Recently, my office has seen a marked increase in the number of U.S. Citizens/Green Card Holders and U.S. Resident Aliens coming forward to file past tax returns with the I.R.S. Now, this does present its own set of challenges that we are very capable of successfully handling for you, but most attorneys many not spot the other problems associated with state filings.
Why state filings, because most U.S. Citizens and others have lived in the U.S. at one time before expatriating overseas and although your clients may consider their state residence terminated many years ago; not so says many U.S. states. More and more states are looking at domiciliary rather than residency to determine if a looming tax liability exists for your clients.
Residence depends largely on the number of days a person is present in a particular state of the United States, but domiciliary looks at the subjective intent of your client. Since the state can not look into the mind of an individual; they look at acts, documents, failure to act and other evidentiary items to see if they can build a case that your client never truly gave up domiciliary in the last state they lived in before becoming an expatriate.
Lets take the recent Hudson case for example:
Lets determine that the list of acts, documents, failure to act and other items of evidence points to your client’s mandate to file not only past Federal Tax Returns, but also State of California Tax Returns. There is a much harsher consequence to individuals who have not filed past California Income Tax Returns than Federal Tax Returns. Generally, Federal tax evasion statutes require an actual bad act for conviction, a very recent California Appellate Court determined that a individual who did not timely file state tax returns for three consecutive years intentionally evaded paying taxes, even without an overt act of intentional evasion, and imprisonment for this state violation be found by the court. Remember, that the Federal Government has a fast track amnesty program for voluntary compliance on past Federal Tax Returns, but the State of California has no such amnesty.
Taxpayer, Hudson, filed his 2007, 2008, and 2009 personal state tax returns about five years late. He had filed and paid tax in the years prior to 2007, knew that he owed tax, and had received demands from the California’s Franchise Tax Board for the tax returns. Later charged with felony tax evasion, Mr. Hudson argued in his motion that an overt action is required for a tax evasion conviction, citing Spies v. United States, 317 U.S. 492 (1943). However, in comparing the federal statute in Spies with the California statutes, Judges Moore and Aronson determine that under California law the willful failure to timely file returns when combined with intent to evade tax can lead to criminal charges absent any overt act.
After additional briefing from the parties, the Appellate Court affirmed that the combination of Mr. Hudson’s previous tax filings prior to 2007, and his inaction during the years at issue and timely filing period thereafter, provided a rational basis for the lower court to determine the defendant harbored the requisite intent to evade paying his taxes when he failed to timely file.
The majority of the Court, including Judge Aronson concurred to distinguish the federal tax evasion statutes that require attempt, and that the distinction from misdemeanor to felony charges includes an attempt requirement.
The minority dissent compared the parity between several federal and California tax evasion statutes to dissuade the majority opinion holding that no affirmative act is required. The dissent would look for an affirmative act such as a double set of books, destruction of records, and concealment of assets to show an attempt to evade taxes in order to maintain consistency between the different federal and state laws, sentencing guidelines, and case precedents. However, this was the minority view and was no persuasive to lessen the crime from a felony to a misdemeanor.
Lets take my state for example:
Currently, I have a client, husband and wife, who lived in the San Francisco area for many years. The husband took at position in Japan and the family moved to Japan in what they believed to be a new long-term residence with no then-current intent to return to California to live. After the tax preparer filed the tax return for the year of expatriation claiming “part-year resident” and in the next subsequent years as “non-resident” and only taxing net rental income from the rent of their home. After 7 years in Japan, the family moved back into their rental dwelling and set up residence once again. So, 7 years in Japan and no intent to return should qualify them as true non-residents of California and not subject to California tax; except for rental income and some small bank account interest where the rent checks were deposited.
“No so”, said the Franchise Tax Board, (FTB), they are looking at taxing all 7 years as if the family had never moved overseas. The FTB said that traveling back to San Francisco to make sure their house was being property taken care of as an investment put them in the state. Credit card records obtained by the FTB from banks showed dates in the U.S., money spent, travel throughout California. They still had not given up their California driver’s licenses, were still registered to vote in California, still maintained bank accounts in California, paid California utilities on their home, and had frequent telephone calls to California from document obtained from the telephone companies.
If are considering becoming an expatriate, please plan your departure so you are no longer a resident and no longer domiciled in your particular state. Also, if you are planning to return to the U.S., please contact us so your repatriating is successful in mitigating your exposure for being considered a resident for all of the years you have been overseas and, most importantly, not be facing criminal charges. We are always happy to talk with you on this most important subject and to make your expatriation or repatriation free of criminal prosecution.
Michael B. Nelson, Esq.