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Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

The National Law Review is pleased to bring you information about the upcoming ABA Criminal Tax Fraud Conference:

When

December 06 – 07, 2012

Where

Wynn Las Vegas
3131 Las Vegas Blvd S
Las Vegas, NV, 89109-1967
United States of America

As in past years, these institutes will offer the most knowledgeable panelists from the government, the judiciary and the private bar. Attendees will include attorneys and accountants who are just beginning to practice in tax controversy and tax fraud defense, as well as those who are highly experienced practitioners. The break-out sessions will encourage an open discussion of hot topics. The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

Michigan Zaps Zappers – Cash Business Owners Beware!

The National Law Review recently featured an article by Paul L.B. McKenney of Varnum LLP regarding Cash Business Owners in Michigan:

The proverbial “second set of books” cat and mouse game with taxing authorities now reflects the fact that most point-of-sale, or POS, bookkeeping is done electronically. Michigan recently joined numerous other jurisdictions by enacting tax enforcement spawned legislation making the sale, purchase, installation, transfer or mere possession of any “zapper” software subject to a felony. Zappers are also known as automated sales suppression devices. Michigan’s statute contains a mandatory minimum of one year incarceration and severe monetary sanctions. See MCLA § 750.411w. The statute defines a zapper as a software program, however accessed or possessed, that “falsifies the electronics records of electronic cash registers and other point-of-sale systems, including, but not limited to transaction data and transaction reports.” MCLA § 750.411w(4)(a). In essence it creates a second set of books, albeit electronic. While the sole purpose of zappers is tax evasion, the prosecution does not have to prove intent, merely use, sale or possession. The zapper software is typically run off a USB thumb drive rather than residing on the computer’s hard drive to avoid leaving evidence of its use. However, as noted below, there is a readily identifiable electronic trail. Zappers have been quietly marketed by freelancing IT types and certain cash register sales people.

A not uncommon example illustrates what a zapper does. Assume a restaurant or other cash receipts business grosses $250,000 per month and is highly profitable. A zapper software “entrepreneur” visits the restaurant early in the month and is told precisely what recorded cash bank deposits are as well as credit card charges totals by day. Alternately, the peddler may sell a USB drive and also provide needed technical support. Assume reported sales total $200,000 and there is $50,000 of unreported cash, or “skim.” The zapper software will quickly and accurately modify the sales records a) by transaction b) by day c) to the penny resulting in the credit card charges and cash deposits equaling what is reported on the books. Thus a traditional audit will find that everything appears to be in order, at least until someone finds evidence of the zapper.

Zappers represent significant lost sales tax and other tax dollars to states. For example, three years ago California estimated zappers at restaurants cost that state $2,800,000,000 in receipts and the corresponding New York estimate was $1,700,000,000. See “State governments target tax-cheating software,” Bloomberg Businessweek, April 3, 2012. In an era of record state fiscal problems, this is real money.

The recent Michigan legislation is effective as of August 29, 2012. It is patterned after another enforcement problem the Michigan Department of Treasury encountered and overcame, false cigarette tax stamps. The Michigan Treasury was hemorrhaging cash because of cigarettes that were brought in from out of state and counterfeit Michigan stamps were purchased on a flourishing underground market. The Department of Treasury urged the legislature to adopt legislation that the mere possession of cigarettes with counterfeit stamps required a minimum prison term. Legislation followed, the minimum mandatory jail time virtually ended the fake stamp problem overnight and Treasury receipts from cigarette taxes swelled.

Economic Sanctions Too

The zapper legislation has teeth. In addition to the one-year minimum mandatory term, there is a fine of up to $100,000. However, from a monetary perspective, there is another more costly provision with which requires disgorgement of “all profits associated with the sale or use of …” a zapper. In the above example, if the skim is $50,000 a month, then $600,000 a year is subject to forfeiture. The offending party is also responsible for all Michigan sales, withholding and other taxes, penalties and interest. These other levies include the corporate income tax and individual income tax. Typically cash businesses that use zappers, such as restaurants and retailers selling small dollar amount items, also pay employees all or some of their wages in cash “under the table” and/or purchase food or inventory.

