Tax Compliance and other Issues in Immigration

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TAXIGRATION
Tax Compliance Issues in
Immigration Cases
Sam Rock, Esq.
Survey for Participants
• Types of cases that you handle:
– Naturalization?
– Non-LPR cancellation of removal?
– NACARA
– DACA
– VAWA
– Adjustment
– Consular processing
© 2013 Immigrant Legal Resource Center
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Scope
•
•
•
Statutory & Case Authority for denial of
immigration benefits on good moral character
grounds
Common compliance issues that implicate
character/type of cases
Retroactive refunds
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Hot Topics
• Tax issues that lead to ?s about GMC and when
• Consular Processing/Adjustment & Public Charge
• 2 years tax returns/USC HH/unreported cash
• Single filing by USC or LPR raises ?? about marriage
• DACA, VAWA, U visas
• Retroactive refunds for parents w/ SSN children
• Immigration Reform
• Cash workers
• Question about whether their returns are revenue
(CTC/ACTC/EITC)
• Unintended Consequences - retroactive EITC for 11
million taxpayers
• W-7 for date of© 2013
entry
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Cases Involving Good Moral
Character (GMC)
•
Natz - INA 316 (a)- GMC for statutory period (specific to
Natz)
•
Cancellation of Removal - 42B
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How far back can they go?
• Cancellation - 10 years
• NATZ - 8 CFR 316.10(2) enables them to review conduct prior to 5
years
– Can consider conduct bf 5 years if conduct in 5 year period does
not reflect reform
• Burden on applicant to show reform
• They can request as many tax years as they want
• Look at past 10 years - consider amending if they look suspect
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Case law
• GMC - Convictions of tax evasion justified finding that candidate did not have GMC.
Matter of Locicero, 11 I&N Dec. 805 (BIA 1966); Sumbundo v. Holder, 602 F.3d 47 (2d
2010)
• Discretion - Failure to file returns justified denial in asylum case. Matter of A-H, 23 I&N
Dec. 774 (2005).
• CIMT - Conviction for tax evasion is CIMT. Matter of W-, 5 I&N Dec. 759 (BIA 1954);
• Kawashima v. Holder, 132 S. Ct. 1166 (2012) - Supreme Court held that conviction of tax
evasion for > $10,000 is an aggravated felony
• Jimenez v. Gonzales, 158 Fed. Appx. 7 (9th Cir. 2005) - use of false SSN to work and pay
taxes does not preclude finding of good moral character
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Bad returns = justification to for CIS/ICE to
challenge GMC
• INA 101(f) and 8 CFR 316.10(b)iii do not require a conviction
o “unlawful acts”
o Matter of A-H, 23 I&N Dec. 774 (2005); Matter of Locicero,
11 I&N Dec. 805 (BIA 1966).
o Etape v. Napolitano, 664 F.Supp.2d 498, 509 (D.Md 2009) false SS claim w/o conviction
o Meyersiek v. USCIS, 445 F.Supp.2d 202 (D.R.I. 2006) false medical claim despite crim charges - std was “would
rise to level of criminality
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Recent Decision in NYC
• Recent IJ ruling in NYC that claiming EITC justified denial on
the basis that the person was not a “lawful resident”.
• Clear error - Definition of “resident” under Internal revenue code
is “substantial presence” or “green card”
• 26 USC §§ 7701(b)(1)-(3)
• “Tax residents” have to pay tax on worldwide income - not an
issue for most undocumented individuals
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The Dirty 1/2 Dozen
• Dependents: Improper claims to dependents.
• Child Tax Credit: Claiming dependent (Dep) for child tax credit when
Dep did not live with taxpayer (ITIN filers)
• Wrong filing status to claim EITC: Client or USC/LPR spouse filed as
Head of Household or Single to preserve EITC when married to spouse
with an ITIN or combined incomes too high for EITC
• Filing as married when not married: Increases standard deduction.
Only when both are undocumented.
• Understatement of Income: Not stating cash income (big issue in
cancellation cases)
• Claiming other people’s children or allowing other people to claim SSN
children and then splitting the refund
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Building Blocks
• ITIN - Individual taxpayer Identification Number - “9”
• Gross Income = income before deductions/exemptions
• Standard Deduction = deduction amount per filing status
(Single, Married Filing Joint/Separate, HH)
• Personal exemptions/dependents are types of deductions $3,800 in 2012
• Taxable income is gross income minus standard deduction,
exemptions and other deductions
• Calculate tax based upon taxable income
• Tax Credits = dollar for dollar reduction of tax
• Refundable credit = type of credit taxpayer can receive in a
refund even though the taxpayer owes no tax
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Exemptions
• Dependents and personal exemptions reduce taxable
income by the # personal exemptions times exemption amount
for the year
• $3800 per exemption in 2012
• Taxpayer and spouse each get 1 personal exemption
– Example for MFJ:
– 2 exemptions @ $3800 = $7200
• Each dependent is an exemption
– 3 dependents reduces taxable income by $11,400
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Filing Status
• Single - $5,800 deduction
• Head of Household - $8,500
– unmarried (never married, divorced, legally separated, lived
apart for last 6 months of tax year)
– Often used inappropriately when filing w/ spouse would
result in loss of EITC
• Married Filing Separate - $5,800
– No EITC
• Married Filing Joint - $11,600
– both spouses must have SSN to obtain EITC
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What is the big deal about
Dependents
• Depends reduce taxable income
• # of dependents multiplied by exemption amount
• Example:
– 4 dependents claimed
– exemption for tax year 2013 = $3900
– 4 x $3900 = $15,600
• Only gets them money back if money withheld. Does not result
in a refund when they didn’t pay in money - like a refundable
credit.
