DENVER NUGGETS OF GOLD: WHERE TAXATION AND IMMIGRATION MEET

DENVER NUGGETS OF GOLD:
    WHERE TAXATION AND
     IMMIGRATION MEET
               Samuel C. Rock (DL), Lexington, KY
               Elise A. Fialkowski, Philadelphia, PA
                Paula Noyes Singer, Newton, MA
            Kevin J. Mullin, Tax Attorney, Denver, CO




                                              2011 Fall Conference – Denver, CO
                                              © 2011 American Immigration Lawyers Association




TAX ISSUES FOR IMMIGRATION
          LAWYERS
 •Resident v. Non-resident

 •Gift, Estate, and Disclosure

 •Ability to Pay

 •Income tax issues



                                             2011 Fall Conference – Denver, CO
                                             © 2011 American Immigration Lawyers Association




      Why U.S. Tax Residency Matters
TAX RESIDENTS                   TAX NONRESIDENTS
WORLDWIDE INCOME                U.S.-SOURCE INCOME
•Same as U.S. Citizens          •Not U.S. citizens or tax residents
•Residents                      •W-4/W-2
   •Green card test                 •Special wage-withholding rules
   •Substantial presence test       •Special Form W-4 rules (only
   (SPT)                            single)
•W-4/W-2                            •Phantom gross-up to eliminate
   •Standard wage                   effect of standard deduction in
   withholding                      wage tables
•W-9/1099                       •W-8s/8233/1042-S
   •28% backup withholding          •30% withholding (14% on
   •$600 threshold for              scholarships)
   independent compensation         •No minimum dollar threshold
   and most payments                for payments


                                             2011 Fall Conference – Denver, CO
                                             © 2011 American Immigration Lawyers Association




                                                                                                1
Why U.S. Tax Residency Matters
TAX RESIDENTS                     TAX NONRESIDENTS
WORLDWIDE INCOME –                U.S.-SOURCE INCOME – Cont.
Cont.
                                  •Can claim treaty benefits to avoid or
•No treaty benefits (except       reduce U.S. tax/withholding if qualify
students and scholars)            •Form 1040NR or Form 1040NR-EZ
•Form 1040 (or simpler 1040A or       •No standard deduction
1040EZ) even if living abroad         •Few deductions and credits
•Disclosures required                 allowed
    •FBAR (for financial              •Single or married filing
    accounts)                         separately
    •Many other possibilities         •April 15 only if have wages
                                      subject to wage withholding,
                                      otherwise June 15



                                              2011 Fall Conference – Denver, CO
                                              © 2011 American Immigration Lawyers Association




  Determining Tax Residency Status
 Green Card Test
    •From 1st U.S. day in greencard status until status is
    revoked or abandoned
 Substantial Presence Test (SPT)
    •31 countable U.S. days and
    •U.S. presence for 183 countable days or more in the
    calendar year based on a weighted formula
        All in the current year, 1/3 in the prior year, and
        1/6 in the year before
        For any purpose (including vacation)
        Including partial days of arrival and departure
    Some U.S. days do not count

                                              2011 Fall Conference – Denver, CO
                                              © 2011 American Immigration Lawyers Association




  Determining Tax Residency Status
Do not count days of an individual exempt from counting days
   •A and G-status foreign-government related individuals
   •F, M, and J Students (including Student Interns)
       Exempt from counting days for any part of 5 calendar
       years in F, J, M, or Q
       Years beginning with 1985 (absences do not restart count)
   •J and Q-status nonstudents (called “teachers and trainees” by
   the IRC)
       Do not count U.S. days for 2 out of the current 7 calendar
       years in F, J, M, or Q status
       Can get some unusual results because of prior visits in F, J,
       M, or Q status some of which were exempt from counting
       and some not
   •When status changes in the year, use the applicable rule for
       counting U.S. days in each status
                                              2011 Fall Conference – Denver, CO
                                              © 2011 American Immigration Lawyers Association




                                                                                                2
Tax Treaty Impact
 A tax resident might also be a resident of a country with a tax
 treaty with the U.S. (“dual resident”)
     •Might be a treaty country resident under the treaty
     residency tiebreaker rule
         Those traveling to U.S. frequently on business might
         be treaty U.S. nonresidents
         Those who move to U.S. will be U.S. treaty residents
     •Must timely file 1040NR/8833 or 8833 separately to be a
     treaty nonresident
     •Being a treaty nonresident does not change requirement
     to submit U.S. disclosure forms!