Zapper programs originated in Europe and migrated first to Quebec in North America. They came from jurisdictions where there were value added taxes. The Internal Revenue Service has taken certain steps to target businesses that might employ zappers, and the State of Michigan has taken notice. It should be pointed out that Michigan’s vigorous criminal and civil penalty regime is separate and distinct from the Internal Revenue Service, which is also free to pursue the same individual and business. There is an exchange of information agreement between the Internal Revenue Service and the Michigan Department of Treasury.

Zapper’s Electronic Fingerprints and Enforcement

Those selling zappers to business owners tout that it leaves no electronic fingerprints, and thus is invisible to the IRS and other law enforcement agencies. That dog don’t hunt. The reality is that zappers leave telltale electronic fingerprints, and the IRS and other agencies have sophisticated criminal techies who can readily check a computer system and flag evidence of a zapper.

How have the IRS and Michigan uncovered businesses running zappers? A secret ceases to be secret when two or more people know about it. When the owner, the manager of a restaurant or store, the zapper software peddler and others, such as the controller or bookkeeper, key employees at the restaurant, at least one or more people at each location, etc. know about the zapper, only one needs to talk. Somebody may have reason to talk, such as a problem with the DEA, IRS, FBI or other law enforcement agency and will readily give up the business owner in exchange for no prosecution or a reduction in charges or sentencing. For example, a metro Detroit freelance IT salesman peddling zappers to bars and restaurants was discovered when a party with law enforcement issues named him. That salesman, in exchange for an extremely lenient sentence, in turn identified and cooperated with Federal law enforcement in prosecuting numerous customers for tax evasion. Some of his customers went to jail. The IRS and other federal and state agencies are seasoned veterans of how to play that game most effectively.

Reality

Those who raid businesses with search warrants typically take away computers, hard drives, USB thumb drives, and other hardware for inspection by highly sophisticated technicians. What does a cash business owner face if his or her business is raided by the State Police or other tax or law enforcement personnel and evidence that a zapper has been applied to the electronic books is uncovered? A plethora of problems. A short, non-inclusive list includes:

The new Michigan legislation and its mandatory jail time and economic sanctions;
Michigan criminal sanctions for various false returns as well as associated civil tax liabilities, fraud penalties and other penalties and interest;
IRS criminal issues including, a five year evasion felony per year and a three year max for false statements on a tax return,
Myriad IRS civil liabilities for income tax and payroll taxes and associated penalties as well as interest, compounded daily, and
If there is fraud, then there is no civil statute of limitations in tax. The IRS and Michigan can and do go back many, many years.

In a well-publicized local zapper case, the owner of the LaShish chain of thirteen suburban Detroit restaurants and his wife were found by the IRS with zapper software that underreported over $16,000,000 in skimmed revenues. The owner was indicted on tax and other charges, is currently a fugitive living in Lebanon, his wife went to jail, and the government seized and sold the formerly prosperous restaurants.

Passive Business Owners & Entities With Multiple Locations

Owners are not the only ones who might want to skim, and use a zapper to hide it. A absentee owner as well as owners of multiple locations have two problems if managers or key employees use zappers to hide embezzlement. In addition to being the victim of the skim, the larcenous employee will tell the IRS and Michigan Treasury that the owner must have done it, and the owner has criminal and civil exposure. Such owners can protect themselves by unannounced electronic audits to determine if any zappers have been used. A telltale sign is that servers, per managers, need to be replaced with unusual frequency. That can well be an attempt to hide evidence of electronic tampering..

What To Tell Clients

Smaller business clients that have zappers are not going to boast about it to their counsel. You might pass along a proverbial word to the wise to cash business owners. This new zapper law is out there, it has teeth, and those who ignore it do so at their peril to both personal liberty and treasure. Also, as noted just above, beware of skimming employees.

