As discussed in a number of previous Tax Alerts, since 2009 the
Internal Revenue Service has created three separate tax amnesty
programs in order to encourage U.S. taxpayers to properly report
and pay taxes on assets held abroad. These amnesty programs
require U.S. taxpayers to pay any overdue tax, penalties and
interest on unreported income, and pay an additional "in
lieu" penalty (the "FBAR penalty") based upon the
amount of unreported funds held abroad. The cost of the FBAR
penalty has increased successively with each of the three programs
such that those who have waited until the current 2012 amnesty
program to report their offshore income and assets pay an FBAR
penalty of up to 27.5% of those assets as compared to the 20% FBAR
penalty paid by participants in the 2009 amnesty program.
Alternatively, many taxpayers have avoided the amnesty programs and
the FBAR penalty, and have instead chosen the route of either
"quiet" disclosure or "noisy" disclosure in
which amended returns for open years are filed that properly report
offshore income. Still others have not yet decided to make
disclosure of any kind.
The tax amnesty program comes at a significant economic cost, but
remains the only way taxpayers can be certain of avoiding criminal
prosecution. While many taxpayers who participate in
"quiet" disclosure or "noisy" disclosure have
underlying circumstances that would not likely lend themselves to
criminal prosecution, there is no assurance that the IRS would not
recommend particular cases for criminal prosecution.
Impact on Green Card Holders and Resident
Aliens
On February 21, 2012, the United States Supreme Court raised the
stakes for green card holders and other resident aliens in criminal
tax cases. In Kawashima v. Holder, 565 U.S. ___
(2012), the Supreme Court upheld the Ninth Circuit Court of
Appeals, holding that conviction of a criminal tax offense, other
than tax evasion, constituted a deportable offense for the
taxpayers in question who were long-time green card
holders.
At issue in this case was whether the taxpayers' guilty pleas
for making and subscribing a false tax return in violation of 26
USC §7206(1) and aiding and assisting in the preparation of a
false tax return in violation of 26 USC §7206(2) were
deportable offenses. U.S. immigration law calls for
deportation of any alien who is convicted of an aggravated
felony. 8 USC §1227(a)(2)(A)(iii). A list of
offenses that constitute "aggravated felonies" is set
forth in 8 USC §1101(a)(43). Subparagraph (M) of
§1101(a)(43) identifies an aggravated felony as an offense
that either: "(i) involves fraud or deceit in which the loss
to the victim or victims exceeds $10,000; or (ii) is described in
§7201 of Title 26 (relating to tax evasion) in which the
revenue loss to the Government exceeds $10,000."
The Supreme Court's holding in this case made clear that the
Government may also be the "victim" in Clause (i) such
that a criminal conviction involving tax liabilities in excess of
$10,000 that involve fraud or deceit, arising other than in the
context of a tax evasion case under 26 USC §7201 could be the
basis for a deportation order. The Supreme Court also made it
clear that violations of 26 USC §7206 involve fraud or
deceit.
To date there have been few criminal cases involving FBAR
violations, i.e. failure to disclose foreign bank and financial
accounts or the failure to pay taxes associated with those
accounts. The reported FBAR cases that we have seen include
allegations that the taxpayers willfully filed false income tax
returns in violation of 26 USC §7206(1). We have seen
few, if any, FBAR cases alleging tax evasion under 26 USC
§7201. Based upon the decision in Kawashima v.
Holder, a green card holder or other resident alien who is
charged and convicted of a violation of 26 USC §7206(1), even
pursuant to a plea bargain, could be subject to deportation from
the United States.
Green card holders and other resident aliens who have elected
"quiet" disclosure, "noisy" disclosure, have
not yet decided to proceed with disclosure, or are currently
involved in a criminal tax proceeding are now on notice that they
may be subject to deportation in the event of a criminal conviction
involving undisclosed bank accounts or financial accounts and
unpaid taxes of over $10,000.
A green card holder who is deported on this basis will likely also
be subject to the exit tax provisions of 26 USC §877A, in
which individuals who give up their green card may be subject to
U.S. income tax as if they had sold all of their worldwide assets
for fair market value at the time of their departure. The
fact that the loss of the green card occurred by reason of
deportation rather than the voluntary action of the taxpayer is
irrelevant with respect to the application of 26 USC
§877A.
The risks of nondisclosure of foreign income and foreign assets by
a green card holder and other resident aliens have increased
substantially as a result of the United States Supreme Court's
decision in Kawashima v. Holder. The risk of
nondisclosure is no longer just financial, but now includes
deportation from the United States.
For green card holders and other resident aliens who have elected
"quiet" disclosure, "noisy" disclosure, or who
have still not reported foreign income or assets, we can help you
evaluate the risks and benefits of each of the options that may be
available to you.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.