Reports of Foreign Financial and Bank Accounts (FBAR) have gained prominence since the Department of Justice began investigating the accounts of Swiss banks, starting with UBS almost a decade ago. Who must file FBARs? Many people who own foreign accounts hail from other countries, and the answer to this question is not always obvious.
Understanding the Requirements
Generally speaking, a U.S. person must file an FBAR if he has a financial interest in or signatory or other authority over (in other words, if he owns or can control) any foreign account that has a balance exceeding $10,000 in the aggregate at any point during the year.
According to the FBAR instructions, U.S. persons include U.S. citizens and U.S. residents. Similarly, the FBAR regulations state that a U.S. person is a citizen of the United States or a resident of the United States, meaning “an individual who is a resident alien under 26 USC 7701(b) and the regulations thereunder.”
Identifying a U.S. citizen is a relatively straightforward affair. Identifying a U.S. resident, on the other hand, can require more in-depth analysis. The FBAR instructions provide that a U.S. person is “an alien residing in the United States. To determine if the filer is a resident of the United States apply the residency tests in 26 USC section 7701(b).” Under those residency tests, a non–U.S. citizen can be a U.S. person (in tax parlance, a “resident alien”) if she satisfies any one or more of three tests: 1) the green card test; 2) the substantial presence test; or 3) the first-year election.
Under the green card test, an individual is a resident alien if he is a lawful permanent resident of the United States at any time during the year. Thus, the FBAR filing obligations apply to a person who holds a green card at any point during the year, unless he invokes the benefits of a tax treaty under which he is treated as a resident of another country.
Under the substantial presence test, an individual is a resident alien if she is present in the United States for 1) at least 31 days in the current year and 2) at least 183 days in the three-year period that includes the current year (counting each day of presence in the current year, one-third of each such day in the preceding year, and one-sixth of each such day in the year before that). Days of presence are excluded for certain foreign government–related individuals, teachers, students, professional athletes, or visitors who intend to leave but are unable to do so for medical reasons. Furthermore, under the “closer connection exception,” a non–U.S. citizen who meets the substantial presence test may still be considered a nonresident alien for tax purposes if she 1) is present in the United States for fewer than 183 days during the current year, 2) maintains a tax home in another country during such year, and 3) has a closer connection during such year to that foreign country than to the United States. Thus, the FBAR filing obligations apply to a person who meets the substantial presence test and does not meet the closer connection exception described above.
Under the first-year election, an individual is a resident alien if he elects to be treated as such during his first year in the United States. Thus, the FBAR filing obligations apply to a person who elects to be treated as a U.S. person for tax purposes under Internal Revenue Code (IRC) section 7701(b)(4)(B) and Treasury Regulations section 301.7701(b)-4(c)(3), but only for the period covered under the election. According to the preamble to the FBAR regulations, “FinCEN [Financial Crimes Enforcement Network] believes that individuals who elect to be treated as residents for tax purposes under section 7701(b) should file FBARs only with respect to foreign accounts held during the period covered by the election.”
This analysis comes with an additional wrinkle. Some non–U.S. citizens elect under IRC section 6013 to be treated as U.S. persons for purposes of filing a joint income tax return with their U.S. citizen or resident alien spouses. Although it appears to be similar in effect, this election is distinct from the first-year election. Individuals electing to be treated as U.S. persons under IRC section 6013 are U.S. persons for income tax and wage withholding purposes, but are they U.S. persons for FBAR purposes?
The answer lies in the preamble to the FBAR regulations, which states: “FinCEN wishes to clarify that the determination of whether an individual is a United States resident should be made without regard to elections under section 6013(g) or 6013(h) of the Internal Revenue Code.” The IRS reiterates this view in Internal Revenue Manual 126.96.36.199.1.2 (Nov. 6, 2015). It is therefore imperative to distinguish between the first-year election to be treated as a U.S. person and the election to be treated as a U.S. person in order to file a joint return. If a person is not a lawful permanent resident, is not substantially present in the United States, and has not made a first-year election, but has made an election under IRC section 6013(g) to be treated as a U.S. person for purposes of a filing a joint return, she does not have to file an FBAR. It is important to note that despite not having an FBAR filing obligation, a person in this situation may still be required to file IRS Form 8938.