2012 Wealth Transfer Tax Laws: The Window of Opportunity is Rapidly Closing

An article by Glen T. Eichelberger, Mary Elizabeth Mason, Bridget O’Toole Purdie, and Brian P. Teaff of Bracewell & Giuliani LLP recently had an article featured in The National Law Review regarding Wealth Transfer:

The window of opportunity to take advantage of the currently applicable wealth transfer tax laws is rapidly closing, and once shut, it is possible that we may never see such generous estate planning opportunities again.

The unique estate planning opportunities currently available are a result of the “Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010” (2010 Act). The 2010 Act introduced the following:

$5,120,000 exemption per person for Federal estate, gift and generation-skipping transfer (GST) taxes
- Highest exemptions ever available
35% maximum marginal rate for the estate, gift and GST taxes
- Lowest rate in decades
“Reunification” of estate, gift and GST tax exemptions
- Greater Planning Flexibility
- Acting together, a couple can give up to $10,240,000 of assets (outright or in trust)

In addition, President Obama’s 2013 Budget Proposal contains proposed rules which would restrict a person’s ability to transfer wealth to their children and more remote descendants. The 2013 Budget Proposal includes the following rules:

Restrict grantor retained annuity trusts (GRATs) to a minimum of 10 years

Elimination of the availability of certain valuation adjustments associated with family limited partnerships

The generous provisions of the 2010 Act are temporary and without further Congressional action, these provisions will expire on December 31, 2012. Act now before it is too late, so that you can benefit from the current advantageous estate opportunities and ensure you are not affected by the proposed rules from the 2013 Budget Proposal.

Some Indiana Local Government Entities May Qualify for Loans Due to Past Misapplied Maximum Fund Rate Calculations

The National Law Review recently published an article by Randal J. Kaltenmark and Jeffery J. Qualkinbush of Barnes & Thornburg LLP titled, Some Indiana Local Government Entities May Qualify for Loans Due to Past Misapplied Maximum Fund Rate Calculations:

Qualified Indiana local government entities – school corporations, cities, towns, counties and library districts – may wish to review their 2012 or prior year budgets due to misapplication of the maximum capital projects fund rate calculation under Indiana statute (Indiana Code 6-1.1-18-12).

Of immediate note is that changes made to this law during the 2012 Session of the Indiana General Assembly allow Indiana local governmental entities to obtain an interest free loan from the State of Indiana for what such entity should have received in 2012 in such rate-capped funds after applying the corrected calculation. The window on obtaining this money this year will be closing in less than 30 days.

The issue originally came to light after Barnes & Thornburg LLP’s representation of two school districts, DeKalb County Eastern Consolidated School District and, most recently, the Metropolitan School District of Pike Township in appeals before theIndiana Tax Court. The misapplications, which were calculated by the Indiana Department of Local Government Finance (DLGF) cost these governmental units more than $1 million per year, collectively.

In both of these cases, the Indiana Tax Court agreed with the firm’s conclusions that the DLGF’s interpretation of the statute was incorrect and ordered those miscalculations to be corrected in the future budget years. On May 4, 2012, the Indiana Supreme Court denied the DLGF’s request to review these Tax Court decisions.

Attorneys involved believe many of the qualified Indiana local governmental entities have been the victim of one or more of these same miscalculations in connection with their 2012 or prior budgets.

Impact of New Medicare Investment Tax on Trusts and Estates

Jonathan W. Igoe of Armstrong Teasdale recently had an article, Impact of New Medicare Investment Tax on Trusts and Estates, featured in The National Law Review:

As part of the Patient Protection and Affordable Care Act enacted in 2010, Section 1411 was added to the Internal Revenue Code. Beginning in 2013, this section imposes an additional tax on individuals and on trusts and estates. It is a tax on net investment income tax. Net investment income includes capital gains.

It has generally been reported that the tax on individuals does not apply unless their modified adjusted income exceeds $200,000 ($250,000 for a married couple).

