Immigration Criminal Tax Consequences of Failing to Disclose Foreign Bank Accounts and Foreign Source Income

Posted on by Moskowitz LLP Posted in Criminal Tax Law

with thanks to Liz Prehn, Law Clerk

Introduction

The recent crackdown by the Internal Revenue Service (IRS) on United Sates taxpayers with previously undisclosed foreign bank accounts and unreported foreign income has resulted in an unprecedented wave of criminal prosecutions. The IRS’ initiative may also result in criminal convictions and deportations of many United States noncitizen taxpayers.

This article discusses the immigration consequences of a tax crime conviction associated with failing to disclose an offshore account and failing to disclose foreign interest income.

This article begins with a brief history of federal prosecutions of U.S. citizens with unreported foreign accounts foreign accounts; it then discusses the typical federal tax crimes U.S. citizens and noncitizen taxpayers could be charged with when foreign bank accounts and foreign source income is not disclosed on a U.S. tax return; the article goes on to discuss how noncitizen taxpayers could potentially face deportation in connection with failing to disclose an offshore account and any applicable foreign interest. The article concludes with the importance of selecting a competent criminal tax attorney and potential strategies that may be utilized by a defense counsel to reduce the risk of deportation of a noncitizen in the context of an undisclosed foreign accounts and undisclosed foreign income.

Background

In July of 2008, the IRS issued a John Doe summons on United Bank of Switzerland AG (UBS) in Switzerland. The summons was a demand to UBS to receive information on United States taxpayers who held foreign accounts with that bank. On February 18, 2009, UBS entered into a deferred prosecution agreement with the U.S. Department of Justice. As part of the agreement, UBS has agreed to turn over in regards to approximately 500 U.S. holders of UBS accounts. The United States Department of Justice has opened criminal investigations of many of these account holders. On August 19, 2009, the United States and the Swiss government entered into an agreement in which to turn over information relating to additional U.S. holders of UBS accounts. The agreement reach on August 19, 2009 interprets the current United States and Switzerland tax treaty to allow the Swiss Government to turn over to the Department of Justice information in cases of “continued and serious tax offenses.” This agreement was approved by the Swiss Parliament and is expected to result in the disclosure of an additional 4,450 U.S. holders of UBS accounts.

During the 2010 calendar year, the IRS and the Department of Justice announced it will begin to pressure other foreign banks to disclose the names of U.S. account holders. The turnover of this information will likely result in the criminal prosecution by the U.S. Department of Justice of many individuals who previously failed to properly disclose offshore accounts and foreign source income.

On March 24, 2011, California’s “Voluntary Compliance Initiative II” was enacted as part of Bill 86, which was signed by Governor Jerry Brown. Under the terms of the Voluntary Compliance Initiative II, certain taxpayers with “hidden or disguised offshore accounts” are encouraged to amended their previously filed state tax returns and pay all tax interest in exchange from relief of certain California civil and criminal penalties. California residents who fail to participate in the amnesty program and are ultimately caught with unclosed foreign accounts or income are subject to criminal prosecution.

Reporting Requirements and Federal Tax Obligations of Noncitizens along with Potential Criminal Penalties

We will begin by discussing the income tax obligations of all noncitizen residents in the United States. Internal Revenue Code Section 7701(a)(30) provides a broad definition of the term “United States persons.” Section 7701(a)(30) provides that “United States persons” shall include all citizens of the United States as well as all residents of the United States. If a noncitizen of the United States resides in the United States, he or she can be characterized for federal income tax purposes as a “United States person.” The Internal Revenue Code goes on to say that all “United States persons” are required to disclose all their worldwide income, including income from all foreign sources. This includes interest income earned from foreign bank or financial accounts.

The Internal Revenue Code requires “United States persons” to disclose interests in foreign bank accounts and foreign source interest income on a Form 1040. For example, Part III of Schedule B of Form 1040 requires “United States persons” to check a box “yes” or “no” in regards to whether the individual at any time during the calendar year had “an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account. This question then directs the individual to the form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

If a “United States person” fails to report income from a foreign financial account and fails to report the existence of an offshore financial account either on the Form 1040 and/or the FBAR, he or she is subject to a list of potential criminal penalties. First, an individual could be prosecuted for federal tax evasion. Tax evasion is defined as the willful attempt to defeat or evade a federal tax due and owing, or evasion of the payment of a tax assessed.1 (Later in this article we will discuss the immigration law consequence if it is determined that the tax loss to the United States Government exceeds $10,000).

