- 1 A Surprising FBAR Victory May Be Cut Short
- 2 Is the FBAR an IRS Form?
- 3 Non-Resident vs Resident for FBAR
- 4 Non-Resident FBAR Filing Requirements
- 5 Resident FBAR Filing Requirements
- 6 What is at Stake in Aroeste?
- 7 Late Filing Penalties May be Reduced or Avoided
- 8 Current Year vs Prior Year Non-Compliance
- 9 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 10 Need Help Finding an Experienced Offshore Tax Attorney?
- 11 Golding & Golding: About Our International Tax Law Firm
A Surprising FBAR Victory May Be Cut Short
The FBAR Refers to Foreign Bank and Financial Account Reporting (aka FinCEN Form 114). And, for several years now, the FBAR has been in the news with countless articles being written on issues involving the difference between willfulness and non-willfulness and how non-willful penalties should be issued. In 2023, even the Supreme Court got in on the action in the case of Bittner, in which the court issued a very taxpayer-friendly ruling that limits the IRS’ ability to issue non-willful FBAR penalties. Recently, there was a new surprisingly taxpayer-friendly California District Court FBAR ruling in the case of Aroeste. In that case, the District Court held that since the taxpayer qualified under the treaty to be treated as a foreign person for tax purposes, the FBAR requirement should not apply — and his penalties were abated.
Now, in a recent January 2024 filing, the US government has signaled it will appeal that ruling.
Is the FBAR an IRS Form?
From the outset, it is important to note that the FBAR is not technically an IRS tax form. Instead, it is a U.S.C. Title 31 form — which falls under Money and Finance and not the Internal Revenue Code (Title 26). The reason why the IRS gets involved in FBAR cases is because back in 2003 the IRS was tasked with enforcement of non-compliance with FBAR (FinCEN Form 114). Since then, and especially in recent years, the Internal Revenue Service has issued significant fines and penalties against taxpayers who have not been compliant.
Non-Resident vs Resident for FBAR
The key issue for Aroeste hinges on the definition of a U.S. person for tax purposes. More specifically — at least for FBAR reporting purposes — is the distinction between being a Non-Resident Alien (NRA) vs a U.S. Tax Resident who may qualify as a foreign person for tax purposes under a U.S. tax treaty.
Non-Resident FBAR Filing Requirements
Technically, only U.S. persons (individuals, trusts, and entities) are required to file the FBAR. In general, even non-resident aliens who made elections to file their tax returns as U.S. persons are not required to file the FBAR. Stated another way, when an NRA makes an election to file their tax return as a U.S. person, this does not make them a U.S. person for FBAR filing purposes.
As provided by the IRS:
“FinCEN clarified in the preamble to the regulations that an election under IRC 6013(g), Election to Treat Nonresident Alien Individual as Resident of the United States, or IRC 6013(h), Joint Return, Etc., for Year in Which Nonresident Alien Becomes Resident of United States, is not considered when determining residency status for FBAR purposes.”
Resident FBAR Filing Requirements
For taxpayers who are U.S. persons, the IRS takes the position that they are still required to file the FBAR even if they live overseas, such as U.S. expats. In the recent case of Aroeste, the question arose of whether a taxpayer who is a U.S. Resident for tax purposes and qualifies as a foreign resident under a treaty would still be considered a U.S. person for FBAR filing purposes.
It is clear that the IRS takes the position that they would still have to file the FBAR — and in fact, in the IRS’ most recent FBAR publication (5569) they provide an example similar to the facts in Aroeste:
“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.”
What is at Stake in Aroeste?
The outcome of Aroeste will have a far-reaching impact on FBAR filing. That is because many lawful permanent residents who reside outside of the United States and in treaty countries make annual treaty elections with Form 8833 to be treated as foreign persons for tax purposes. This may mean that taxpayers who qualify for such treaty elections will not have to file an FBAR.
And of course, there will be the influx of filings by Taxpayers who may have previously been penalized and now seek to abate the penalties that were previously issued against them.
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.
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.