What is less well known is that this new investment tax applies to trusts and estates at a much lower income level. Section 1411 provides that the new tax applies when income reaches the level at which it is taxed at the highest marginal rate. In 2012, the highest marginal tax rate is reached when undistributed net income reaches $11,650. This figure will be adjusted for inflation in 2013.

Depending upon what the income tax rates are in 2013, a trust or estate which has a substantial amount of undistributed net taxable income may find itself paying federal income tax of 43.4 percent (39.6 + 3.8) on much of that income. This is in addition to any state income tax (6 percent on income in excess of $9,000 in Missouri).

This makes careful income tax planning for estates and trusts more important than it has ever been.

New York Attorney General Files First Tax Enforcement Complaint Under New York’s Trailblazing False Claims Act Statute

The National Law Review recently published an article about New York’s Tax Enforcement written by Michael A. Berlin, David W. Bunning, Mark F. Glaser, and Barbara T. Kaplan of Greenberg Traurig, LLP:

On April 19, 2012, New York’s attorney general filed the first tax enforcement complaint under New York’s novel False Claims Act (“Act”), alleging that Sprint-Nextel Corp. had deliberately understated sales tax payments to New York by over $100 million since July, 2005. Under the Act, the defendant could be held liable for three times the amount of these damages, plus penalties of $6,000 to $12,000 per violation, plus attorneys’ fees.

The Act, like its counterparts in federal law and the laws of 28 other states, permits a whistleblower to bring an action for false claims against the government. In New York, whistleblowers can be paid from 15-30 percent of the proceeds recovered. In 2010, New York amended its false claims act statute to become the first state to expressly permit recovery for tax fraud.¹

In 2011, the Taxpayer Protection Bureau was created to work with whistleblowers and enforce the Act. Complaints by whistleblowers are filed under seal pending government investigation. According to a press release issued by the attorney general, the original whistleblower action was filed in March of 2011, just after the Taxpayer Protection Bureau was created. The Bureau conducted “an extensive investigation and determined the extent of Sprint’s illegal conduct.” By filing the superseding complaint on April 19, the attorney general took over that law suit.

The complaint alleges that Sprint-Nextel deliberately understated sales tax to be collected from its customers and paid to New York by arbitrarily treating part of monthly access charges to cell phone subscribers as non-taxable interstate calls rather than as taxable access charges. It further alleges that to carry out this plan false records and statements were submitted to New York tax authorities, and the practice was concealed from the taxing authorities, competitors and customers. According to the complaint, approximately 25 percent of the monthly access charges were arbitrarily designated as non-taxable, resulting in a loss to New York of more than $100 million in tax revenue.

The press release states that this produced a competitive advantage by making Sprint-Nextel’s plans “cheaper than competitors’ plans by $4.6 million per month, collectively, because of sales tax not collected and paid.” In addition to triple damages, penalties, and attorney’s fees, the complaint seeks to ensure that Sprint-Nextel’s customers are insulated from any liability for the unpaid sales tax² and seeks to prevent early termination fees from being enforced against any customers who terminate their contract before the end of the contract term.

The attorney general’s press release notes that the Act “is one of the state’s most powerful civil enforcement tools.” Indeed it is, for at least three reasons. First, the State can recover from acts reported by whistleblowers, which may otherwise be unknown to the State and undiscoverable through audit or other means. Second, New York can recover significantly more money in an action under the False Claims Act than it otherwise could using the tax statutes. Triple damages plus penalties and attorneys’ fees minus the amount paid to a whistleblower is far more than the sales tax plus 14 percent interest and the 30 percent penalty that could otherwise be recovered. Third, the filing of the complaint is public, in contrast to a tax audit, which must remain undisclosed because of taxpayer secrecy laws.