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Example-Dependency
• Income - $25,000
• Exemption amount for 2012 = $3800 per person exempt
• Married Filing Joint - Standard deduction $11,800
• 3 dependents
• Total exemptions - 5
• Total Exemptions = 5 X $3800 = $19,000
• Taxable income = $25,000 - $11,800 - $19,000 = $0
• Does the taxpayer owe any tax?
• If taxpayers’ employers withheld zero in tax then refund of 0
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Dependency test
• 26 USC §§ 152(a)-(f)
• Residency - US, Canada or Mexico
• Support - more than 50%
• Relationship
• Special rules for income and marriage
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Relationship is the meat
• The category of the relationship will determine whether the
“dependent” can be used for a refundable credit
• Group A - Qualifying family members
– son/daughter, niece/nephew, grandchildren, stepchildren,
parents, aunts/uncles, foster/step children
– Can be used for refundable credits
• Group B - Member of the household
– entire year and earns less than exemption amount
– cannot be used for refundable credits
– See Immigration Lawyer Cheat Sheet Flow Chart
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Survey for Participants
• With respect to CIR:
a. Who believes requiring payment of back
taxes for legalization will result lots of tax
revenue $$ for the Federal govt?
b. Who does not?
© 2013 Immigrant Legal Resource Center
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Child Tax/Additional Child Tax
Credit
•
Qualifying child must live with taxpayer to qualify
•
Refundable credit so can get refund even though no fed tax
owed or withheld
•
#1 source of fraud in ITIN filing population
•
Generally limited to amount withheld in SS/Medicare or
15% of Adjusted Gross Income
•
$1000 credit per claimed dependent
•
NOTARIO 101 - this is where the fraud is (claim all
dependents with an ITIN for this credit)
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The problem with the ACTC/CTC
• Very well documented: March 31, 2009 and 2011 TIGTA Reports $4.2
billion paid out and problems with residency of children
• IRS report derailed Rubio’s DREAM bill
• Dependents claimed for CTC even though not residing in US
• No requirement to submit support with 1040 thus dependents in
MX claimed for this credit
• Problem with IRS giving the credit even though documents
submitted with W-7 indicated child in MX.
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Elements of Child Tax Credit
• Qualifying child (QC) who lived with taxpayer for more than 6
months
o Relationship - son/daughter, niece/nephew,
grandchildren, brother/sister
•
•
Under 17 at end of tax year
No SSN required
• If box 6(c)(4) checked on 1040 then child claimed for Child
Tax Credit
• If “other” marked for dependent’s relationship to taxpayer on
6(c)(3) and 6(c)(4) checked then you probably have a
problem
• IRS Pub 519 (Tax Guide for Aliens); IRC § 24
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Form 1040, Box 6(c)
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Software Example
• Children Claimed as Dependents vs. Claim for
CTC/ACTC
• Base income $25,000
• ITIN taxpayer/spouse
• 3 children
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Earned Income Credit
• Very Substantial SSN-based refundable credit - means
money paid out greater than what paid in. It is Welfare-like.
• Can be up to almost $6000 per year
• Major source of fraud/errors (not qualifying children and
marital status) = 25% of all claims/$12 billion annually
• Opportunity to retroactively claim the EITC for persons who
obtain SSNs for family members
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EITC Elements
• Taxpayer and spouse must both have SSN
– Filing MFJ w/ spouse that has ITIN will disqualify return from
EITC
• Considered low income - between $2,000 and $44,000
• # of Qualifying children up to 3 children increase the amount of
credit
• Cannot be claimed if filing as Married Filing Separate or with a
spouse that has an ITIN
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Why did my client’s spouse file as
single or head of household?
• SSN spouse files as Head of Household to get EITC because return
disqualified if:
• other spouse has an ITIN
• filing status is Married Filing Separate (MFS)
• Combined income disqualifies or reduces EITC
– Head of Household = single + maintained residence for QC
– (never married, divorced, separated, lived apart for last 6
months)
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Software Example
• Illustrates how tax preparers claim HH to get EITC
when USC married to an undocumented
• Show retroactive refund after spouse obtains SSN or
single parent obtains SSN
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Amend if USC filed HH or Single when
married
• At minimum your client should file Married Filing
Separate
• Conservative approach is to file Married Filing Jointly,
thus taking the sting out
o Usually we state tax preparer error citing IRS statistics
regarding preparer incompetence.
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Retroactive EITC
• Claim after spouse/children obtain residency/SSNs
• Financial windfall for clients
• Can claim refunds up to 3 years back
• Can offset debt in prior years from amendments to
correct fraudulent/non-compliant returns
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How to Get Returns
• Can obtain transcripts from Practitioner line
o (866) 860-4259
o Need 8821 (Account Release)
• Ask for Account Transcripts, Return
Transcripts, statement of account
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Form 8821
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