The Supreme Court of the United States has recently affirmed that pleading guilty to or assisting in the filing a false tax return is considered an “aggravated felony,” which is a deportable offense. This means that a resident alien can be immediately deported if he pleads to or is convicted of certain tax crimes.

The decision has far-reaching and detrimental effects on lawful permanent residents in the United States because the Supreme Court decided that falsely filing a tax return involved an act of deceit or fraud (factors in immigration issues) even though deceit or fraud may not be part of the actual [tax] crime itself.

The Crime(s):

1. Akio Kawashima - pleaded guilty to willfully filing a false tax return,
2. Fusako Kawashima - pleaded guilty to aiding and assisting the preparation of a false tax return.

The Kawashima, a married couple native to Japan who became lawful residents of the U.S. in 1984. They ran a successful restaurant chain called Cho Cho San in Thousand Oaks, California and Tarzana, California. The IRS determined that the total actual tax loss to the government was $245,126. At the time of this writing we do not have access to the indictment in the case, however, it is possible that they chose to plead to the false tax return charges in an effort to avoid tax evasion charges as tax evasion has been previously determined to be a deportable offense and carries higher prison sentences.

Shortly after the couple pled guilty, the Immigration and Naturalization Service (now the Department of Homeland Security) charged the Kawashimas with being deportable from the United States, under Title 8 of the United States Code.

Arguing that Filing False Tax Returns are Not Aggravated Offenses

The Kawashimas’ thus began a serious legal battle over whether filing a false tax return constitutes an aggravated felony leading to this Supreme Court Decision. 

The Supreme Court analysis was based on a statute dealing with immigration and naturalization issues.  An aggravated felony includes the crimes of murder, rape, sexual abuse of minors, illicit trafficking of firearms, money laundering, and running a prostitution ring.  As to tax crimes, Title 8 of the USC, provides that  an aggravated felony is defined as:

• (i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or
• (ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.  
  See USC, Title 8 §1101(a)

First, Mr. Kawashima’s attorney argued that the term “aggravated felony” does not apply to them under the immigration deportation standards because the crime he pled to,  willfully making or subscribing a false tax return, does not specifically involve “fraud and/or deceit” (as needed for deportation matters).   In attempting to clarify the immigration standards, however, the Court held that meaning of “deceit” means the “act or process of deceiving (as by falsification, concealment, or cheating).    Therefore, once Mr. Kawashima pled to knowingly submitting a tax return that was false, the Court reasoned that he had also thereby committed a felony that involved ‘deceit.’

As such, this case may mean that taxpayers who are convicted or plead to willfully making or subscribing a false tax return are also guilty of acting in a deceitful offense. 
  
Scope of the Consequences

Tax Crimes: 

Justice Ginsburg, who wrote the dissent, pointed out the far reaching consequences of this case. She explained that any conviction by federal, state, or local taxing authority that involves an amount over $10,000 would render the resident alien taxpayer deportable.  For example, furnishing a false W-2, supplying false or fraudulent information to an employer, or filing an incomplete or false return to a municipality, may be considered misdemeanors in some jurisdictions, yet could be considered an aggravated felony with punishment of deportation.

The decision rendered in Kawashima v Holder, has far-reaching and life-changing effects for all citizens.  There are a number of resident aliens in the Bay Area who need to be aware of this new development. The Supreme Court has equated filing a false tax return as a crime on the same level as murder or rape for the purposes of deportation. The Supreme Court’s decision is in line with other efforts of Congress and the Commissioner of Internal Revenue within the last decade to enforce existing tax laws and to create new tax laws that punish varying degrees of tax crimes. 

Offshore Tax Compliance: 

This decision raises new questions about efforts to get taxpayers to report foreign accounts with the Offshore Voluntary Disclosure Program (OVDI/OVDP). If you decide to participate in the OVDI/OVDP program, see 2012 Offshore Voluntary Disclosure Program, are you now in jeopardy of deportation because of the Kawashima case? Currently, the IRS has publicly declared that they will not report taxpayers participating in the OVDI to the Department of Justice (DOJ) if they made a mistake by not including their foreign assets on past tax returns. However, the IRS has not mentioned that they will refrain from calling Homeland Security.  Added to this, are you also in jeopardy of being deported when the overseas financial institutions begin compliance with the Foreign Account Tax Compliance Act (FATCA) by submitting your financial information directly to the IRS? These questions are just the tip of the iceberg. 

