Treaty Residency ‘Escape Hatch’ May Be New FBAR Hot-Button Issue

Tax litigation attorney James Dawson spoke with Tax Notes about a novel order from a magistrate judge indicating that tax treaty residency status is relevant for inquiries into the need to file foreign bank account reports. Mr. Dawson said that although the decision is only an order on a discovery motion and may not carry the same weight as a full opinion, it still has significant implications for future Report of Foreign Bank and Financial Accounts (FBAR) litigants.

“If you have a dual citizenship, you better be raising this argument. Otherwise, contact your malpractice carrier,” Mr. Dawson said. He also said the case illustrates how the government’s position on the applicability of FBAR penalties has become almost a strict liability standard, with green card status being enough to establish status as a resident, which is sufficient to find liability.

The court dismissed the government’s assertion that the plaintiffs were seeking to obtain the administrative record to leverage it in other matters, including in an unfiled action challenging information penalties. The court held that it is only responsible for determining if the administrative record is discoverable in the case before it.

“The government, I think, withheld part of its power because they view the [information return penalty] litigation as separate. . . They were willing to say, 'This was a discovery order, and you want the documents. The worst that can happen is we have to turn over those documents.' I don’t think they truly disclosed their arguments,” Mr. Dawson said. “If anybody wants to immediately jump on this case and say it has a very broad application, I would put a little bit of caution . . . [in applying] this case to other information reporting requirements because they didn’t really go full monty in terms of their arguments.”

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