_{1 The 2010 legislation was spearheaded by Eric Schneiderman, then a state senator, who became attorney general in January, 2011.}

_{2 If a seller does not collect sales tax from a buyer, either the seller or the buyer can be held liable for the tax.}

The Growing Corporate Threat of Taxpayer Identity Theft Fraud

The National Law Review recently published an article by Latour “LT” Laffferty of Fowler White Boggs P.A. regarding Identity Theft:

Identity theft continues to be a growing problem nationwide, but particularly in Florida which continues to lead the nation per capita in reported incidents of identity theft according to the Federal Trade Commission (FTC), a national clearinghouse for consumer fraud complaints. Taxpayer identity theft fraud, a subset of identity theft in general, is the most prevalent form of identity theft according to the FTC which reported that tax-related identity theft incidents increased from 51,702 in 2008 to 248,357 in 2010. This is a dramatic increase from the 35,000 instances of employment-related identity theft cases reported in 2007.

Taxpayer identity theft fraud involves not only the theft of someone’s identity but also the filing of a fraudulent tax return using the victim’s social security number to receive a tax refund often totaling more than $9,000.00. The IRS identified and prevented the issuance of more than $14 billion in fraudulent refunds in 2011. A 2008 report issued by the Treasury Inspector General for Tax Administration (TIGTA), an IRS watchdog, stated that the prevention of taxpayer identity theft fraud is an employer’s issue involving the security of their systems and data. According to TIGTA, 938,664 of the 2.1 million fraudulent tax returns filed in 2011 involved identity theft and totaled $6.5 billion. The stolen information includes the person’s name, date of birth and social security number or Medicare beneficiary number.

The latest twist, however, is that your own employees are in on the crime as law enforcement agencies are reporting that employees at many businesses that compile personal information are misappropriating and selling the information to thieves who are filing fraudulent tax returns. The Centers for Medicare and Medicaid Services (CMS) issued a Fraud Alert in February 2012 warning healthcare providers that perpetrators are misappropriating the identities of Medicare beneficiaries from “employers, schools, hospitals, and prisons” but any businesses that store personal information are at risk from current or prospective employees. Recent law enforcement arrests report finding suspects with massive quantities of tax refunds and lists of prospective employers to apply for jobs with the specific intent to steal taxpayer identities from their databases.

The reality of this emerging threat is that perpetrators are actually targeting organizations for employment so that they can specifically breach their data security and commit identity theft and aid those committing tax refund fraud. These organizations have both a fiduciary and legal duty to safeguard that personal information, but also a legal duty to notify those consumers who they can reasonably identify that their personal information has been stolen.

Supreme Court's Decision in Kawashima v. Holder and the Hard-Learned Lessons of an Old Tax-Crime Conviction

An article regarding a recent Supreme Court Decision written by Dawn M. Lurie of Greenberg Traurig, LLP was published in The National Law Review:

A married couple, natives of Japan, small business owners, who immigrated to the U.S. legally and became Legal Permanent Residents (green card holders) in 1984, began, and continue to run, successful Japanese restaurants in various affluent areas of California. Over two decades ago, in 1991, the couple made false statements on their federal corporate tax return, and were convicted of the related crimes in 1997 in federal court, one spouse for making the false statements, the other for assisting with making them. The spouse convicted of making the false statements served a four-month prison sentence, and the couple paid $245,000 back to the government that it was found to have owed in taxes and penalties.

Their troubles, however, were far from over, as many long-term green card holders who were convicted of certain crimes have come to know in the severest of ways.

Three years after their convictions in 2001, the legacy Immigration and Naturalization Service (INS) brought removal (deportation) charges against the couple in immigration court, alleging their convictions amounted to commissions of “aggravated felonies,” types of crimes, which, if committed, result, according to the immigration law, in automatic removal from the U.S.

Thus began a legal battle through the Immigration Court, the Board of Immigration Appeals, the United States Court of Appeals for the Ninth Circuit and, finally, the Supreme Court of the United States, in what is now the precedent to be known as Kawashima v. Holder, 565 U.S. ____ (2012), decided on February 21, 2012.

