Entries Tagged 'Foreigners working in USA' ↓

For those of you who have U.S. passports (or have permanent residency status AKA “green cards”), leaving the country just became a little more expensive.

We now have an exit tax–new Section 877A of the Internal Revenue Code.

The new law was signed on June 17, 2008. I’ll get a “plain English” explanation shortly. In the meantime, feel free to print off and read the Joint Committee on Taxation’s explanation. (Warning: massive PDF). The discussion you want to read starts on page 36.

The exit tax will raise an estimated $411 million in tax over the next 11 years, they think. (Sorry, the source is in Tax Notes Today, locked inside Lexis-Nexis. 2008 TNT 118-2 is the cite, if you want it. I couldn’t find the source of the estimate, which apparently was a Baucus/Grassley press release).

Comment #1: good luck with that.

Comment #2: peanuts, really.

The exit tax rules (new Internal Revenue Code Section 877A) are buried in a special law aimed at giving tax relief to people serving in the Armed Services.

Comment: this is a classic example of “for the children” politics.

Here’s a report from the Congressional Research Service which outlines the penalties facing those who employ aliens. [PDF] Let’s not render any value judgments on the efficacy of the penalties, eh? :-)

There’s a really interesting case to be argued November 9 in the Supreme Court: Pasquantino v. United States.

A general principle of international law that says one country’s courts won’t enforce another country’s tax laws. Put another way, the Canadian government can’t sue someone in U.S. courts to collect Canadian taxes.

The Pasquantino case involves three gentlemen who dodged Canadian and Province of Ontario taxes on the importation and sale of liquor. They were prosecuted and convicted in the U.S. of wire fraud. Appeals follows, and today they get their day in in the Big Time: the U.S. Supreme Court.

Mr. Pasquantino (actually there are two of them in this case) achieved immortality in the legal universe. Immortality for lawyers is defined as a Supreme Court case bearing your name as a party. I’m not sure this is what Mr. Pasquantino’s mother expected her son to achieve when he grew up. But I digress. . . .

Mr. Pasquantino is claiming that the principle (U.S. courts won’t enforce foreign tax claims) prohibits the U.S. from pursuing a wire fraud conviction against him. His theory is this: “You (the U.S. government) can’t prosecute me for cheating the Canadians out of tax. Therefore the money is clean from a U.S. law perspective. So how can you convict me for wire fraud when the money I made is clean?”

(I vastly oversimplify, of course).

I care about this because I do a lot of tax planning for nonresidents of the United States. I help them minimize their U.S. taxes while keeping everything completely legal and fully compliant with U.S. tax laws. However, what happens if they are not fully reporting income back to their home country? If they are breaking the tax laws of their home country, can Bad Things Happen to them in United States as well?

The Pasquantino opinion is going to give a bit of guidance on this point, I hope.

Update 11 February 2005: Here is a link to the petitioner’s brief, the respondent’s brief (that’s the U.S. government), and the petitioner’s reply brief. Warning: all are PDFs.

Current tax law says the IRS cannot share tax information with other government agencies. Now the Treasury Inspector General for Tax Administration has suggested that the IRS ask Congress to change the law. This will allow the IRS to share information.

Expect something out of Congress after a while, to achieve precisely this. Turn on your legislative auto-trackers to look for amendments to 26 U.S.C. Section 6103.

What does this mean? I think it might mean that the IRS will be able to enforce Form 1040C filings, for one. I haven’t seen this done in 21 years of practicing law. (These are final tax returns filed by aliens as they leave the U.S.). It means that there will be better matching for how many days an alien was present in the U.S. (The IRS will be able to cross-reference immigration entry/exit data with tax return filings, thus making it difficult for people to stay here too long without triggering tax return filing requirements.)