updated 2:28 PM CEST, May 24, 2023

'FBAR escape hatch' for Green Card holders seen in little-noticed FBAR ruling last month

Little noticed last month – around two weeks before the U.S. Supreme Court's landmark ruling on Feb. 28 on how penalties for "non-willful" Report of Foreign Bank and Financial Accounts (FBAR) violations should be determined – a U.S. District Court in California issued another major ruling involving FBARs.

And like the Supreme Court ruling, the District Court's ruling found in favour of the taxpayer in question, although Virginia La Torre Jeker, a Dubai-based tax professional who is known globally for her articles on U.S. expat tax issues, has said the "taxpayer-friendly" case is "sure to be appealed by the undoubtedly furious IRS."

(After studying the issue further, La Torre Jeker now says, it's possible that the IRS might think that it "has too much at stake to keep pursuing this one in court," but, she then adds, "this is definitely a case to watch.")

The reason for the probable IRS ire, according to La Torre Jeker, is what she calls the decision's acknowledgement of the possibility that a U.S. Green Card-holder who is tax resident in another country may be potentially able to use their Green Card status to trigger a "tie-breaker claim" that exists in the income tax treaty their country of residence has with the United States. 

The Aroeste case  (Aroeste v. United States, Case No. 22-cv-682-AJB-KSC) is one of two significant FBAR cases that were made public last month, but which haven't received much publicity, possibly because of the focus on the Bittner case, which was decided and hit the headlines on the last day of February. 

The other less-well-noticed case involved a final settlement of an FBAR complaint involving Paul Manafort, a former campaign manager for Donald Trump.

Of the two less-well-publicized cases, Aroeste v. United States will be seen as the more important, in terms of its significance for FBAR cases going forward, because in it, the court effectively states that FBAR filing may not be required if the taxpayer in question is a Green Card-holder (rather than a U.S. citizen) who is resident, for tax purposes, in another country, which has an income tax treaty with the U.S.  

In other words, explains La Torre Jeker, in a recent blog posting on the Aroeste case (headed "Treaty Tie-Breaker is an FBAR Escape Hatch, Says the Court!"), "such a 'dual resident' might qualify as a resident of the other country, under a tie-breaker rule contained in the treaty."

She added, in her posting: "After applying the treaty rules, if the individual qualifies as a 'resident' of the foreign country, the individual may compute his U.S. tax liability for all or part of a tax year as if he was a non-resident alient of the U.S., using Form 1040-NR."

However, La Torre Jekker emphasized the complexity of such Green Card FBAR cases – which she noted that the court in the Aroeste matter also acknowledged – and the fact that an appeal in the Aroeste matter was certain to follow.

"Let's see what that Ninth Circuit has to say," she concluded.

"It will be recalled that the Ninth Circuit has been taxpayer-friendly when it comes to FBAR penalties."

(To listen to La Torre Jeker discussing the Aroeste case in a podcast with John Richardson, click here.

The Manafort settlement  

According to a Florida-based non-profit website known as the Florida Bulldog, the Manafort FBAR case emerged last year, when the U.S. Justice Department claimed that the Florida resident had failed to file FBARs (also known as Form 114s) in 2013 and 2014 for various accounts he had held at the time in Cyprus, St. Vincent and the Grenadines, and the UK. (Other publications, including the Washington Post, also carried the story, crediting the Florida Bulldog for having had it first.)

According to the Florida Bulldog, paperwork dated Feb. 22 and filed in the U.S. District Court for the Southern District of Florida revealed that Manafort had agreed to pay US$3.2 million to settle "federal charges that he failed to disclose foreign bank accounts he used to funnel 'millions of dollars' to himself, without paying income taxes". 

The publication reported that the agreement followed "months of settlement discussions" and had been approved by Miami US. District Judge Rodolfo Ruiz in the last week of February. 

Manafort's lawyer, Fort Lauderdale-based Jeff Neiman of Neiman Rashbaum & Pineiro, didn't provide a comment to the Florida Bulldog, but the Washington Post quoted him as having "confirmed the settlement in a brief telephone interview" and adding that his client was 'happy to have this chapter of his life behind him'. 

Bank Secrecy Act of 1970

FBARs have their origins in the so-called U.S. Bank Secrecy Act of 1970, which obliges any U.S. taxpayer who holds US$10,000 or more at any point during the tax year in one or more non-U.S. banks or financial institutions to report this information to the U.S. Treasury (via the Financial Crimes Enforcement Network, or FinCEN), or else face potentially significant penalties.

It was some years after 1970, however, before multi-million-dollar FBAR cases began making headlines in U.S. district courts around the country. 

FBARs have become known for their eyewatering penalty assessments, the largest of which is still said to have been the one for US$100 million that was given to a University of Rochester, New York professor named Dan Horsky in 2016.