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Tax Compliance Issues in Immigration Cases Sam Rock, Esq. TAXIGRATION.

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Presentation on theme: "Tax Compliance Issues in Immigration Cases Sam Rock, Esq. TAXIGRATION."— Presentation transcript:

1 Tax Compliance Issues in Immigration Cases Sam Rock, Esq. TAXIGRATION

2 Survey for Participants Types of cases that you handle: –Naturalization? –Non-LPR cancellation of removal? –NACARA –DACA –VAWA –Adjustment –Consular processing 9 © 2013 Immigrant Legal Resource Center

3 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 © 2013 Immigrant Legal Resource Center 8

4 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 entry © 2013 Immigrant Legal Resource Center 34

5 Cases Involving Good Moral Character (GMC) Natz - INA 316 (a)- GMC for statutory period (specific to Natz) Cancellation of Removal - 42B © 2013 Immigrant Legal Resource Center 11

6 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 © 2013 Immigrant Legal Resource Center 12

7 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 6 © 2013 Immigrant Legal Resource Center 13

8 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 © 2013 Immigrant Legal Resource Center 14

9 9 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 9

10 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 © 2013 Immigrant Legal Resource Center 15

11 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 © 2013 Immigrant Legal Resource Center 16

12 Exemptions 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 © 2013 Immigrant Legal Resource Center 17

13 13 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 18

14 14 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. 19

15 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 © 2013 Immigrant Legal Resource Center 19

16 16 Dependency test 26 USC §§ 152(a)-(f) Residency - US, Canada or Mexico Support - more than 50% Relationship Special rules for income and marriage 16

17 17 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 17

18 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? 18 © 2013 Immigrant Legal Resource Center

19 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) © 2013 Immigrant Legal Resource Center 20

20 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. 33 © 2013 Immigrant Legal Resource Center 23

21 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 32 © 2013 Immigrant Legal Resource Center 21

22 Form 1040, Box 6(c) 22 © 2013 Immigrant Legal Resource Center

23 Software Example Children Claimed as Dependents vs. Claim for CTC/ACTC Base income $25,000 ITIN taxpayer/spouse 3 children © 2013 Immigrant Legal Resource Center 24

24 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 35 © 2013 Immigrant Legal Resource Center 25

25 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 © 2013 Immigrant Legal Resource Center 26

26 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) 39 © 2013 Immigrant Legal Resource Center 28

27 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 © 2013 Immigrant Legal Resource Center 29

28 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. © 2013 Immigrant Legal Resource Center 30

29 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 © 2013 Immigrant Legal Resource Center 31

30 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 © 2013 Immigrant Legal Resource Center 32

31 18 Form 8821 33

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