. IRC 4424 is not intended to impede the special agent's legitimate tax investigation by placing insurmountable administrative obstacles in the agent's path.

  3. As a general rule, a disclosure which would not be allowed in an income tax case under the provisions of IRC 6103 should not be made in a wagering tax case under the provisions of IRC 4424.

  4. Congress did not intend, nor does IRS policy permit, IRC 4424 to be used as a vehicle for making disclosures to other law enforcement agencies beyond that which is necessary for Federal tax administration.

11.3.26.6.1  (05-24-2005)
Similarity of Investigative Disclosures Under IRC 4424 and Investigative Disclosures Under IRC 6103

  1. There is a similarity between investigative disclosures made in a wagering tax investigation pursuant to IRC 4424 and those investigative disclosures allowed by IRC 6103(k)(6).

  2. Although IRC 6103 is not controlling regarding disclosures in the wagering tax area, IRS employees should look to IRC 6103(k)(6) guidelines when making investigative disclosures of wagering tax information.

  3. As in IRC 6103(k)(6) situations, IRS employees should be able to answer affirmatively the following four questions before making a wagering tax disclosure:

    • Am I acting within the scope of my employment and authority?

    • Am I acting to complete an authorized and assigned investigation, information gathering project, or other project?

    • Is this disclosure being made only to the extent necessary for, and the purpose of, obtaining the desired information?

    • Am I making this disclosure in good faith?

11.3.26.6.2  (05-24-2005)
Permissible Investigative Disclosures

  1. In this example, a wagering tax investigation of an individual is opened and, as a logical first step, the special agent contacts the local police in order to examine their files for possible leads. Pursuant to IRC 4424 the IRS may divulge sufficient wagering tax information to third parties to obtain information necessary for the administration or civil or criminal enforcement of Title 26. The following illustrates the practice of limiting disclosure to the extent required to elicit the information sought.

    1. The agent begins the conversation by stating, "I am a special agent of the Internal Revenue Service conducting an investigation of the tax liability of John Doe. Do you have any information in your files which I could review?" This minimal disclosure may be sufficient to obtain the desired information.

    2. If the police officer states that there are files on three different John Does, and asks which one the special agent wants to inspect, it would only then become necessary to reveal more specific information regarding the taxpayer such as address, description, or some other identifying characteristics to enable identification of the taxpayer. This disclosure is permissible since it is made only to the extent necessary to obtain information relevant to a wagering tax investigation.

    3. If the police officer then responds that there are separate files on that John Doe dealing with his involvement in prostitution, bootlegging, and gambling, it would then be permissible for the special agent to state an interest in the gambling files. At this juncture, disclosing the fact of wagering tax investigation is necessary to obtain the desired information.

11.3.26.7  (05-24-2005)
Disclosure to Other Law Enforcement Officials

  1. IRC 4424(c) precludes the use of tax information gathered for wagering tax enforcement purposes in the prosecution of nontax offenses. The coverage is broad; it precludes the:

    1. Use of the information directly, for nontax purposes; and

    2. Exploitation of that information for use in gathering leads in nontax situations.

  2. Information gathered or developed in connection with a wagering tax investigation should be identified and segregated from other tax information where possible.

  3. A caveat such as the one below should be associated with all wagering tax information.

    "THIS DOCUMENT CONTAINS WAGERING INFORMATION WHICH UNDER IRC 4424 AND 6103 MAY BE DISCLOSED ONLY FOR THE ADMINISTRATION OR CIVIL OR CRIMINAL ENFORCEMENT OF THE INTERNAL REVENUE CODE. IT MAY NOT BE USED FOR INTELLIGENCE OR PROSECUTORIAL PURPOSES, FOR GAMBLING OFFENSES SET FORTH IN TITLE 18 USC, OR ANY OTHER PURPOSE."

  4. Disclosure to local law enforcement officers may cause them more harm than good in the long run. They may have to segregate the information provided by the IRS from that which they have developed on their own in order to avoid tainting their independently developed case.

11.3.26.7.1  (05-24-2005)
Disclosure of Fact of Wagering Tax Investigation to a United States Attorney

  1. Because the Department of Justice has taken the position that wagering tax cases are not generally high priority, the Criminal Investigation Division, Special Agent in Charge, may disclose to a U.S. and/or Strike Force Attorney the fact that Criminal Investigation is contemplating or has begun a wagering tax investigation of a specific taxpayer.

  2. Such disclosure may be made in order to determine whether or not the Department of Justice would prosecute that individual upon the submission of sufficient evidence to make a wagering tax case on that individual in order to preserve limited IRS resources.

    Note:

    Disclosure of wagering tax information for this purpose is permissible under IRC 4424.

