The Tax Times

Wednesday, February 11, 2026

From Taxpayer to Target: Employment Tax, Immigration Enforcement, and Denaturalization Risks

The federal government has quietly built an integrated enforcement machine that links employment tax, immigration status, and even the security of U.S. citizenship itself. For practitioners, that means facts that once lived in separate silos—payroll practices, N‑400 answers, and criminal exposure—now interact in ways that can be life‑changing for clients.

In June 2025, DOJ’s Civil Division formally elevated denaturalization to one of its five top enforcement priorities, instructing lawyers to “prioritize and maximally pursue” revocation of citizenship wherever the law and evidence allow. The memo singles out, among others, undisclosed felonies, participation in criminal enterprises, and financial fraud—including tax and PPP fraud—as preferred targets, making any inconsistency between a client’s criminal/tax history and their N‑400 a potential citizenship case rather than “just” a criminal or tax problem.

At the same time, the April 7, 2025 IRS–ICE Memorandum of Understanding authorizes ICE, under IRC §6103(i)(2), to request taxpayer identifying information and selected return data in support of criminal immigration cases. Although formally “targeted,” the agreement is already being challenged in court by immigrant‑serving organizations who argue that it erodes long‑standing expectations of tax confidentiality and will chill compliance, especially among ITIN filers. For employers, the MOU is widely expected to fuel more payroll tax audits and joint investigations focused on unauthorized workers.

Denaturalization itself is pursued through civil actions under 8 U.S.C. §1451(a), which allows revocation if citizenship was illegally procured or obtained by willful misrepresentation or concealment of material facts. DOJ has used cases like United States v. Borgono to show that even “technical” omissions—such as failing to disclose pre‑naturalization involvement in a fraud scheme later prosecuted criminally—can cost a client their citizenship years after the fact. The burden is “clear, convincing, and unequivocal,” but there is no right to appointed counsel, and the government can reach back to conduct that would have been material to the original naturalization decision.

For High‑Net‑Worth Clients, The Loss Of Citizenship Can Also Be A Tax Event.
The expatriation regime under IRC §877A generally treats certain individuals as selling all of their property the day before expatriation, subject to a mark‑to‑market tax above a statutory exclusion. Legislative explanations make clear that denaturalization is treated as the expatriation date for §877A purposes, notwithstanding the “relation‑back” doctrine under 8 U.S.C. §1451(a), so the tax consequences are forward‑looking from the judgment date. That alignment creates a narrow and sensitive window for any pre‑denaturalization planning, especially when spouses or children could themselves face derivative denaturalization under the immigration laws.

For practitioners in tax, immigration, and criminal defense, the practical takeaway is straightforward: you can no longer advise in one domain without at least screening for exposure in the others. Every N‑400, every employment tax problem involving unauthorized workers, and every criminal plea by a naturalized client is now a potential denaturalization and expatriation case in disguise—and the agencies talking to each other makes it more likely those threads will be pulled.

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Sources

1. https://www.wilmerhale.com/en/insights/client-alerts/20250613-doj-civil-division-issues-enforcement-priorities-memorandum

2. https://www.hklaw.com/en/insights/publications/2025/04/irs-and-ice-memorandum-of-understanding-will-drive-tax

3. https://www.justice.gov/archives/opa/press-release/file/1060906/dl?inline=

4. https://www.govinfo.gov/content/pkg/USCOURTS-flsd-1_18-cv-21835/pdf/USCOURTS-flsd-1_18-cv-21835-0.pdf

5. https://ogletree.com/insights-resources/blog-posts/doj-civil-division-sets-enforcement-priorities-to-advance-administrations-policy-objectives/

6. https://files.epi.org/uploads/IRS_ICE_MOU-April-2025.pdf

7. https://www.gtlaw-insidebusinessimmigration.com/department-of-justice/doj-civil-division-prioritizes-denaturalization-in-new-enforcement-memo/

8. https://forumtogether.org/article/denaturalization-fact-sheet/

9. https://www.brookings.edu/wp-content/uploads/2025/12/IRSDATA_12_04_2025_ImplementationPlan_IRS_ICE_FOIA_August2025.pdf

10. https://www.nytimes.com/2018/07/23/us/denaturalize-citizen-immigration.html

11. https://www.justice.gov/civil/media/1404046/dl?inline

12. https://www.mayerbrown.com/en/insights/publications/2025/06/doj-civil-division-announces-five-enforcement-priorities

