Possible New FBAR Rules for Green Card Holders?

Pic Courtesy: https://www.pexels.com/photo/gothic-towers-of-uppsala-cathedral-10894301/

Earlier in February 2023, as most tax professionals were buried under the avalanche that is tax season, a Court Case was quietly albeit significantly making its way through the US District Court for the Southern District of California intending to provide a reprieve for green card holders from having to file FBARs if they can be treated as a resident of a foreign country under treaty tie-breaker rules. 

This is a HUGE deal for United States Permanent Residents living abroad if they claim treaty benefits! 

What We Already Know?

Let us go back to my blog post here to quickly review how a green card holder living outside the United States in a country with a favorable tax treaty can apply the benefits of tie-breaker rules to qualify as a resident of that country and therefore file their US taxes as if they are a non-resident of the United States under 26 CFR § 301.7701(b)-7 {link in bibliography}. 

As we know, a Green Card holder is a common use term for a non-citizen of the US whose status is that of a "lawful permanent resident". We also know that a US Citizen, a lawful permanent resident and any non-immigrant visa holder who has fulfilled the  Substantial Presence Test is considered a tax resident of the United States and is required to report their world-wide income and assets. They are therefore required to file the Form 114, Report of Foreign Bank and Financial Accounts. 

This Form 114, is mandated under Title 31 of the United States Code and it comes under the purview of the Bank Secrecy Act under 31 CFR §1010.350  stating that every "US Person" as defined under 26 U.S Code § 7701(b) {links to §'s in bibliography}. The IRS has the authority to oversee compliance of the form.

How Does Aroeste v. United States Change This Rule?

Alberto and Estella Aroeste are United States permanent residents or green card holders living in Mexico. They had been claiming tax treaty benefits for these years. The IRS had audited their tax filings for years 2011 through 2015 and assessed about $ 3 million in taxes & penalties arising from failure to file information returns including FBARs. the scope of the FBAR penalties was later narrowed to years 2012 & 2013. 

They admitted to the non-compliance but disputed the penalties stating that their ability to be treated as a Mexican Resident under the US- Mexico tax treaty did not require that they file FBARs. That this exemption would also disqualify them from being treated as "US Persons". 

The Court Case then went on to describe a "5-Step Process" below that could provide an "Escape Hatch" for certain "United States persons" from filing FBARs: 

1. Under 26 U.S.C. § 7701(b)(6), anyone allowed to permanently reside within the United States by virtue of U.S. immigration laws is a “lawful permanent resident” for tax purposes unless an applicable tax treaty allows that person to be treated as a resident of a foreign country for tax purposes only;
2. Under 26 U.S.C. § 7701(b)(1)(A)(i), any “lawful permanent resident” is a “resident alien”;
3. Under 31 C.F.R. § 1010.350(b)(2), any “resident alien” is a “resident of the United States”;
4. Under 31 C.F.R. § 1010.350(b), Any “resident of the United States” is a “United States person” required to file an FBAR;
5. Therefore, any person allowed to permanently reside in the United States by virtue of U.S. immigration laws must file an FBAR unless that person is entitled to be treated as a resident of a foreign country under a tax treaty. 

The Court concluded that if under the tax treaty, the Aroestes were considered Mexican residents for 2012 & 2013, they would not be obligated to file FBARs. However, if they were considered US residents, they would be subject to the FBAR penalties.

Most tax attorneys and experts believe that the Internal Revenue Service will appeal this case. In recent foreign information rulings, the Court has tended to side with the taxpayer. More in my post here.   

If any of these complex situations apply to you, you should be working with a tax advisor who is an expert in foreign tax compliance.  

Bibliography: Aroeste v. United States 22-cv-682-AJB-KSC, (S.D. Cal. Feb. 13, 2023); 31 CFR § 1010.350; 26 U.S. Code § 7701 ; 31 C.F.R. § 1010.350(b)(2); 26 CFR § 301.7701(b)-7; taxnotes® article. 

---

Consult with an Enrolled Agent for your unique tax needs and make sure your questions are answered. Always remember to read my disclaimer here. If you have any more questions regarding this or other tax matters, contact me via my website www.mntaxbiz.com.