Does a Treaty Govern FBAR Reporting Obligations: A Federal Court Answers “Yes”

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).


Much of the current litigation between taxpayers and the United States has centered on the definition of willfulness or whether the non-willful FBAR penalty should apply on a per year or per account basis.  Accordingly, there have been very few cases covering other requirements the United States must show to meet its burden of proof to impose FBAR penalties.

Tax professionals should expect that to change in the future.  Indeed, a recent Order from the Southern District of California serves as a reminder that the United States must show various other requirements outside the willful context.[i]  In Aroeste, the dispute between the taxpayer and the United States was an ostensibly simple one: whether a tax treaty between the United States and Mexico could serve to abrogate the definition of a “United States person” under the FBAR-reporting rules.

The Meaning of “United States Person”

Only “United States persons” have obligations to file FBARs.  Of course, this includes those born in the United States who have not taken effective actions to expatriate.  This also includes, however, “a resident of the United States,” which is defined further in the Title 31 regulations as “an individual who is a resident alien under 26 U.S.C. § 7701(b) and the regulations thereunder but using the definition of ‘United States’ provided in 31 C.F.R. § 1010.100(hhh) rather than the definition of ‘United States’ in 26 C.F.R. § 301.7701(b)-1(c)(2)((ii).”[ii]

The interplay between section 7701(b) (located in Title 26 of the Code) and 31 C.F.R. § 1010.350(b) (located in Title 31 of the Code) is somewhat complex.  Under section 7701(b), a non-U.S. citizen is treated as a “resident alien” if he or she is a “lawful permanent resident of the United States at any time” during a calendar year.[iii]  Moreover, an individual is a “lawful permanent resident” if he or she has been “lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws” and if “such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).”[iv]  In common parlance, a “lawful permanent resident” is often referred to as having a “green card.”

However, section 7701 confirms that so-called “green card” status can terminate—at least for federal tax purposes—if an individual “commences to be treated as a resident of a foreign country under provisions of a tax treaty between the United States and the foreign country, the individual does not waive the benefits of such treaty applicable to residents of the foreign country, and the individual notifies the Secretary of the commencement of such treatment.[v]

The Discovery Dispute in Aroeste

Factual Background

By way of background, the Aroestes filed suit against the United States challenging certain FBAR penalty determinations made against them.  After the United States counterclaimed for the unpaid balances, the district court stayed the lawsuit.  The district court concluded that a stay would be helpful until the Supreme Court resolved an FBAR-related issue in the pending case of U.S. v. Bittner, 142 S. Ct. 2833 (2022) (cert. granted).  However, the district court permitted the parties to continue limited discovery on two narrow issues: (1) whether Alberto Aroeste was a resident of Mexico under the United States – Mexico income tax treaty (the “Treaty”); and (2) whether Alberto Aroeste was a “United States person” required to file an FBAR for the years at issue.

Under the court’s discovery order, the Aroestes requested their IRS administrative file from the United States.  The United States resisted production of the administrative file on the basis that the administrative file was not relevant to the determination of whether Mr. Aroeste was a “United States person” under Title 31.  The parties filed motions with the court to resolve the discovery dispute.

The Parties’ Contentions

In seeking to compel production of their administrative file, the Aroestes contended that “if Mr. Aroeste was treated as a Mexican resident under the Treaty, that fact would disqualify him from being counted as a ‘United States person’ under the FBAR regulations.”  Conversely, the United States argued that “Mr. Aroeste’s status under the Treaty is irrelevant because the Treaty solely concerns residency for purposes of income tax and excise tax assessments under Title 26 of the United States Code, whereas FBAR penalties are assessed under Title 31.”

The Court’s Conclusions  

After reviewing 31 C.F.R. § 1010.350(b)(2) and section 7701, the court held primarily in favor of the Aroestes.  The court concluded that the “upshot of this statutory and regulatory framework applicable to this action, in which tax treaties provide a potential escape hatch that excuses certain ‘United States persons’ from filing FBARs, can be expressed as a 5-step process”:

In this case, it was undisputed that Mr. Aroeste had a “green card.” On the basis of the Treaty, the court concluded that Mr. Aroeste would not be a lawful permanent resident within the meaning of 26 U.S.C. § 7701(b)(6) if he commenced to be treated as a resident of Mexico under the Treaty (with the additional caveats enumerated in the statute); which might in turn have ultimately excused him from the requirement to file FBARs . . .”  Moreover, the court specifically held that “a determination of Mr. Aroeste’s tax residency under the Treaty is directly relevant to—indeed is outcome determinative of—the issue of whether he was required to file the FBARs at issue . . .”

The Takeaway

Good arguments win litigation.  The same is true for litigation related to FBAR penalties.  Taxpayers should therefore ensure that they raise all relevant and novel arguments in defense of a proposed or assessed FBAR penalty.  As Aroeste shows, this now includes whether a governing treaty should apply.


[i] Aroeste v. U.S., No. 22-cv-682-AJB-KSC, 2023 WL 1974144 (S.D. Cal. Feb. 13, 2023).

[ii] 31 C.F.R. § 1010.350(b).

[iii] See 26 U.S.C. § 7701(b)(1)(A)(i).

[iv] Id. § 7701(b)(6).

[v] Id.