Second, the filing of a false tax return or making a false statement on a tax return may result in prosecution for filing a false tax return.2 In order to be convicted of filing a false tax return, the IRS or Department of Justice must prove that an individual willfully signed and filed a tax return, or other document such as an FBAR that he or she did not believe to be true and correct in a material matter.3 A defendant may also be prosecuted for filing of a false tax return if the prosecution proves that the individual willfully aided or assisted in the preparation of a tax return, affidavit, claim, or other document that is fraudulent or false as to any material matter with knowledge that the document would be submitted to the IRS.4

Third, an individual could be charged in a conspiracy to defraud the United States. An individual can be charged in a conspiracy to defraud the United States if two or more persons agree to commit a substantive offense against the United States or to defraud the United States, and if the commission of the overt act was in furtherance of the conspiracy.5

Fourth, an individual may be criminally prosecuted for the willful failure to file an FBAR.6 If the failure to file occurs during the violation of another law or is part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, there are increased criminal penalties.7

Finally, nonresident taxpayers that fail to disclose offshore income are subject to various penalties determined under state law.

Immigration Consequences of Federal Convictions for Tax Offenses

Individuals who are not United States citizens, including those lawfully admitted for permanent residence (green card holders) are subject to deportation from the United States based on certain criminal convictions, including a conviction for “aggravated felony.”8 An “Aggravated felony” is defined to include offenses 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.”9 Aliens in the United States, regardless of status, who are convicted of an aggravated felony are not eligible for review from deportation or asylum.10

As discussed above, a nonresident or alien residing in the United States must disclose their offshore account and income generated from that account on a U.S tax return annually. Failure to do so may result in the alien being convicted of at least one federal or state tax crime. If an alien were to suffer a criminal conviction for not disclosing a foreign account and/or foreign source income, not only could the alien face incarceration and serious fines, such a criminal conviction can result in loss of child custody, termination of pension benefits, and even deportation from the United States. Clearly, there are far broader implications for an alien convicted of a tax crime than for U.S. citizens. Consequently, it is crucial for all noncitizens with previously undisclosed foreign bank accounts or foreign source income to have proper competent legal counsel that can advise them about the immigration consequences of a criminal conviction associated with a tax crime.

Importance of Competent Counsel

Unfortunately, in many cases, criminal attorneys representing noncitizen taxpayers are not properly equipped with knowledge of immigration law to competently assist their clients. Such a case was highlighted in Padilla v. Kentucky, 130 S Ct. 1473 (2010). In Padilla v. Kentucky, a long-time lawful permanent resident was charged with drug offense. The defendant was charged with the transportation of marijuana in Kentucky state court. The defendant accepted a plea bargain after the defendant’s attorney assured that he did not have to worry about immigration status since he had been in the country so long.11 In reality, the defendant’s plea bargain rendered him deportable with no opportunity for relief. The defendant attempted to challenge his guilty plea. The Kentucky court refused to allow the defendant to change his guilty plea and concluded that deportation was collateral to the plea and refused to allow the defendant to change his plea. The United States Supreme Court disagreed and overturned the lower state court.

What needs to be taken away from the Padilla is an attorney representing a noncitizen in felony type case needs to be well versed in immigration law. This is particularly the case when such an attorney is negotiating a plea agreement for his or her client and is advising the client in regards to a guilty plea. There are legitimate practical objections which require a defense counsel to tell noncitizen clients about when making a decision to plead guilty. These consequences tend to be scattered randomly throughout a jurisdiction’s code and regulations, and all too many criminal attorneys are unfamiliar with them. Justice Stevens, writing for a five-justice majority, held that “our law has enmeshed criminal convictions and the penalty of deportation… And, importantly, recent changes in our immigration law have made removal nearly an automatic result for a broad class of noncitizen offenders.”12 As such, there is now a duty imposed on every criminal defense attorney representing noncitizen clients that pending criminal charges may result in deportation from the United States. Preserving the “client’s right to remain in the United States may be more important to the client than any potential jail sentence.”13 Criminal attorneys that represent noncitizens in matters involving the failure to properly disclose offshore bank accounts or foreign income must have a full understanding of immigration law.

Only criminal defense attorneys with an understanding of immigration law can best serve assure a positive outcome of such a case. Such an attorney can bring in the potential consequence of deportation in the process so the interests of his client are best served. In particular, defense counsel “may be able to plea bargain creatively with the prosecutor in order to craft a conviction and sentence that reduces the likelihood of deportation.”14

The lesson learned from the Padilla case is that all attorneys representing clients before the IRS, department of justice, or state taxing agency in matters involving previous undisclosed offshore accounts or foreign source income should inquire about the citizenship of their clients. In cases where an attorney is representing a noncitizen, the attorney should either be well versed in immigration law or associate with counsel who is competent in immigration law. The attorney must be prepared to immediately discuss the consequences of a criminal conviction with his or her client.

