Form 114 US Person Definition | FBAR Tax Lawyer
FinCEN Form 114 US Person definition is a highly important component of FBAR and US international tax compliance. In this essay, I will discuss in detail the FinCEN Form 114 US Person definition and highlight some common issues that arise with respect to this definition.
Form 114 US Person Definition: What is Form 114 and What is its Relation to FBAR
FinCEN Form 114, Report of Foreign Bank and Financial Accounts (used to be TD F 90-22.1) is commonly known as FBAR, the Report of Foreign Bank and Financial Accounts. This form is used by US persons to report to the IRS a financial interest in or signatory authority over foreign financial accounts. This is one of the most important forms that US taxpayers need to file in order to comply with their US international tax law requirements. A failure to file an FBAR when required may result in an imposition of severe IRS penalties.
Form 114 US Person Definition: Only US Persons are Required to File FBARs
It is important to understand that only “US Persons”, as defined by the IRS for the FBAR compliance purposes, are required to file FBARs. What is the legal basis for this and where does this term “US Person” come from?
BSA (Bank Secrecy Act) §5314(a) states that the Secretary of the Treasury shall require a “resident or citizen of the United States or a person, in, and doing business in, the United States, to keep records, file reports”. This seems like the FBAR requirement may apply a hugely broad group of people (far beyond US residents and citizens), especially if one takes into account that the “United States” is defined to include all 50 states, the District of Columbia, the territories, and insular possessions of the United States and the Indian lands as defined in the Indian Gaming Regulatory Act. 31 CFR §§1010.350(b) and 1010.100(hhh). The territories and possessions of the United States include American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the US Virgin Islands (see BSA Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts (FinCEN Form 114), p. 5.).
Despite this initial impression, the actual definition that we use today is much smaller than what is mandated by §5314(a) and it is thanks to BSA §5314(b). BSA §5314(b) states that the IRS has the discretion to interpret what this provision actually means and who is exempt from the FBAR filing requirement.
Armed with this authority, on February 26, 2010, the IRS issued proposed regulations, which for the first time defined that only “US Persons” needed to file FBARs. This is why we discuss the definition of a US Person when we discuss who is required to file FBARs.
Form 114 US Person Definition: Who is a Person
Before we turn to the definition of a “US Person”, we need to discuss who is considered to be a “Person” for the Form 114 purposes. Under 31 CFR §1010.350(b), a “person” includes: natural persons (US citizens and US residents) and entities, including but not limited to: corporations, partnerships, trusts, or limited liability companies formed under the laws of the United States. This definition includes entities disregarded for tax purposes (as long as they are US persons).
Additionally, pension and welfare plans are also US entities that need to file FBARs. See Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 76 Fed. Reg. 10, 234 (Feb. 24, 2011); IRM 188.8.131.52.1.3(3) (06-24-21). Even though the regulations do not mention it, the Form 114 instructions expand the “person” definition to estates. It is important to note that, according to page 6 of the FBAR electronic filing instructions, an executor of an estate has a fiduciary obligation to file FBAR on behalf of the estate and on behalf of the decedent in the year following the decedent’s death.
Form 114 US Person Definition: General Definition of a US Person
The definition of a US person includes the following categories of persons:
(1) US citizens;
(2) residents of the United States;
(3) an entity, such as a corporation, partnership and a limited liability company, created or organized in the United States or under the laws of the United States;
(4) a trust formed under the laws of the United States; and
(5) an estate formed under the laws of the United States.
Let’s analyze each of these categories in more detail.
Form 114 US Person Definition: US Citizens
All US citizens are subject to the FBAR filing requirement, even minor children. The general definition of a US citizen is contained in 8 USC §1401.
Form 114 US Person Definition: US Residents
All US residents are subject to FBAR filing requirements. Pursuant to 31 CFR §1010.350(b)(2), the definition of “US residents” follows the definition of a resident alien under §7701(b) with one modification – the definition of the “United States” still follows 1010.100(hhh) described above. Also, see IRM 184.108.40.206.1.2 (11-06-15).
There are three classes of US residents: (1) US permanent residents; (2) persons who satisfied the Substantial Presence Test; and (3) persons who elected to be treated as US residents. Let’s discuss each of these classes of US residents in more detail.
1. US Permanent Residents (the “Green Card Test”)
A person is considered a US person if at any time during the calendar year the person has been lawfully granted the privilege of residing permanently in the United States under the immigration laws and such status has not been revoked. 26 USC §§7701(b)(1)(A)(i) and 7701(b)(6).
One of the most common issues occurs when a person has been issued a green card and he has not yet physically entered the United States. In such cases, this person would not be considered as a resident alien until he actually physically enters the United States. 26 USC §7701(b)(2)(A)(ii). Once he enters the country, however, he becomes a US permanent resident and continues to be one until the green card is revoked or considered abandoned either judicially or administratively. See 26 CFR §301.7701(b)-1(b)(2) and 26 CFR §301.7701(b)-1(b)(3).
2. Substantial Presence Test
Even if a person is not a US permanent resident, he may still be considered a US Person if he meets the IRC §7701(b)(3) substantial presence test. In reality, there are two substantial presence tests.
The first substantial presence test is met if a person is physically present in the United States for at least 183 days during the calendar year. 26 USC §7701(b)(3). The second substantial presence test is met if two conditions are satisfied: (1) the person is present in the United States for at least 31 days during the calendar year; and (2) the sum of the days on which this person was present in the United States during the current and the two preceding calendar years (multiplied by the fractions found in §7701(b)(3)(A)(ii)) equals to or exceeds 183 days. 26 USC 7701(b)(3)(A).
Let’s focus on the mechanics of the second calculation. The way to determine whether the 183-day test is met is to add: (a) all days present in the United States during the current calendar year (i.e. the year for which you are trying to determine whether the Substantial Presence Test is met) + (b) one-third of the days spent in the United States in the year immediately preceding the current year + (c) one-sixth of the days spent in the United States in the second year preceding the current calendar year. See 26 USC §7701(b)(3).
Note that the Internal Revenue Code (IRC) provides a number of important exceptions to the Substantial Presence Test. In this article, I am just providing the general rule.
3. Election to be Treated as a US Resident Alien
A person who makes the first-year election to be treated as a US resident alien pursuant to §7701(b)(4) is a US Person for FBAR purposes. Note, however, that this rule applies only to elections made under this provision. A nonresident alien spouse of a US person who makes an election under the IRC §§6013(g) and 6013(h) to be treated as a resident alien will not be considered as a US person for the FBAR compliance purposes. This is an important divergence between the income tax and FBAR rules.
Form 114 US Person Definition: US Entities, Trusts & Estates
Entities (corporations, partnerships, limited liability companies, et cetera), trusts and estates created, organized or formed in the United States or under the laws of the United States are generally considered to be US Persons for FBAR purposes.
A foreign subsidiary of a US parent will not have any FBAR obligations as long as it is not formed, created or organized under the laws of the United States. However, the US parent company may be required to include the foreign accounts of its foreign subsidiary on its FBAR. 31 CFR §1010.350(e)(2)(ii).
Moreover, a foreign entity organized in and under the laws of a foreign country will not be subject to the FBAR requirements even if it elects to be treated as a US entity for US tax purposes. See Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 76 Fed. Reg. 10, 234-238 (Feb. 24, 2011).
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