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Aroeste v. United States: Form 8833, Nonresident Status and Green Card Risk

The case of Aroeste v. United States has significant implications for international taxpayers, particularly those with dual residency status or those who may be considered residents of both the United States and another country under domestic laws. In Aroeste v. United States, 22-cv-00682-AJB-KSC (S.D. Cal. Nov. 20, 2023) the court ruled that Alberto Aroeste, a Mexican resident with a U.S. green card, was not a “United States Person” required to file a Report of Foreign Bank and Financial Accounts (FBAR) for 2012 and 2013. The court applied the United States-Mexico Income Tax Treaty and the Internal Revenue Code, using tie-breaker rules to determine Aroeste’s residency. Despite Aroeste’s late filing of Forms 8833 (Treaty-Based Return Position Disclosure) and failure to file Form 8854 (Initial and Annual Expatriation Statement), the Court found these did not waive treaty benefits and ruled the Form 8854 requirement invalid. Aroeste was exempted from FBAR obligations but liable for a $2,000 penalty for late filing of Forms 8833.

The Court’s ruling in Aroeste provides a precedent that dual residents who are treated as residents of a treaty country (in this case Mexico) under the tie-breaker rules of a tax treaty may not be obligated to file FBARs, assuming their status aligns with Aroeste’s situation. This could affect clients who have similar residency statuses under other U.S. income tax treaties. Although Aroeste was not precluded from being treated as a resident of Mexico despite failing to timely file Form 8833 for disclosing his treaty-based position, the court did subject him to a financial penalty for each delinquent Form 8833. This highlights the necessity for timely and accurate filing of treaty-based position disclosures to avoid penalties.

Additionally, taxpayers should also be aware that taking a treaty position like that in Areoste can impact their immigration status. 8 CFR Sec. 316.5(c)(2) provides that an applicant who is lawfully admitted permanent resident of the U.S. but voluntarily claims nonresident status to claim special exemptions from income tax liability… raises a rebuttable presumption that the applicant has relinquished the privileges of Lawful Permanent Resident (LPR) status. An applicant may overcome the presumption that they have abandoned their status with acceptable evidence that he or she did not abandon his or her LPR status. In light of these considerations, taxpayers must exercise caution and thoroughly evaluate the implications of claiming a nonresident status, and seek the advice of immigration counsel where necessary.

As for the income tax, the tie-breaker rules are a set of criteria used under tax treaties to resolve cases of dual residency. These rules determine in which country a person is considered a tax resident when they meet the domestic tax residency criteria of two countries. The criteria typically consider factors such as the location of a permanent home, the center of vital interests (personal and economic ties), habitual abode, and nationality.

Despite holding a U.S. green card, Aroeste lived in Mexico, filed tax returns there, and had significant personal and economic ties to Mexico. The Court found that under the treaty’s tie-breaker rules, Aroeste was a tax resident of Mexico for the years in question. This determination was crucial because it meant he was not considered a “United States Person” for those years and, therefore, not required to file FBARs for his Mexican financial accounts.

The Service has long held that the broad definition of “United States Person” under Title 31 of the U.S. Code encompasses lawful permanent residents because they are considered residents of the United States for tax purposes. The recent decision in Aroeste overturns this long-held understanding.

Given that the government is expected to appeal the court’s decision to the Ninth Circuit, there remains a degree of uncertainty regarding the long-term applicability of this ruling. Until there is more clarity and finality regarding the appeal, it may be prudent for taxpayers who are dual residents and file as non-U.S. residents under a tie-breaker provision of a U.S. income tax treaty to continue filing FBARs and other required international information returns. The Areoste v. United States case serves as a critical reminder of the complexities surrounding FBAR filing requirements for individuals with dual residency status. It highlights the potential for treaty tie-breaker rules to impact FBAR obligations and the importance of compliance with treaty-based position disclosure requirements.

As the legal landscape continues to evolve, particularly with the expected government appeal, international clients should seek professional advice to ensure compliance and to navigate the intricacies of U.S. tax law effectively. If you are a taxpayer already considering resolving prior year non-compliance and in a similar circumstance to the taxpayer in Areoste, you should consult with your tax advisor for the potential implications of the Court’s decision.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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