Can a Treaty Election Help Eliminate FBAR (FinCEN Form 114)?
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Treaty Election and FBAR (FinCEN Form 114)
Update to our 2022 version of this article:
When a Taxpayer is considered a US person, that means that 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 US tax purposes, in a situation in which 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 in order to be treated as a foreign resident for tax purposes, so they would file a form 1040-NR instead of a 1040—they are still required to file the FBAR.
Recently, in 2022, the US government updated its FBAR reference guide and Practice Unit provided the following example:
FBAR Practice Unit
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“CAUTION: U.S. tax treaty provisions do not affect residency status for FBAR purposes.
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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).”
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FBAR Publication 5569
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“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.“
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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: US 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? In 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.
Missed Prior FBAR Filing?
If a person failed to file FBARs in prior years, they are not out of luck. The US government has developed various international information tax amnesty programs, collectively referred to as offshore voluntary disclosure. Some of the more common programs include Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures –– but there are other options available as well.
International Tax and Offshore Compliance
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.