Abandoned FBAR Appeal May Limit Green Card FBAR Fines

Abandoned FBAR Appeal May Limit Green Card Penalties

How an Abandoned FBAR Appeal May Limit IRS Enforcement

Unlike several other international information reporting forms such as Form 8938, Form 3520, and Form 5471, the FBAR is not an IRS tax form but is rather a FinCEN Form. Therefore, the rules involving the FBAR are found in Title 31 (Money and Finance) of the United States Code and not Title 26 (Internal Revenue Code) — although the IRS is tasked with enforcement of FBAR violations. While the FBAR has been around for more than 50 years, it has only been in the past 10 to 20 years that the IRS has increased enforcement for FBAR compliance, which has led to many taxpayers being assessed fines and penalties. Taxpayers who want to challenge an FBAR penalty unfortunately are not able to go to Tax Court since it is not a tax form and have to file a lawsuit in Federal court. While typically taxpayers are required to pay the tax first to challenge the IRS in federal court, a case a few years back (Mendu) took the position that taxpayers shouldn’t have to pay the penalty first since it is the IRS enforcing the penalty — but the taxpayer does not get an opportunity to challenge it at Tax Court. Further limiting the IRS’s domination over FBAR penalties was the fact that the Supreme Court in Bittner limits the IRS’s ability to assess non-willful penalties. With the recent case of Aroeste, the IRS may be limited in enforcing FBAR filing requirements against Green Card Holders who live abroad.

Aroeste was a Green Card Holder Living Abroad in Mexico

In this case, the taxpayer resided overseas as a green card holder and would otherwise qualify under the tax treaty to be treated as a non-resident alien for tax purposes. The general rule is that when a taxpayer qualifies as a non-resident alien for tax purposes they are only taxed by the United States on their US-sourced income — not their worldwide income. Still, the IRS takes the position that taxpayers are required to report international information reporting forms even if they are non-resident aliens for tax purposes — although in the recently proposed foreign trust regulations, there is the potential that taxpayers may be able to avoid filing Form 3520 if they qualify under the treaty as a non-resident alien.

Even though the Taxpayer would qualify under the treaty to be treated as a non-resident alien, the IRS still enforced fines and penalties against the taxpayer for non-willful FBAR violations.

IRS Takes the Position Aroeste Should have Filed

A few years ago, the Internal Revenue Service published Publication 5569 which helps explain FBAR reporting and enforcement protocols. In the publication, the IRS uses an example of a Green Card Holder living abroad to explain why taxpayers still have to file an FBAR even if they live overseas as a green card holder in qualify under a treaty could be treated as a non-resident alien:

As provided in Publication 5569: 

• • • “Example: 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.”

District Court Rules in Favor of Taxpayer

In this case, in the District Court of California, the judge ruled in favor of the taxpayer and against the US government on the issue of whether the taxpayer was required to file the FBAR.

As provided in the Court’s ruling:

• • • “Specifically, the Court finds Aroeste is a United States person, but ceased to be treated as a lawful permanent resident of the United States because he commenced to be treated as a resident of Mexico under the Treaty, did not waive the benefits of such Treaty, and notified the Secretary of the commencement of such treatment. Thus, Aroeste is not subject to FBAR penalties. The Government must discharge Aroeste’s liability for penalties still outstanding for the non-filing of a FBAR for the years 2012 and 2013 pursuant to 31 U.S.C. § 5321, totaling $21,851.76, and must refund Aroeste’s payment of $3,004.”

Notice of Appeal Abadndoned

After this ruling was issued, The US government filed a notice of appeal showing it had every intention to appeal the court’s rulings, but ultimately the government dismissed its appeal with prejudice (meaning it could not reignite the same appeal at a future date)

What does this Case Mean?

This ruling puts the U.S. government in a precarious position when it comes to enforcement of FBAR against green card holders who qualify under a treaty to be treated as a foreign person for tax purposes. It is unknown why The US government specifically dismissed its appeal although presumably, they did not want to lose again and provide some taxpayers with a stronger position to challenge FBAR. Taxpayers who reside overseas in a treaty country and may have made or qualify to make an election under Form 8833 to be treated as a non-resident may want to consider the pros and cons of this type of approach — noting that at the current time, the IRS would probably still challenge any taxpayer who did not file an FBAR based on these arguments.

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.