In my practice, I often receive calls from people who are confused about their FBAR obligations. A recent call raised an important issue of whether a tax treaty election may affect one’s FBAR obligations. In this brief article, I would like to address this issue of tax treaty election FBAR obligations.
Tax Treaty Election FBAR Obligations: What is 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.
Tax Treaty Election FBAR Obligations: US Person
In another article, I already addressed in great detail the definition of a US Person. Here, I will just briefly state the categories of persons who fall under the definition of a US Person for FBAR purposes:
(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.
Tax Treaty Election FBAR Obligations: US Person & Tax Treaty Election
Now, we have come to the critical point and the main subject of this essay: would a tax treaty election to be treated as a resident of another country under a valid income tax treaty affect one’s FBAR obligations? In other words, can you elect out of being a US Person by making a tax treaty election?
The main general answer is no – a tax treaty does not and cannot affect FBAR filing obligations. See Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 76 Fed. Reg. 10, 234 & 238 (Feb. 24, 2011); also, IRM 188.8.131.52.1.2(6) (11-06-15). If a person meets the definition of a resident alien under IRC §7701(b) (i.e. he meets the FBAR definition of a US Person), even if he is not treated as a resident for income tax purposes due to an election under an income tax treaty, he will still be subject to FBAR.
The main exception to this rule would be an abandonment of US permanent residency through a tax treaty election, because it would affect the definition of a resident alien under IRC §7701(b).
Contact Sherayzen Law Office for Help with Your FBAR Compliance and FBAR Voluntary Disclosure
Sherayzen Law Office specializes in FBAR compliance and Offshore Voluntary Disclosures that involve prior FBAR noncompliance. We have helped hundreds of US taxpayers around the world with their FBAR issues, and we can hep you!