In this case, the couple argued that the crimes for which they were convicted, specifically those related to making false statements on a tax return in violation of 26 U.S.C. §7206(1) and (2), respectively, did not meet the relevant statutory definition of an “aggravated felony.” The Supreme Court, in a 6-3 decision, disagreed, affirming the Ninth Circuit’s decision and finding that the crimes for which the couple were convicted indeed qualify as aggravated felonies that render them automatically deportable from the United States.

Which particular crimes will be classified as aggravated felonies is not always clear, hence, the lengthy court battles that can ensue. Congress provides categories of offenses to be considered aggravated felonies at 8 U.S.C. §1101(a)(43). Some of the categories appear more explicit, such as “murder, rape, or sexual abuse of a minor,” (8 U.S.C. §1101(a)(43)(A)), and “a theft offense (including receipt of stolen property) or burglary offense for which the term of imprisonment [is] at least one year,” (8 U.S.C. §1101(a)(43)(A)(G)), while others, like the one the Court addressed in Kawashima, appear to leave more room for interpretation.

In the case of the Kawashimas, the government sought to have them deported from the U.S. based upon the definition of “aggravated felony” found at 8 U.S.C. §1101(a)(43)(M), for having been convicted of “an offense that (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.” The couple was convicted of crimes related to false statements on tax returns, not tax evasion specifically, and so the Immigration Judge found that it was “clause one,” i.e., crimes involving fraud or deceit in which the loss to the victim (in this case, the U.S. government) exceeds $10,000, which qualified the crimes for which they were convicted for the “aggravated felony” classification thus rendering them both deportable.

The Supreme Court rejected all arguments made by the Kawashimas, including that the crimes for which they were convicted were not crimes of “fraud and deceit,” since fraud and deceit were not specific elements of the crimes for which they were convicted; that by only specifically including tax evasion in the category of definitions, Congress intended that to be the only tax crime that should fall within the aggravated felony definition; that, if tax crimes were to be deemed crimes of fraud and deceit in accordance with “clause one,” then “clause two,” which addressed tax evasion only, would be rendered superfluous; and that the statute was ambiguous and should, therefore, given the severity of the punishment of deportation, be construed in their favor, citing the Court’s decision in INS v. St. Cyr, 533 U.S. 289 (2001).

The Court found that making false statements on tax returns necessarily entails fraud and deceit, that there were likely special reasons for why Congress determined it needed to mention tax evasion specifically in its own clause that had nothing to do with intending to limit the scope of crimes, tax crimes included, that could be included in the definition of aggravated felony under “clause one,” thus rendering “clause two” non superfluous. Moreover, it stated, the statute’s meaning was clear enough not to warrant a St. Cyr type of deference.

Justice Ginsberg, on the other hand, joined by Justices Breyer and Kagan in her dissent, agreed with the Kawashimas that the statute was ambiguous, and that, given the severity of the deportation punishment, its meaning should be construed in their favor. She also pointed out that the crimes for which the Kawashimas were convicted were lesser offenses than crimes of tax evasion, and surmised that Congress likely intended to limit the tax crimes that could be deemed to be aggravated felonies to tax evasion by giving it its own clause in the list of aggravated felony definitions. She further expressed concerns that this precedent would hurt the prosecution of tax cases by dissuading foreign nationals charged with tax crimes from pleading to lesser offenses, thus delaying the government’s ability to collect on and enforce the tax laws. Moreover, she worried about the floodgates aspect of the case, namely, that the Court’s decision throws open the definition of “aggravated felony” under “clause one” to encompass a vast array of tax crimes at the federal, state and local levels, including misdemeanors.

Obviously and unfortunately, dissenting opinions, no matter how well-reasoned and humanitarian, are not binding precedent, and, the law that allows foreign nationals to be deported based on an aggravated felony conviction is discomfortingly unambiguous: “[a]ny alien who is convicted of an aggravated felony at any time after admission is deportable,” (8 U.S.C. §1227(a)(2)(A)(iii). This means that if the court finds that a crime for which a foreign national was convicted is deemed to fit within one of the descriptive categories of aggravated felonies as laid out by Congress in the immigration law, no matter how long ago the conviction was, no matter how dearly the foreign national paid for it through imprisonment and/or fines, and regardless of whether the foreign national otherwise has led, and now leads, a perfectly law-abiding life that includes raising a family here in the U.S., and running successful businesses that create jobs and fuel the economy, that foreign national is still deportable.