                                           2011 Fall Conference – Denver, CO
                                           © 2011 American Immigration Lawyers Association




IRS International Tax Enforcement
  IRS focus on enforcing reporting of worldwide income by
  USCs/tax residents disclosures
     •Requirement for disclosure forms (see list in practice
     advisory)
         Huge penalties for not submitting disclosures
         Voluntary Compliance Initiatives
     •Many issues for former LPRs who did not follow IRS
     rules
  Employment tax audits/USCIS now sends info on
  sponsored employees to IRS



                                           2011 Fall Conference – Denver, CO
                                           © 2011 American Immigration Lawyers Association




               I-140 Ability to Pay
  The Regulation – 8 CFR 204.5(g)(2)

         “Ability of prospective employer to pay wage.”
        Any petition filed by or for an employment-based
  immigrant which requires an offer of employment must be
  accompanied by evidence that the prospective United States
  employer has the ability to pay the proffered wage.
         The petitioner must demonstrate this ability at the time
  the priority date is established and continuing until the
  beneficiary obtains lawful permanent residence ….



                                           2011 Fall Conference – Denver, CO
                                           © 2011 American Immigration Lawyers Association




                                                                                             3
I-140 Ability to Pay
        Evidence of this ability shall be either in the form of
copies of annual reports, federal tax returns, or audited
financial statements.
        In a case where the prospective United States employer
employs 100 or more workers, the director may accept a
statement from a financial officer of the organization which
establishes the prospective employer's ability to pay the
proffered wage.
        In appropriate cases, additional evidence, such as
profit/loss statements, bank account records, or personnel
records, may be submitted by the petitioner or requested by
the Service.”


                                        2011 Fall Conference – Denver, CO
                                        © 2011 American Immigration Lawyers Association




             I-140 Ability to Pay
•Yates Memo (5/4/04), AILA InfoNet Doc No. 04051262
•Required evidence:
•Federal tax return or
•Annual report
•Audited financial statement
•Discretionary evidence:
•Statement from financial officer
•Profit/loss statement
•Bank account records
•Personnel records, etc.
•Three tests:
       Net income test
       Net current assets test
       Actual payment test
                                        2011 Fall Conference – Denver, CO
                                        © 2011 American Immigration Lawyers Association




           I-140 Ability to Pay
•I-140 Standard Operating Procedures
•Case law—Matter of Sonegawa, 12 I&N 612 (BIA
1967—financial losses can be overlooked if created
by unexpected and uncharacteristic events such as
one bad year
•Recent decisions—Service Center trends
•Creative Evidence




                                        2011 Fall Conference – Denver, CO
                                        © 2011 American Immigration Lawyers Association




                                                                                          4
US Gift and Estate Tax
                What are Estate and Gift Taxes?
  Tax on Transfers of Assets by RA and NRAs
     •During Life (Gifts) – Gift Tax
     •On Death (Estate) – Estate Tax
  Calculated on FMV of Asset at Time of Transfer
     •Note: Income Tax is only on appreciation not FMV
  Maximum Tax Rate (2013)* = 55%
  Exemptions (2013)*
     •Estate Tax - $1M
     •Gift Tax - $1M
  *Current ET/GT Rates and Exemptions Return to pre-2001
  levels unless new legislation is enacted

                                                        2011 Fall Conference – Denver, CO
                                                       © 2011 American Immigration Lawyers Association




Test for RAs and NRAs (Domicilary/Non-Dom)
               Who is a Resident for ET/GT Purposes?

 No Statutory Tax Definition, i.e, No Substantial Presence or Green
 Card Test
 Factual/Subjective Test (Presence + Intent to Stay)
 •NRA acquires RA status for GT/ET purposes if person is living in
 the U.S., for even a brief period of time, with no definite present
 intention of leaving
 •Will not become a RA if in the U.S. but no intention to remain
 indefinitely
 •Once becoming a RA, will not change domicile unless leaves U.S.
 •Permanent Resident can be NRA
 •Undocumented or G-4 World Bank Employee - Can be RA

              GT/ET Tax Treaties (only 17) can clarify RA Status
                                                        2011 Fall Conference – Denver, CO
                                                       © 2011 American Immigration Lawyers Association




 ESTATE AND GIFT TAX FOR RA AND NRA
How Does the ET and GT Impact RAs and NRAs?
     RESIDENTS (DOMICILIARY)                   NONRESIDENTS (NON-DOM)

 TYPICALLY A PERMANENT RESIDENT            TYPICALLY AN INVESTOR
 ALL ASSETS LOCATED WORLDWIDE              ONLY ASSETS “DEEMED” TO BE IN US