  3. The Government attorney should be informed that any information gleaned from data subject to IRC 4424 may only be used for the purpose of civil or criminal enforcement of the Internal Revenue Code, and that any such information may not be used for intelligence or prosecutorial purposes such as the enforcement of gambling offenses set forth in Title 18 USC or any other nontax administration purposes.

11.3.26.7.2  (05-24-2005)
Disclosure to Local Law Enforcement Authorities

  1. The IRS may not notify and invite law enforcement officers to accompany its agents on a raid if the purpose of the invitation is to advise local law enforcement that the IRS expects to encounter nontax information which may fall within the jurisdiction of the local police.

  2. If in the judgment of an agent, or his/her manager, the assistance of the local police is necessary in order to effectively conduct a raid or make an arrest, the agent may notify local police to request such assistance. This limited disclosure is permissible under the authority of IRC 4424(b) since it is made for wagering tax enforcement purposes. Such situations might include crowd control and securing the premises.

  3. Local police may advise that they wish to accompany special agents on a raid in execution of a search warrant in which the affidavit for issuance was based upon information received from the local police. The fact that the information on which the warrant was based was compiled from information received from the police is not an appropriate criterion to permit their participation in the raid. The specificity which is generally required of a search warrant would normally limit the scope of the search to IRC Chapter 35 tax information.

  4. Generally, IRS personnel should refrain from active participation in the execution of non-IRS search and arrest warrants. However, local police authorities may, of their own volition, invite IRS personnel to observe their activities regarding a possible target of a police gambling investigation. Prior to accompanying any law enforcement agency on a raid, the agent should consult with his/her group manager to obtain all necessary approvals. If the necessary approvals are obtained, IRS agents may observe the police activities. However, under no circumstances may IRS agents disclose wagering tax information to local police authorities.

11.3.26.7.3  (02-28-2003)
Disclosure of Nontax Criminal Violations

  1. The IRS may uncover evidence of crimes falling outside its jurisdiction during the course of a wagering tax raid.

  2. Any return information seized would be subject to the disclosure limitations of IRC 4424 or 6103.

  3. Any evidence which is not a tax return or return information may be disclosed to the appropriate Federal, State or local law enforcement authorities as provided in IRM 11.3.34.

11.3.26.8  (02-28-2003)
Disclosure to Informants

  1. Limited disclosures may be made to informants in order to ask them necessary questions or to guide them as necessary in relation to a wagering tax investigation.

  2. However, if a special agent determines that an informant is passing tax information to any other law enforcement authority, the agent should, with the advice of his/her manager, either terminate the relationship or cease disclosure.

11.3.26.9  (05-24-2005)
Use of Outside Expert

  1. If records obtained by the IRS in a wagering tax investigation cannot be deciphered due to codes used by the bookie, the agent may, if necessary, have an expert decipher the codes.

    Example:

    This expert may be an informant, an FBI agent, a local police officer, or a State police officer. Prior to disclosure, a cover sheet using caveat language, such as that set forth in IRM 11.3.26.7(3) above, should be attached to the records.

11.3.26.10  (05-24-2005)
Disclosure to Taxpayers and to Designees

  1. IRC 4424(b) provides that a disclosure of wagering tax information may be made in connection with the administration or civil or criminal enforcement of any tax imposed by Title 26.

  2. IRC 4424(b)(1) further provides that information so disclosed may not be "divulged or made known in any manner whatever by any officer or employee of the United States to any person" except in connection with the administration or civil or criminal enforcement of Title 26.

  3. Disclosures of wagering tax information under IRC 4424 may be made to taxpayers and designees if these disclosures are made "in connection with the administration or civil or criminal enforcement of" any tax imposed by Title 26.

    Example:

    If the IRC 4424(b) standard is met, the filer of a Form 11-C or a Form 730 (or the person on whose behalf the return was filed), his or her designee, fiduciary, or attorney-in-fact may receive copies of these returns.

  4. Although IRC 6103 is not controlling in wagering tax situations, IRS employees can look to the IRC 6103(c) guidelines in IRM 11.3.3, Disclosure to Designees and Practitioners, to determine whether the taxpayer has authorized another person to access the wagering tax information.

  5. In the example in (3) above, if any of the individuals meet the IRC 4424(b) standard, then disclosures may also be made to their representatives in accordance with a properly executed disclosure consent document such as Form 2848, Power of Attorney, when practice is involved/contemplated, or a Form 8821, Tax Information Authorization.

  6. The disclosure restrictions of IRC 4424 apply only to officers and employees of the United States.

  7. If a disclosure is made under IRC 4424(b) to any individual other than an officer or employee of the United States, there are no further restrictions on disclosure by this individual.


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