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December 5, 23

NEWS / Taxpayer Beats IRS in Landmark Case on foreign bank reporting for dual residents


In a significant victory for taxpayers with dual residency status, a California federal district court has ruled that certain tax treaty provisions can exempt individuals from the requirement to file a Report of Foreign Bank and Financial Account (FBAR). The case, known as Aroeste v. United States, could have far-reaching implications for taxpayers who maintain financial accounts in both the United States and a foreign country.

FBAR regulations, which stem from the Bank Secrecy Act of 1970, require "United States persons" to file FBARs with the US Treasury's Financial Crimes Enforcement Network (FinCEN) for any foreign financial accounts exceeding $10,000 at any time during the calendar year. The term "United States person" is broadly defined to include United States citizens, residents, and corporations.

In the Aroeste case, the taxpayer was born in Mexico and had lived there his entire life. He also owned a condominium in Florida, which he primarily used for vacation purposes. In 1984, the taxpayer applied for a United States green card, which he has never relinquished.

In 2012 and 2013, the taxpayer had financial interests in or signature authority over 5 foreign accounts based in Mexico. The balance of those accounts exceeded $10,000 for both 2012 and 2013.

Because the taxpayer never filed FBARs for 2012 and 2013, the US Internal Revenue Service (IRS) assessed $100,000 of total FBAR penalties against him (a single non-willful failure to file an FBAR can result in a penalty of up to $10,000). The taxpayer sued the government, arguing that he was not liable for the penalties because he was a resident of Mexico under the United States-Mexico tax treaty.

The court agreed with the taxpayer, finding that the United States-Mexico tax treaty effectively terminated the taxpayer's status as a United States person for purposes of FBAR reporting. The court also rejected the government's argument that dual residents who claim treaty benefits are still subject to FBAR reporting.

Implications

The Aroeste decision is a significant victory for taxpayers with dual residency status. It suggests that taxpayers with dual residency may not be automatically subject to FBAR reporting if they can claim treaty benefits.

Taxpayers with dual residency status should carefully review their tax treaty entitlements to determine whether they are exempt from FBAR reporting. It is worth noting that while FBAR is governed by the Bank Secrecy Act of 1970, there are other reporting requirements that affect foreign bank accounts, such as the Foreign Account Tax Compliance Act (FATCA) of 2010, which require United States taxpayers with foreign financial assets (which include bank and other financial accounts) exceeding $50,000 on the last day of the tax year or $75,000 at any time of the year to file Form 8938 with the IRS. Accounts deemed to be trust would be subject to foreign trust reporting requirements on IRS Form 3520 and 3520-A, while accounts that could be deemed Passive Foreign Investment Companies (PFICs) would need to be reported on Form 8621. Given that the law governing each reporting requirement is different, the court ruling will likely not automatically apply to the other reporting requirements but may be used as a precedent in future cases involving IRS-imposed penalties for failure to file the necessary reporting forms.

Please note that A&M Logos International is not a law firm and does not have authority to provide any legal or tax advice. We can, however, assist you with the preparation of certain tax personal and business tax forms, including US tax residency certification, which is usually required to claim tax treaty benefits abroad. Call us today at (212) 233-7061 or e-mail us at info@apostille.us.



 




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