Failure to File Form 8833 does not Waive the Benefits of the Tie-Breaker Rule of Tax Treaty

In 2023, the district court heard a significant tax case. In "Aroeste v. U.S., 132 AFTR 2d 2023-6577," the U.S. District Court for the Southern District of California addressed several key issues regarding the application of the United States-Mexico Income Tax Convention (the "Treaty") and the requirements for filing Reports of Foreign Bank and Financial Accounts (FBARs). I used a legal AI to help me summarize the case. Let's see what this case is. 

Key Facts:

• Plaintiff: Alberto Aroeste, a Mexican citizen with a U.S. green card.
• Defendant: United States of America.
• Background: Aroeste, who has lived in Mexico his entire life, was assessed FBAR penalties for failing to report his foreign bank accounts for 2012 and 2013. He argued that he should not be considered a "United States person" required to file FBARs because he was treated as a resident of Mexico under the Treaty.

Legal Issues:

1. FBAR Filing Requirements: Whether Aroeste was a "United States person" required to file FBARs for 2012 and 2013.
2. Treaty-Based Position: Aroeste adequately notified the IRS of his treaty-based position to be treated as a resident of Mexico, which would exempt him from FBAR filing requirements.
3. Penalties for Non-Compliance: Was Aroeste liable for penalties for failing to report his treaty position promptly?

Court's Findings:

1. FBAR Filing Requirements:

   • The court found that Aroeste was a lawful permanent resident of the United States during the years at issue, which generally would make him a "United States person" required to file FBARs.
   • However, under IRC §7701(b)(6), a lawful permanent resident can cease to be treated as such if they commence to be treated as a resident of a foreign country under a tax treaty and notify the Secretary of the commencement of such treatment.
     
     

2. Treaty-Based Position:

   • Aroeste did not promptly submit Form 8833 (Treaty-Based Return Position Disclosure) for 2012 and 2013 until October 2016, after the IRS had already begun audits.
   • The court agreed with Aroeste that failing to file Form 8833 promptly does not waive the Treaty's benefits. Instead, it results in a penalty under IRC §6712, which imposes a $1,000 penalty for each failure to meet the requirements of IRC §6114. The penalty is not significant compared to the FBAR penalty, and I believe that the monetary difference in this case can affect unknown numbers of taxpayers with similar issues. 
     
     

3. Penalties for Non-Compliance:

   • The court found that Aroeste was liable for penalties totaling $2,000 under IRC §6712 for failing to report his treaty position in a timely manner in 2012 and 2013. 
   • The court also found that the IRS's assessment of FBAR penalties was not valid because Aroeste was not a "United States person" for FBAR purposes due to his treaty-based position.

Conclusion:

• The court denied the government's motion for summary judgment and granted in part and denied in part Aroeste's motion for summary judgment in part and denied it in part.
• Aroeste was not subject to FBAR penalties for 2012 and 2013 because, under the treaty, he was treated as a resident of Mexico.
• Aroeste was liable for a $2,000 penalty for failing to report his treaty position timely.
• The government was ordered to discharge Aroeste's liability for the outstanding FBAR penalties and refund his payment of $3,004.

This case highlights the importance of timely filing treaty-based return position disclosures and the potential consequences of failing to do so, even when the underlying treaty position is valid.

Please be aware that each case is different, and this outcome cannot be applied to all cases involving late filing of Form 8833. However, this particular case is worthwhile to examine for your situation. 

Disclaimer

Tax laws always have exceptions. We aim to provide broad guidance in simple, understandable language. We recommend any reader consult with appropriate paid professionals to obtain tailored guidance after disclosing your facts and circumstances. Our blogs do not provide professional opinions to readers. The author assumes no legal responsibility for this blog.