13. https://www.aila.org/library/policy-brief-denaturalization-and-the-administration-s-targeting-of-u-s-citizens

14. https://www.irs.gov/pub/opr-taxpros/2025-7-requesting-irc-6103-information-from-the-OPR.pdf

15. https://immpolicytracking.org/policies/doj-memo-sets-civil-division-enforcement-priorities-on-dei-antisemitism-gender-procedures-sanctuary-policies-and-denaturalization/

16. https://www.hklaw.com/en/insights/publications/2025/04/irs-and-ice-memorandum-of-understanding-will-drive-tax

17. https://www.gtlaw-insidebusinessimmigration.com/department-of-justice/doj-civil-division-prioritizes-denaturalization-in-new-enforcement-memo/

18. https://www.crowell.com/en/insights/client-alerts/whats-old-is-new-again-the-expansion-of-sharing-tax-information-and-the-effect-on-employment-and-immigration-cases

19. https://www.wilmerhale.com/en/insights/client-alerts/20250613-doj-civil-division-issues-enforcement-priorities-memorandum

20. https://www.mayerbrown.com/en/insights/publications/2025/06/doj-civil-division-announces-five-enforcement-priorities

21. https://www.americanimmigrationcouncil.org/blog/ice-irs-data-sharing-agreement-court/

22. https://lawblogs.uc.edu/ihrlr/2025/05/29/from-taxpayer-to-target-understanding-the-consequences-of-irs-data-sharing-with-ice/

23. https://www.visalawyerblog.com/trump-administration-reveals-irs-deal-with-ice-to-aid-in-mass-deportations/

24. https://forumtogether.org/wp-content/uploads/2025/05/IRS-ICE-Immigration-Data-Sharing-Agreement-Explainer.pdf

25. https://www.foley.com/insights/publications/2025/10/irs-permitted-to-share-tax-data-with-ice-considerations-for-employers/

26. https://files.epi.org/uploads/IRS_ICE_MOU-April-2025.pdf

27. https://www.justice.gov/archives/opa/press-release/file/1060906/dl?inline=

28. https://forumtogether.org/article/denaturalization-fact-sheet/

29. https://www.govinfo.gov/content/pkg/USCOURTS-flsd-1_18-cv-21835/pdf/USCOURTS-flsd-1_18-cv-21835-0.pdf

30. https://www.nytimes.com/2018/07/23/us/denaturalize-citizen-immigration.html

31. https://www.justice.gov/civil/media/1404046/dl?inline

32. https://taxprofblog.aals.org/2025/11/22/ice-and-the-irs-updates-after-court-filings/

33. https://taxpolicycenter.org/taxvox/new-ice-irs-data-sharing-agreement-has-three-problems

34. https://onlabor.org/the-irs-ice-deal-threatens-all-workers/

35. https://www.epi.org/policywatch/ice-and-irs-reach-agreement-to-share-taxpayer-information-of-suspected-undocumented-immigrants/

36. https://fedscoop.com/judge-blocks-irs-ice-data-sharing-agreement/

37. https://www.foxrothschild.com/events/criminal-tax-employment-tax-enforcement-immigration-denaturalization

38. https://news.bloomberglaw.com/us-law-week/falsifying-a-tax-return-can-cost-your-citizenship-under-trump

39. https://www.forbes.com/sites/virginialatorrejeker/2025/09/08/uscis-updated-view-citizenship--denaturalization-tax-compliance--moral-character/

40. https://globalreferral.group/denaturalization-could-open-the-door-the-u-s-exit-tax/

41. https://www.imidaily.com/north-america/doj-now-using-past-tax-mistakes-to-strip-us-citizenship/

42. https://thehill.com/opinion/immigration/5703262-denaturalization-legal-ethical-issues/

43. https://news.bloombergtax.com/tax-insights-and-commentary/tax-expatriations-may-result-from-denaturalization-initiative

44. https://truthout.org/articles/trump-administration-sets-goal-to-denaturalize-thousands-of-us-citizens-in-2026/

45. https://www.npr.org/2025/06/30/nx-s1-5445398/denaturalization-trump-immigration-enforcement

46. https://www.youtube.com/watch?v=I5bTXKFirrY47.