Defining Aggravated Felony

As discussed above, an aggravated felony results in automatic removal from the United States without any possibility of discretionary review by the immigration court. Generally, in the past, the immigration court was limited to looking to the language of the statute under which the defendant was convicted to determine whether the offense is an aggregated felony. The immigration court could not consider the underlying facts and circumstances of the case in which the defendant was convicted. Such a review was known as the “categorical approach.”15 Recently, the United States Supreme Court seemed to have relaxed this rule somewhat in Nijhawan v. Holder, 129 S. Ct 2294, 2300 (2009). In Nijhawan v. Holder, the United States Supreme Court discussed whether a defendant’s conviction for conspiracy to commit fraud was an aggravated felony under 8 U.S.C. Section 1101 Section 1101(a)(43)(M)(i). The Court ultimately decided that it was appropriate to examine the specific circumstances surrounding the defendant’s crime to determine the amount of the loss to the victim. The Court went on to say “the requirement that the offense was “in which was appropriate to examine the specific circumstances surrounding the defendant’s crime to determine the amount of the loss to the victim.16 Accordingly, in decided whether to remove a noncitizen, the immigration court will now look to the statutory language of the offense to determine whether it involved “fraud or deceit,” and then will analyze the record of the criminal proceeding to determine whether the offense involved a loss to the government of more than $10,000.

Applying this view of statutory interpretation, the Supreme Court has unambiguously classifies a conviction under Section 7201 in which a loss to the government exceeds $10,000. Consequently, if a noncitizen is convicted of the tax crime of willful attempt to defeat or evade tax due and owing, or evasion of the payment of a tax assessed, the immigration court will determine that the noncitizen committed an “aggravated felony.” With that said, the Supreme Court is silent as to whether any other tax crimes could be classified as an “aggravated felony. The Ninth Circuit Court of Appeals has weighed in on this controversy.

In Kawashima v. Holder, 593 F.3d 979, 985 (9th Cir. 2010), the Ninth Circuit Court of Appeals stated that the filing of a false return or the willful aiding or assisting in the preparation of a return or any other material matter to the IRS under Sections (1) and (2) of 26 U.S.C. Section 7206 necessarily involves fraud or deceit “because the provisions require the government to prove either that the defendant ‘willfully’ subscribed to a statement in a tax return he did not believe to be true, or that the defendant ‘willfully’ aided and assisted in the making of a false or fraudulent return”17 Given that 8 U.S.C. Section 1101(a)(43)(M)(i) has defined an “aggravated felony” to include an offense that involves “fraud or deceit,” noncitizens that are convicted under 26 U.S.C. Section 7206 which involves a loss of $10,000 or more in the 9th Circuit will likely be found guilty of an aggregated felony in the 9th Circuit.

Following the Ninth Circuit Court of Appeal’s position in Kawashima v. Holder, in the offshore context, the offense of failure to file an FBAR under 31 U.S.C. Section 5322 may also appear to involve fraud or deceit. The mens rea required for a conviction under Section 5322 is willfulness.18 The element of 8 U.S.C. Section 1101(a)(43)(M)(i) is likely satisfied of “fraud or deceit” because the knowing and intentional failure to file an FBAR can be characterized as the deceitful attempt to hide information from the government. Given that the mens rea required under Section 5322 seems to be in line with Section 1101(a)(43)(M)(i), it is possible a court in the Ninth Circuit will find a conviction under Section 5322 amounts to a aggravated felony.

How is Counsel to Proceed in Tax Cases?

The first step defense counsel should ask when representing nonresident in potential prosecution of a tax crime or the failure to disclose a foreign bank account is does the loss to the government exceed $10,000. If the tax loss involves tax loss to the government that exceeds $10,000 and relates to an offense described in Section 7201 or Section 7206 in the Ninth Circuit, counsel should be prepared to engage the prosecution early may attempt to structure a plea accordingly to avoid removal. Parties frequently agree on tax loss during plea negotiations, and under appropriate circumstances may be able to stipulate to a tax loss of not more than $10,000.19

Defense counsel will face a far more difficult task in representing a noncitizen defendant accused of other federal or state tax crimes that could be characterized as Section 1101(a)(43)(M)(1) offense. This is because defense counsel must be prepared to determine if the charged offense could be classified as an “aggravated felony.” In order to determine which if any federal or state tax crimes could be classified as an “aggravated felony” under 8 U.S.C Section 1101(a)(43)(M), we must look more closely at the statutory language of subsection (M). The Third Circuit Court of Appeals took the position determining whether any tax offense can be classified as an “aggravated felony” cannot “be answered solely by looking at the language (of subsection (M) itself.”20 The Third Circuit went on to say subsection (M)(ii) clearly and unambiguously classifies a conviction under Section 7201 as an aggravated felony, but is silent as to any other tax offenses.