Who does the Internal Revenue Service consider a tax preparer? For such a simple question, the answer can be complicated. This is an important question for attorneys, accountants, Enrolled Agents, or other professionals. Tax returns that show substantial understatements due to tax preparer error, whether it be intentional or not, are subject to penalties under §6694 of the Internal Revenue Code. These tax preparer penalties are presumptively valid and the preparer challenging the penalty bears the burden of proving that he or she did not intentionally disregard rule or regulation pertaining to tax law, Internal Revenue Code §6694(b)(2).

Treasury Regulation § 301.7701-15 generally defines a tax return preparer as, “any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code.”  A person may be deemed a tax return preparer regardless of their education or professional status and regardless of their location (whether the person is within the United States or not) as long as he or she satisfies the definition of a tax return preparer. Treas. Reg. § 301.7701-15(d)(e).

As with any statute, the devil is in the details.  What does the IRS consider “compensation”? What is considered a “substantial portion” of the return? And when would the IRS consider the employer of the tax preparer to be the “real” preparer and apply penalties? Are there any exemptions to this statutory scheme? Finally, how much is the penalty?

To put it simply, if you are paid for your services then you are compensated for your work. But what if you are preparing a tax return for your sister and she decides to babysit your children for the weekend to thank you. Is this compensation?  According to Treasury Regulation § 301.7701-15(f)(1)(xii), it depends on the tax preparers intention. If you prepare a tax return expecting no compensation, then you are not a tax return preparer. If you expect something in return, even if it is insubstantial, then you are a tax return preparer.

A “substantial portion” of the tax return is a little harder to identify.  Any advice given to the taxpayer before the transaction occurs is not considered part of the preparation of the substantial portion of a tax return. Treas. Reg. 301.7701-15(a)(2)(i).  In order for advice to be considered part of the substantial portion of the tax return, it has to be given after the event occurred. For example, if attorney Joe gives advice about a merger (the event) and possible tax consequences before the merger occurs, Joe is not considered a tax preparer. However, if after the merger is completed, Joe continues to give advice, then he is considered a tax preparer at that time.

The analysis of what constitutes a “substantial portion of the tax return” does not end there. The IRS also looks at “substantial” in a much more practical way.  For example, in the infamous case, Goulding v. United States, 957 F.2d 1420 (7th Cir. 1992), Goulding was tax return preparer for a partnership return. The IRS concluded that Goudling was also the tax return preparer for an individual return of a partner even though Goulding did not prepare that individual’s return. The partnership return constituted only one line on the individual taxpayer’s return.  How can this be substantial? The IRS concluded, and the 7th Circuit agreed, that the one line represented a substantial portion of the taxpayer’s income and overall tax liability. See also Treasury Regulation §301.7701-15(b)(3)(iii) for an example in the corporate context.

When do you, as an employer, become liable for the tax preparation of your employee?  As an example, in Schneider v. U.S., 257 F.Supp.2d 1154 (2003), Schneider was a Certified Public Accountant that had an employee prepare a substantial portion a client’s return that Schneider signed.  There was an understatement of income determined by the IRS due to an incorrect assessment of business deductions. The court held that, “[…] being an employer of one or more persons who prepare a tax return for compensation is sufficient to qualify one as an income tax preparer.” 257 F.Supp.2d 1154, 1160.  Schneider received the penalty.  Have you ever signed a return prepared by your employee?

Volunteering your time or performing perfunctory mechanical functions in the preparation of tax returns excuse a tax preparer from penalties associated with preparation because of policy reasons. Treasury Regulation § 301.7701-15(f) lists who is not a tax return preparer. People who are employees of the IRS, people who provide assistance under the Volunteer Income Tax Assistance (VITA) program established by the IRS, and any organization sponsoring or administering a program established help the elderly (provided that the program follows established guidelines), are just some of the examples of preparers who are not considered tax preparers.

The tax return preparer penalty, depending on your intent, is equal to the greater of $1,000 or 50% of the income derived or to be derived by the tax return preparer (Treas. Reg. § 1.6694-2(a)) or equal to the greater of $5,000 or 50% of the income derived or to be derived by the tax return preparer (Treas. Reg. § 1.6694-3(a)).  If you are liable for a penalty as a tax return preparer with the intent to deceive the IRS, you would have to pay at least $5,000 or half of the income you earned, whichever is higher.

As the above examples reveal, whether or not you will be considered a tax return preparer is plain confusing. Other contexts, such as what happens if you are an employer who does not sign the tax return, have not been addressed in this blog.  It is of paramount importance to understand how this area of law can be argued and defended.   If you are accused, it is extremely important to defend and overcome the allegations because they can cost you far more than the above monetary penalty, they can cost you your license and livelihood.    Please contact Moskowitz LLP at (415) 394-7200 or via our Tax Law Firm's website if you have any concerns or questions regarding this complicated aspect of the tax law.

