If you hold a US Green Card, you can be deported for willfully filing a false tax return (or for aiding and abetting the filing of a false tax return), and, perhaps for willfully failing to file a so-called FBAR. The United States Supreme Court issued a decision on this very matter just last year.
Summary of Kawashima v. Holder
• A Japanese resident alien couple were convicted under the US tax laws for willfully filing a false tax return or aiding and abetting the filing of such a return
• They appealed their deportation under the Immigration and Nationality Act (8 U.S.C. §1227(a)(2)(A)(iii)) as aliens who had been convicted of a so-called “aggravated felony” based on their conviction.
• The United States Supreme Court, held that the crime of willfully making and subscribing a false tax return and the crime of willfully aiding and assisting the preparation of a false tax return are deportable offenses under the Immigration and Nationality Act.
• Accordingly, the deportation order was upheld in the Kawashima case.
Three Justices on the Supreme Court dissented and provided their view that the holding in the case was overly broad and swept “a wide variety of federal, state, and local tax offenses—including misdemeanors—into the “aggravated felony” category [which category is grounds for deportation].” With this case, green card holders must now be even more diligent in the preparation of their tax returns and so-called FBARs. The dissenting Justices also noted that the Kawashima holding could discourage alien individuals fearing deportation from pleading guilty to certain tax offenses that are less egregious than tax evasion, with the result that enforcement of the tax laws could become unduly complicated and delayed.
This recent case raises the stakes for Green Card holders and other US resident aliens who have undisclosed foreign assets or financial accounts. Based upon the Kawashima holding, a Green Card holder or other resident alien who has elected to make a “quiet” disclosure, or who has not yet decided how he will proceed with disclosure of unreported foreign income or assets , can be subject to deportation in the event of a criminal conviction involving these tax matters. The safest bet is to enter the IRS Offshore Voluntary Disclosure Program (OVDP). Entering the OVDP enables a taxpayer to become compliant, avoid substantial civil penalties and generally eliminates the risk of criminal prosecution.
If a long-term Green Card holder is deported (or otherwise relinquishes the Green Card), he or she may also be subject to the so called “expatriation” tax provisions, which are the subject of another blog posting. Under these rules, the individual will generally be treated as if he sold all of his worldwide assets at fair market value at such time and will be subject to income tax on the deemed gain. Additionally, very harsh tax results are imposed on any US person who later receives a gift or bequest from such an expatriate.
It is very clear that the Kawashima case has significantly raised the risks of nondisclosure of foreign income and foreign assets by any Green Card holder or other resident alien. The costs now include not only the possibility of an astronomical economic impact but the possibility of deportation from the United States. Tax crimes are serious matters and have very serious consequences.
The key element in a tax crime involves proof that the act was done “willfully”. “Willfulness” can be inferred from circumstantial evidence. Generally, the courts have stated that in cases involving statutory tax crimes, “willfulness” requires a showing of specific intent to commit the illegal act. It requires more than a showing of careless disregard or gross negligence. Proving “willfulness” imposes a high burden of proof on the prosecution in criminal tax cases, requiring a finding “beyond a reasonable doubt” that the taxpayer-defendant acted with the specific intent to violate the tax law.
Ignorance of the law may be a defense in a criminal tax case if it is asserted in good faith. Reliance by the defendant on a professional tax return preparer may also be a defense to a charge of willfully filing a false tax return, if the taxpayer-defendant can demonstrate that he provided the preparer with complete and full information of all material facts and then filed the return without any reason to believe it was false.
Kawashima v. Holder provides an even greater incentive to make sure your return preparer is qualified and familiar with all the special filings required for offshore assets and account. At a minimum the preparer should be requesting that you complete a tax organizer that asks for specific tax information so a full understanding and factual background of your tax case and the information you provided is memorialized in writing. The IRS has been very carefully looking at whether taxpayers have revealed the existence of foreign accounts and assets to their tax advisors in making a determination whether an omission was “willful”. Without a tax organizer being completed, it is very easy for the return preparer to say “The client never told me about this account.”