It goes without saying that here the importance of honestly and meticulously filing tax returns cannot be overestimated. The IRS can and does investigate businesses large and small, as well as individuals. Small business owners and green card holders should enlist the professional help of seasoned, reputable tax accountants in preparing their returns, and make sure that they are given complete copies of the returns that were filed with all of the worksheets. These records should be maintained indefinitely, in an organized manner, and in a safe place.

Green card holders should also seriously consider applying for U.S. citizenship through naturalization as soon as they are eligible to apply. Generally, to become a naturalized citizen, the legal permanent resident must complete the U.S. Citizenship and Immigration Services (“USCIS”) Form N-400 with supporting documentation, be at least eighteen years old and of good moral character, must pass a civics exam and meet certain English language requirements, and meet a physical presence requirement.

To meet the physical presence requirement, the individual generally must have resided continuously as a Legal Permanent Resident in the U.S. for at least five (5) years prior to filing the N-400 application, or for at least three years if married to and living with the same U.S. Citizen for the last three (3) years; have been physically present in the U.S. for at least thirty (30) months out of the previous five (5) years (absences of more than six (6) months but less than one year break the continuity of residence unless it is established that residence was not abandoned during such period); and have resided within the state or USCIS district in which they are applying for naturalization for at least three months. Certain applicants such as members of the U.S. Armed Forces serving during periods of conflict are not subject to the continuous residence requirement, and, in many cases, the naturalization process for U.S. military personnel is expedited.

It bears remembering that while there are certain situations in which individuals can be stripped of their naturalized U.S. citizenship and face deportation (e.g., treason, fraud on a citizenship application), they are rare and extreme. Critically, naturalized citizens cease to be “aliens” in the eyes of U.S. immigration law, and are not deportable under the aggravated felony provision.

Foreign nationals charged with crimes while in the U.S. should, before entering a plea agreement or otherwise, make certain to secure seasoned immigration counsel with specific experience in navigating the immigration consequences of criminal convictions, in addition to any counsel that may be representing them on the criminal charges. This cannot be emphasized enough. A seasoned immigration attorney will have an in-depth knowledge of the aggravated felony provisions and the laws governing deportation and will be able to work with criminal counsel to competently try his or her best to achieve an outcome that will not have the brutal after-effect of triggering the aggravated felony provisions of the immigration law.

Finally, it should also be remembered that there is more cooperation among related U.S. government agencies. Cooperation has been observed in similar cases where Immigration and Customs Enforcement (ICE), the Department of Labor, the Department of Justice and/or the Internal Revenue Service increased investigations, including worksite enforcement actions, based on tax evasion issues. Foreign nationals with businesses in the United States need to ensure that they are in compliance with all applicable laws.

Illinois Reverses Position on Income Tax Treatment of Benefits for Civil Union Partners

An article by Elizabeth A. Savard, Todd A. Solomon and Brian J. Tiemann of McDermott Will & Emery regarding Illinois Income Tax Policy for Civil Unions was recently published in The National Law Review:

The Illinois Department of Revenue recently issued guidance reversing its position on the state income tax treatment of benefits for non-dependent civil union partners.

Federal law excludes amounts that an employer pays toward medical, dental or vision benefits for an employee and the employee’s spouse or dependents from the employee’s taxable income. However, because civil union partners are not recognized under federal law, employers that provide these same benefits to employees’ civil union partners must impute the fair market value of the coverage as income to the employee that is subject to federal income tax, unless the civil union partner otherwise qualifies as the employee’s “dependent” pursuant to Section 152 of the Internal Revenue Code.