“Perrigo v. United States: District Court Backs Pharmaceutical Taxpayer on Economic Substance and Transfer Pricing”

In late January 2026, the Western District of Michigan entered final judgment awarding Perrigo roughly 89 million dollars in tax refunds after rejecting the IRS’s attack on the company’s cross‑border omeprazole structure. The decision, following a detailed September 2025 opinion, offers rare, taxpayer‑friendly guidance on both the economic substance doctrine and Section 482 discounted cash‑flow transfer pricing.

What happened in Perrigo?

Perrigo, a global OTC manufacturer, partnered with unrelated Israeli company Dexcel to bring a generic OTC omeprazole product to the U.S. market under a 2005 supply and distribution agreement. In 2006, Perrigo shifted the contract rights from a U.S. affiliate (L. Perrigo Company, “LPC”) to a disregarded LLC owned by an Israeli partnership, then subcontracted U.S. distribution back to LPC, as part of a broader globalization initiative.

Years later, the IRS audited 2009–2012 and argued that:

· The intercompany assignment lacked economic substance and should be ignored, and

· In the alternative, Section 482 allowed the IRS to reallocate virtually all the Israeli entity’s income back to the U.S. entity using an ex‑post DCF analysis.

Perrigo paid the asserted liabilities and filed a refund suit; the court ultimately sided largely with Perrigo, culminating in the January 27, 2026 final judgment.

Economic substance: more than just tax savings

The court found that the contract assignment had real economic substance and was not a sham, even though tax minimization was an important driver. Several facts carried the day:

· The restructuring was part of a company‑wide globalization strategy for its growing international business, not a one‑off tax play.

· Perrigo sought and followed sophisticated professional advice in designing the structure.

· Evidence supported that the assignment actually occurred in 2006, notwithstanding later‑executed documentation with retroactive effective dates, which the court viewed as common in large multinationals.

The IRS emphasized that the Israeli LLC had minimal employees and thin capitalization at the outset, arguing it could not realistically bear risk or perform substantive functions. The court rejected that narrative, concluding that enough risk and responsibility were genuinely shifted to sustain the transaction under the common‑law economic substance and sham‑transaction doctrines (the case did not apply codified section 7701(o)).

Section 482: ex‑ante vs. ex‑post DCF

On the transfer‑pricing side, the court took direct aim at the government’s Section 482 methodology. The IRS expert priced the assignment using a DCF method heavily grounded in ex‑post information and sought a royalty equivalent of about 21.5 percent, effectively pulling back nearly all of the foreign affiliate’s income.

The court instead endorsed Perrigo’s basic DCF approach, with modifications, stressing that:

· Arm’s‑length pricing must be determined on an ex‑ante basis—using information known or reasonably knowable at the time of the transaction.

· Financial projections prepared for non‑tax business purposes as of November 2006 were an appropriate starting point.

· Ex‑post actual distribution costs and differentiated discount rates were not appropriate inputs in this context.

After the court’s adjustments (including rejecting fully loaded actual distribution costs and multiple discount rates), the resulting implied royalty was about 11.12 percent—roughly double Perrigo’s litigating position of 5.25 percent, but still far closer to the taxpayer than to the Service. The court described the government’s Section 482 position as arbitrary and capricious.

Practical takeaways for multinationals

For tax directors and advisers, Perrigo offers several concrete lessons:

· Economic substance is still about facts and narrative: a well‑documented business strategy, contemporaneous advice, and real allocation of risks and responsibilities can overcome aggressive sham‑transaction theories, even when tax is a significant motive.

· Documentation timing matters—but is not fatal: back‑dated‑effective intercompany agreements executed within the same fiscal year are not automatically suspect if supported by other credible evidence of when the transaction occurred.

· Build transfer‑pricing files around ex‑ante evidence: projections, board materials, and non‑tax business cases contemporaneous with the transaction will be central when a court is asked to choose between taxpayer and IRS DCF models.

· Expect continued IRS reliance on economic substance and ex‑post data, but be prepared to challenge those approaches using Perrigo as persuasive authority, particularly in the context of intangible‑related restructurings.

If you’d like, I can turn this into a fully polished, client‑branded post for your firm site, including a short “What this means for you” box aimed at U.S.‑based multinationals considering or defending cross‑border restructurings.

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