 •Transfer of asset acquired prior to or   •Same ET/GT rates as USC (2013 max
 after becoming RA                         55%)
 •Same ET/GT rates as USC (2013 max        •BUT, PALTRY ET/GT exemption v USC
 55%)                                      •$60k NRA v $1m USC (2013)
 •Same Exemption as USC (2013 $1m          •Treaty may increase exemption
 E+G)                                      •No ET/GT marital deduction unless
 •ET - No unlimited marital deduction      USC or Spousal Trust
 unless spouse USC or Spousal Trust        •Assets deemed to be in US
 •GT – No unlimited marital deduction –    •US real estate
 limited to $136k annually to spouse       •Stock in US corporation for ET
                                           •Stock in US corporation – no GT
                                           •Treaties can clarify if asset is “deemed”
                                           to be in US or 3rd country


                                                          2011 Fall Conference – Denver, CO
                                                          © 2011 American Immigration Lawyers Association




                                                                                                            5
US Estate/Gift Tax Planning vs. No Planning
   What Difference Does Advance ET/GT Tax
                Planning Make?
  ESTATE/GIFT TAX - RA                   ESTATE/GIFT TAX – NRA

  $5M in Chinese bank account            $5m US real estate transferred to
  transferred to daughter by Death       daughter by Death or by Gift
  or Gift (2013)                         (2013)

  o No Planning prior to RA status       o No Planning prior to acquiring
  $2,161,500 Estate or Gift Tax         US real estate
                                         $2,161,500 Estate or Gift Tax
  o Planning – Make $5m Gift to
  daughter prior to RA                   o Offshore Planning prior to
  No Estate Tax – No Gift Tax           acquiring US real estate
                                         No Estate Tax – No Gift Tax

                                                    2011 Fall Conference – Denver, CO
                                                    © 2011 American Immigration Lawyers Association




    IRS/Treasury Disclosures for RA and NRA
         The IRS has an Inquisitive Mind!
RESIDENTS (DOMICILIARY)                          NONRESIDENTS (NON-DOM)

Disclosures required (whether any tax is due)   Disclosures required
FBAR Form TD F 90-22.1                           Form 5472
-Report Foreign Bank Account                     -Report Ownership of US
Form 8938                                        Corporation
-Report Foreign Financial Assets                 Form 8233
Form 5471                                        -Election of Treaty Benefits
-Report Ownership Foreign Corporation            Form 8840
Form 8865/8621                                   -Claim of Closer Connection to
-Report Ownership Foreign                        3rd country
Partnership/Disregarded Entity
Form 3520                                        Other Forms
-Report Foreign Gifts and Distributions from
Foreign Estate/Trust                             Penalties
Other Forms                                      Criminal
 Penalties – Criminal/Civil                     Civil
OVDI – program ended 8/31/11
                                                    2011 Fall Conference – Denver, CO
                                                    © 2011 American Immigration Lawyers Association




                    Big Picture
               Low Income Tax Issues
  •Recognize risks, defend appropriately and recognize
  opportunities for post-SSN refunds
  •In cancellation cases, returns can lead to challenges to
  good moral character of your client
  •Ethical duties of attorney to the court
     •ABA Model Rule 3.3 Candor to Court
  •High rate of error/fraud in returns prepared in
  undocumented communities (notarios)
  •SSNs via EADs can save your client big $ and may
  result in refunds (?? EITC)

                                                    2011 Fall Conference – Denver, CO
                                                    © 2011 American Immigration Lawyers Association




                                                                                                      6
The Usual Suspects
•Improper claims to dependents
•Improper claims to Child Tax Credit for ITIN filers on the
1040
   • ☑ in 6(c)4 is a representation that dependent lived
   with client
•Spouse USC/LPR who has SSN spouse files as Head of
Household/Single with SSN children to preserve EITC
when married and living together with ITIN spouse
•Tax returns that don’t show dependents may indicate
SSNs sold
•Not stating cash income


                                      2011 Fall Conference – Denver, CO
                                      © 2011 American Immigration Lawyers Association




          Rules for Dependency
•Definition is very broad and can include,
sons/daughters, nieces/nephews, brothers/sisters,
grandparents, and in-laws
•Can live in MX/U.S. or Canada if one of listed family
relationships
•Must pay more than 50% of financial resources (easy
for MX per USAID/CIA reports)
•Dependency is a red herring—just gets the preparers
to the Additional child tax credit
    •$1,000 per child (must live with taxpayer)
    •no me conviene

                                      2011 Fall Conference – Denver, CO
                                      © 2011 American Immigration Lawyers Association




    Earned Income Tax Credit
A♠ = USC spouse with SSN files HH or single to
claim EITC
   •Disqualified if files with ITIN spouse or
   Married Filing Separate

Q♥ = Retroactive Claims to EITC after client has
SSNs
  •If not claimed then can go back for 3 years
  •Can be $6,000 per year


                                      2011 Fall Conference – Denver, CO
                                      © 2011 American Immigration Lawyers Association




                                                                                        7
Questions & Answers




             © 2011 American Immigration Lawyers Association




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