Definition of “U.S. person” for FBAR (Report on Foreign Bank and Financial Accounts) Purposes
Since October of 2008, the definition of a “U.S. person” has been going through a turbulent phase of uncertainty with periodic expansions and retractions. The pre-2008 FBAR instructions (dating back to July of 2000 version) defined the “U.S. person” broadly as: “(1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.” See IRS Announcement 2010-16.
Two important features of this definition stand out. First, the term “person” is defined to include not only individuals, but also virtually any type of business entity, estate or trust. 31 C.F.R. §103.11(z) Even a single-member LLC, which is generally disregarded for tax purposes, may be classified as a U.S. person because it has a separate juridical existence from its owner. A partnership or a corporation created or organized in the United States is considered to “domestic” under 26 U.S.C. §7701(a)(4). Second, the definition of who should be considered as a U.S. resident is interpreted under 26 U.S.C. §7701. Under 26 U.S.C. §7701(b), an individual is a U.S. resident if he meets any of the three bright-line tests: (1) lawful admission for permanent residence to the United States (“green card”); (2) substantial presence in the U.S.: the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days; (3) and first-year election to be treated as a resident under 26 U.S.C. §7701(b)(4). Thus, the definition of a U.S. resident under the tax rules is much broader than the one used in immigration law.
In October of 2008, the IRS revised the FBAR instructions and further expanded the definition of a “U.S. person” by including the persons “in and doing business in the United States.” This revision caused a widespread confusion among tax professionals. The outburst of comments and questions prompted the IRS to issue Announcements 2009-51 and 2010-16, suspending FBAR filing requirement through June of 2010 (i.e. for calendar years 2008 and 2009) for persons who are not U.S. citizens, U.S. residents, and domestic entities. Instead, the tax professionals were referred back to July of 2000 FBAR definition of a “U.S. person.”
In the meantime, in February of 2010, the IRS published new Proposed FBAR regulations under 31 C.F.R. §103. The proposed rules modify the definition of a “U.S. person” as follows: “a citizen or resident of the United States, or an entity, including but not limited to a corporation, partnership, trust or limited liability company, created, organized, or formed under the laws of the United States, any state, the District of Columbia, the Territories, and Insular Possessions of the United States or the Indian Tribes.” 75 Fed. Reg. 8845 (proposed February 23, 2010) (to be codified as 31 C.F.R. 103.24(b)). This definition applies even if an entity elected to be disregarded for tax purposes. Id. The determination of a U.S. resident status is to be done according to 26 U.S.C. §7701(b) and regulations there under, except the meaning of the “United States”(which is to be defined by 31 U.S.C. 103.11(nn)). Id.
Thus, if the proposed regulations will ultimately be codified in their current form, the definition of the “U.S. person” will be slightly broader than that of the July of 2000, but will represent a major regression from October 2008 definition. Nevertheless, based on even existing (July of 2000) definition of the “U.S. person,” the IRS has been able to cast a wide net over U.S. taxpayers, trying to force disclosure of as many foreign financial accounts as possible.