The Illinois Department of Revenue previously indicated that Illinois would follow the federal approach in taxing the fair market value of employer-provided coverage for non-dependent civil union partners because state law did not provide an exemption from such taxation. However, recent guidance issued by the Department of Revenue reverses that position and indicates that employer-provided benefits for a non-dependent civil union partner are now exempt from Illinois state income taxation. Illinois civil union partners are directed to calculate their state income taxes by completing a mock federal income tax return as if they were married for purposes of federal law.

In addition, for federal tax purposes, employees may not make pre-tax contributions to a Section 125 cafeteria plan on behalf of a non-dependent civil union partner (i.e.,contributions for the partner generally must be after-tax) and may not receive reimbursement for expenses of the non-dependent civil union partner from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) or health savings accounts (HSAs). However, for Illinois state tax purposes, the employee now can be permitted to pay for the non-dependent civil union partner’s coverage on a pre-tax basis.

Employers providing medical, dental or vision benefits to civil union partners residing in Illinois should take action to structure their payroll systems to tax employees on the fair market value of coverage for employees’ non-dependent civil union partners for federal income tax purposes, but not for state purposes.

IRS Extends Transition Relief for Puerto Rico Qualified Plans to Participate in U.S. Group Trusts and Deadline to Transfer Assets

Posted in the National Law Review an article by attorney Nancy S. Gerrie and Jeffrey M. Holdvogt of McDermott Will & Emery regarding U.S. employers with qualified employee retirement plans that cover Puerto Rico:

On December 21, 2011, the U.S. Internal Revenue Service (IRS) issued Notice 2012-6, which provides welcome relief for U.S. employers with qualified employee retirement plans that cover Puerto Rico employees. Notice 2012-6 provides that the IRS will extend the deadline for employers sponsoring plans that are tax-qualified only in Puerto Rico (ERISA Section 1022(i)(1) Plans) to continue to pool assets with U.S.-qualified plans in group and master trusts described in Revenue Ruling 81-100 (81-100 group trusts) until further notice, provided the plan was participating in the trust as of January 10, 2011, or holds assets that had been held by a qualified plan immediately prior to the transfer of those assets to an ERISA Section 1022(i)(1) Plan pursuant to a spin-off from a U.S.-qualified plan under Revenue Ruling 2008-40.

Notice 2012-6 also extends the deadline for sponsors of retirement plans qualified in both the United States and Puerto Rico (dual-qualified plans) to spin off and transfer assets attributable to Puerto Rico employees to ERISA Section 1022(i)(1) Plans, with the resulting plan assets considered Puerto Rico-source income and not subject to U.S. tax.

There are now two separate deadlines:

- First, in recognition of the fact that Puerto Rico adopted a new tax code in 2011 with significant changes to the requirements for qualified retirement plans, the IRS has extended the general deadline to December 31, 2012, for dual-qualified plans to make transfers to Puerto Rico-only plans, in order to give plan sponsors time to consider the effect of the changes made by the new tax code.
- Second, in recognition of the fact that the IRS has not yet issued definitive guidance on the ability of an ERISA Section 1022(i)(1) Plan to participate in 81-100 group trusts, the IRS has extended the deadline for dual-qualified plans that participate in an 81-100 group trust to some future deadline, presumably after the IRS reaches a conclusion on the ability of a dual-qualified plan to participate in an 81-100 group trust, as described in Revenue Ruling 2011-1.

For more information on the issues related to participation of ERISA Section 1022(i)(1) Plans in 80-100 group trusts, see “IRS Permits Puerto Rico-Qualified Plans to Participate in U.S. Group and Master Trusts for Transition Period, Extends Deadline for Puerto Rico Spin-Offs.”

For more information on the issues plan sponsors should consider with respect to a dual-qualified plan spin-off and transfer of assets attributable to Puerto Rico employees to ERISA section 1022(i)(1) plans, see “IRS Sets Deadline for Transfers from Dual-Qualified to Puerto Rico-Only Qualified Plans.”

Category: Tax

Criminal Tax Fraud and Tax Controversy 2012 – December 6-7, 2012

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