If you searched for IRS OVDI, you are aware that the Department of Justice and the Internal Revenue Service have instituted massive campaignes in the last couple of years to find and collect tax on worldwide income, ivnestment, and assets.     As a result of these campaigns the DOJ and IRS designed the 2011 Offshore Voluntary Disclosure Initiateive.     The State of California has recently developed its own program.   

The federal program offers benefits to encourage taxpayers to disclose foreign accounts now, including but not limited to ownership interests in foreign entities such as corproations, partnerships, trusts, wire transfers, annuitities or life insurance plans, etc.  By participating, individuals may avoid the risk of IRS detection and criminal prosecution and mitigate severe monetary penalties.  The deadline for particiaption in this program is August 31, 2011.     

This 2011 OVDI may provide an excellent opportunity for individuals to come into ttax compliance and void serious punishments.   However, participation in the program may also result in an investigation and/or audit by the criminal investiagtion division of the IRS, in which full and complete dislosure and ooperation is essential in order to utilize this OVDI and not invite other possible criminal and civil actions.    Note that participation in OVDI does not offer amnesty for other crimes uncovered in the investigation.     Further absent full and complete disclosure and cooperation, the government may find cause for failure to supply information, false statements, etc.    Finally, while non-participation in the program may be a calculated avenue for some, it potentially leaves individuals vulnerable to criminal prosectuion for counts including but not limited to, FBAR violation, consipiracy, perjury, tax evasion, failure to supply information, etc.  

We are currently representing many individuals in light of the offshore disclosure inititatives and we invite you to contact us.

The case USA v. Barry Bonds which ended in April 2011, demonstrated the magnitude the government will pursue someone simply on the grounds of lying.

At the Law Offices of Stephen Moskowitz, LLP, we routinely handle clients who are presumed by the IRS to have lied about something on their tax return. Efforts to investigate by the IRS or State are unrelenting and intrusive. What we can learn from the Bonds case is that the government will use all of its resources and power to prosecute someone if they think they lied. If, for any reason, you are under investigation we recommend that you seek immediate representation.

Relief from Penalties Imposed by Section 6707A

The Small Business Jobs Act of 2010 (“SBJA”), signed into law in September of last year provides enormous relief for those who would have suffered penalties from not disclosing certain tax shelters to the IRS.  Internal Revenue Code section 6707A imposes strict penalties for nondisclosure of tax shelters and transactions it considers “abusive,” whether previously “listed” as abusive by the IRS or not.   “Listed” transactions carry the highest penalties when not disclosed on a Form 8886.  Prior to the passage of the SBJA, the penalty for each year of nondisclosure was $100,000 for an individual and $200,000 for a corporation or other entity. 

New Caps for Penalties

The SBJA decreases the penalties to a minimum of $5,000 for individuals and $10,000 for corporations.  Fortunately for taxpayers, the penalties will be capped at 75% of the tax benefits the shelter would have given the taxpayer if it was allowed by the IRS.  Also, this change is retroactive and will apply to any penalties imposed after December 31, 2006.

Victims were Often Unknowing Taxpayers

Many of those penalized for not disclosing allegedly abusive tax shelters were not purposefully trying to commit tax fraud or “scam the system.”  Small businesses or high-income individuals were sold pension plans, for instance, that both their insurance agents and CPAs deemed acceptable, only to find out that because the plans were funded by life insurance they should have been disclosed.  But unknowing taxpayers are subject to harsh penalties even if they didn’t know the transaction was “listed” or “substantially similar” to a listed one. 
Section 6707A does not allow the IRS to reduce or waive the penalty in most cases.  Even the IRS’ Revenue Agents thus have their hands tied when they want to extend mercy to unknowing taxpayers who had been fallen victim to abusive tax shelters.

Waiting on the IRS

The IRS is working to implement these new 6707A penalties and is reopening cases with penalties assessed beginning in 2007 in order to retroactively change the amount.  As with many IRS processes, it can be a lengthy ordeal for many waiting taxpayers.  If you are waiting to pay your penalty until the new amount has been assessed under the SBJA, you can consider the advantages and disadvantages to paying any estimated amount due as the IRS may be calculating interest from the date of the first assessment.

The experienced tax lawyers at the Law Office of Steve Moskowitz, LLP can help you understand whether the changes under the SBJA favorably impact your tax situation.  Call us today for a free attorney-client privileged consultation if you have this or any other tax issue.  We can help you.