The Appeals Court than asked:

Why does subsection (M) include both a general provision encompassing “fraud and deceit” and a specific provision directed solely at the offense of federal tax evasion? If subsection (M)(i) applies to tax offenses(s), what is the purpose of subsection (M)(ii)? Does the juxtaposition of subsections (M)(i) and (M)(ii) signal an intent to exclude other tax offenses from the definition of aggravated felonies in (M)(i).21

The Third Circuit of Appeals determined that subsection (M)(i) is a general provision and subsection (M)(ii) is a specific provision that only applies to federal tax offenses. Under this analysis, specific provisions of the statute govern the general provisions of the statute. The majority in Third Circuit Court of Appeals stated in no uncertain terms tax evasion is the “capstone” of tax law.22 Consequently, in the view of the Third Circuit, only a Section 7201 offense could be characterized as an aggravated felony.23

Then Appeals Court Judge Samuel Alito dissented from the majority on the ground that he believed subsection (M)(i) was unambiguous and that the offense of filing a false return is an act involving fraud or deceit. Judge Alito stated if Congress had not intended subsection (M)(i) to apply to tax offenses, Congress would have provided so in the statute. The Ninth Circuit Court of Appeals went on to follow Judge Alito’s dissent and determined that the filing of false tax returns under Section 7206 is an aggravated felony under subsection M(i). The Ninth Circuit Court of Appeals explained that “Congress has often realized its inability to anticipate every possible type of case, and may have added subsection (M)(i) to ensure that no tax evasion case fell outside subsection (M)’s definition of an aggravated felony.”

The lesson to be learned from Judge Alito’s dissent and the Ninth Circuit’s recent opinion in Kawashima v. Holder opinion is simple, unless defense counsel is representing a noncitizen taxpayer in the Third Circuit, counsel must be cognizant of the fact that any federal or even state tax crime involving a tax loss of over $10,000 can be determined to be an aggravated felony. As such, defense counsel should carefully consider whether the particular offense charged involves fraud or deceit and a tax loss of $10,000. This is the case for both federal and state tax crimes charged. In cases where the defendant has been charged with willfully failing to file an FBAR, defense counsel should attempt to avoid an aggravated felony designation by arguing that the act itself did not cause any loss to the government.

Only after defense counsel has closely examined all the facts of the case, should defense counsel begin meaningful dialogue with the prosecution. If possible, defense counsel should be prepared to distinguish the mens rea of the offenses that his or her client faces from that of Sections 7201 and 7206 of Title 26. Only after defense counsel has adequately prepared his or her defense should begin negotiations with the government.

  1. See 26 U.S.C. Section 7201.
  2. Unlike tax evasion under Section 7201, this federal tax crime does not have an element requiring a tax deficiency.
  3. See 26 U.S.C. Section 7206(1).
  4. See 26 U.S.C. Section 7206(2).
  5. See 18 U.S.C. Section 371.
  6. See 31 U.S.C. Section 5322(a).
  7. See 31 U.S.C. Section 5322(b).
  8. See 8 U.S.C. Section 1227(a)(2)(A)(iii).
  9. See 8 U.S.C. Section 1101(a)(43)(M).
  10. It should be noted that an alien may also be subject to deportation from the United States if he or she committed a felony involving moral turpitude within five years after the date of admission to the United States. See 8 U.S.C. Section 1227(a)(2). Some federal courts have held that tax fraud or tax evasion involves moral turpitude. However, unlike in situations of an aggravated felony, there is a specific date upon which an alien may no longer face deportation. In addition, an alien may petition the immigration court requesting a “cancellation of removal.”
  11. 130 S.Ct at 1478.
  12. 130 S. Ct. at 1481.
  13. 130 S. Ct. at 1483.
  14. 130 S. ct. at 1486.
  15. See Singh v. Ashcroft, 383 F.3d 144, 147-48 (3d Cir. 2004).
  16. 130 S. Ct. 736 (2009).
  17. Id. At 983.
  18. Willfulness means that the defendant acted with the knowledge that the conduct in question was unlawful.
  19. This approach is limited by the need for the stipulation of facts accompanying a plea agreement to accurately portray the facts underlying the offense. See U.S.S.G. Section 6B1.4(a) (Stipulation of facts must “not contain misleading facts”). 
  20. Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004).
  21. Id. At 222.
  22. Id at 224.
  23. Kawashima v. Holder, 593 F.3d 979, 985 (9th Cir. 2010).