Can Treaty Country Green Card Holders Escape Filing FBAR?

Can Treaty Country Green Card Holders Escape Filing FBAR?

Taxpayer Prevails on FBAR Filing Treaty Election

When a Taxpayer is considered a U.S. person, they are required to report their worldwide income on their US tax return. They are also required to report their global assets on various international information reporting forms, such as the FBAR (Foreign Bank and Financial Account Reporting Form aka FinCEN Form 114), FATCA (Foreign Account Tax Compliance Act, aka Form 8938) Form 3520 Foreign Gift and Trust Reporting – and several other invasive IRS tax forms. When a taxpayer is a resident of a treaty country, they may qualify to make a treaty election that they want to be treated as a foreign resident for U.S. tax purposes, in a situation where they have significant contacts with a foreign country.  If a person is considered a foreign resident for tax purposes under a treaty election, are they exempt from filing the FBAR?

The IRS Says a Treaty Election Does Not Eliminate FBAR

The IRS’ position is that even if a US person qualifies to make a treaty election to be treated as a foreign resident for tax purposes, they would file a form 1040-NR instead of IRS Form 1040 — they are still required to file the FBAR.  Recently, in 2022, the US government updated its FBAR reference guide while the Practice Unit provides the following example:

FBAR Practice Unit

• • • “CAUTION: U.S. tax treaty provisions do not affect residency status for FBAR purposes.

      • The federal tax treatment of a USP does not determine whether the person must file an FBAR. FBARs are required under the BSA provisions of Title 31 of the United States Code (USC) not under any provisions of Title 26 of the USC. Entities that are USP and are disregarded for tax purposes may be required to file an FBAR. This statement is derived from an example provided by IRM section 4.26.16.2.1(2) Example (11-06-2015).”

FBAR Publication 5569

• • • “Kyle is a permanent legal resident of the U.S. Kyle is a citizen of the United Kingdom. Under a tax treaty, Kyle is a tax resident of the United Kingdom and elects to be taxed as a resident of the United Kingdom. Kyle is a U.S. person for FBAR purposes. Tax treaties with the U.S. do not affect FBAR filing obligations.“

2023 Litigation Update (Aroeste v US)

There is currently a very important case brewing at the federal court level (Aroeste v US) involving a nuanced FBAR foreign account penalty conundrum. In general, there are three categories of individual taxpayers who have to file FBAR: U.S. Citizens, Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test.  

But what happens if a taxpayer resides overseas and makes a treaty election to be treated as a foreign person so that they are not considered a US person for tax purposes? I

n other words, if someone is a permanent resident of the United States but claims treaty benefits to be treated as a foreign person, are they still considered a US person for FBAR filing purposes?  This is the challenge taxpayer makes as to whether the US/Mexico tax treaty will overrule the IRS’ position on treaty elections and FBAR.

2024 Case Update, Appeal Dismissed (Aroeste v US)

Recently, the U.S. made a motion to dismiss their appeal, with prejudice. This secures a victory for Aroeste but will make it more challenging for future taxpayers to rely on the case in the future.

United States’ Motion to Dismiss Appeal

• • • Pursuant to Rule 42(b) of the Federal Rules of Appellate Procedure, the United States, the appellant in Case No. 24-338, through its counsel, moves that:

      • (1) its appeal in Case No. 24-338 be dismissed with prejudice;

      • (2) each party should bear their own costs and fees associated with this appeal;

      • (3) an order of dismissal be entered by the Clerk of this Court;

      • (4) notification of such order be transmitted to the Clerk of the United States District Court for the Southern District of California; and

      • (5) copies be transmitted to each of the parties. The undersigned emailed counsel for the appellee notice of this motion on May 2, 2024, but has not yet received their views on the relief requested.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.