Tax Notes International: Article by Robert Goulder: FBAR Madness: We need to Chat About Aroeste

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On Monday 11 Sept 2023, Robert Goulder wrote a detailed article about the implications of what he calls “The Green Card From Hell”! His article can be reviewed in its entirety through the subscription service provided by Tax Notes International – FBAR Madness: We Need to Chat About Aroeste.

Goulder made some key observations that are worth repeating for anyone who has been a green card holder for basically more than seven years. That can trigger the “expatriation” tax provisions – the focus of this blog.

The facts of the case of Mr. Alberto Aroeste are covered extensively and accurately in Goulder’s article.

He noted:

This week’s article concentrates on the novel FBAR issue that will be decided in Aroeste v. United States, an illegal exaction suit before the U.S. District Court for the Southern District of California.7 The case has garnered attention for good reason. It pushes back against the government’s dubious policy of requiring individuals treated as nonresidents under a U.S. tax treaty to provide FBAR filings. Let’s note the futility of the financial information which the government seeks from these folks. It concurrently exempts treaty nonresidents from the need to file IRS Form 8938 (“Statement of Specified Foreign Financial Assets”), the tax code’s counterpart to the FBAR.8 It remains problematic that the government should demand reporting from treaty nonresidents as if they were residents.9

Goulder – FBAR Madness: We Need to Chat About Aroeste.

The one issue not explained well relates to how and when lawful permanent residency (i.e. a “green card”) under Title 8 is even valid in the first place. Goulder’s article explains some of the rights of lawful permanent residency status, but also addresses some key areas of the immigration law the same as most tax law experts cover a different area of the law. See, SCOTUS’ observations of the law in this context: Unplanned Expatriation: Lawful Permanent Residents’ Deportation Risks for Filing U.S. Federal False Tax Returns

For instance, Goulder claims green card holders cannot be deported as long as the immigration status remains valid. True – but what is not explained is how easy it is to cease to have a valid one in the first place. What he doesn’t explain is how and when an individual can “abandon” or “relinquish” the status as a green card holder (as a matter of law) by not residing permanently in the United States. See, Fundamentals of Immigration Law, written by Charles A. Wiegand, III, Former Immigration Judge, Oakdale, Louisiana. The law is complex as described by Wiegand.

Goulder does not seem to find the government’s arguments persuasive (“ain’t buying it“!):

For Aroeste, there seems to be little doubt his closer personal and economic ties are with Mexico. The IRS knows this. An analysis conducted by an IRS agent concluded that he spent no more than 67 days in the United States during 2012 and 57 days in the United States in 2013, with three-quarters of the remaining time spent in Mexico.

Goulder –

The IRS doesn’t care where Aroeste had closer personal and economic ties. That’s because it doesn’t care about the tiebreaker. As the government sees it, the treaty is a distraction that has no meaningful role to play in this litigation. The plaintiff’s immigration status is conclusive, end of story. His green card settles the matter, such that all further inquiries are superfluous and should cease.


What bothers me about that argument is how the government’s position selectively wishes away the existence of the U.S. tax treaty network — but only for application of the FBAR regime. The Mexico treaty would still mean something in another context, but not on the pivotal issue of Aroeste’s status as a U.S. person for FBAR purposes. Sorry, I ain’t buying it.


The government argues the treaty is only relevant for income and excise tax purposes, and what we have here are penalties based on violations of the Bank Secrecy Act — not the Internal Revenue Code. As the government sees it, no plaintiff can successfully challenge penalties authorized by Title 31 with legal remedies based on Title 26. I’m still not buying it.

Id, Goulder

I would recommend you take a read through his article that also addresses a discussion on how the government prefers to keep internal memoranda from the eyes of the public. He discusses at some length – Tax Analysts and Coastal States. How the Court in Aroeste took an approach different from the D.C. Circuit in articulating 9th Circuit law regarding attorney client privileged documents in the possession of the government.  

Short Window of Wait Times for CLN: One Month to 6 Weeks?

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The wait times for the State Department to issue a Certificate of Loss of Nationality (“CLNs”) used to be quite long, based upon the author’s experience with various clients. That has all changed since about the beginning of this year 2023. The author has seen cases that are taking less than 6 weeks from the date of the meeting to take the oath of renunciation before a consular officer.

See a prior post back in 2014: Wide Window of Wait Times for CLN: One Month to 9 Months (or More?)

See another of the author’s posts regarding the CLN (2014): The Importance of a Certificate of Loss of Nationality (“CLN”) and FATCA – Foreign Account Tax Compliance Act.

Also, in a prior post back in 2014, this author discussed the importance of IRC Section 7701(a)(50): Why Section 7701(a)(50) is so important for those who “relinquished” citizenship years ago (without a CLN). . .

These issues all relate to important timing considerations under the law which can be impacted by how long it takes to receive the CLN:

  • When can an individual who has taken the oath of renunciation be able to file IRS Form 8854, Initial and Annual Expatriation Statement?
  • When do you measure the values of the assets/liabilities for determining whether the former citizen was a “covered expatriate”?
  • What will be the date as set forth in the statute (877A) for calculating the “mark to market” taxable gain (if any):?

FATCA is Found Illegal by Belgium government –

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The press release of the Belgian Protection Authority from May 24, 2023 provides:

The Belgian Data protection authority today declared unlawful, and decided to prohibit, the transfers of personal data of Belgian “Accidental Americans” by the Belgian Federal Public Service Finance (FPS Finance) to the US tax authorities under the intergovernmental FATCA agreement. According to the Belgian DPA, the data processing carried out under this agreement does not comply with all the principles of the GDPR, including the rules on data transfers outside the EU. It also asks the FPS Finance to alert the competent legislator of the shortcomings identified by the DPA.

Belgian DPA prohibits the transfer of tax data of Belgian “Accidental Americans” to the USA

It is interesting that the term “Accidental Americans” is used in the release. The individual who filed the complaint is a dual Belgian and American citizenship and from the “Accidental Americans Association of Belgium.” The official website of the DBA provides the summary in part as follows:

Conclusions of the Litigation Chamber

The Litigation Chamber concludes that the transfers of data of Americans residing in Belgium to an authority located in a country outside the EU (which cannot offer an adequate level of data protection) are unlawful. For this reason, the Belgian DPA prohibits the FPS Finance from processing the complainants’ data and asks it to alert the competent legislator of this prohibition and of the shortcomings found.

The Belgian DPA also orders the FPS Finance to inform in a complete and accessible manner the data subjects of the data processing carried out as part of the FATCA agreement and of its modalities. It also asks to carry out a “DPIA” which is an analysis of the risks associated with this data processing.

The parties can appeal this decision.

Hielke Hijmans, Chairman of the Litigation Chamber, concludes: “Ordering the cessation of data flows to the United States under the FATCA agreement may seem harsh, but once we find that they do not comply with the applicable law, we are obliged to stop these data flows. This principle has been confirmed in the rulings known as the “Schrems rulings”.

The full decision in French can be reviewed here

A “National” versus a “Citizen” – A difference without a distinction?

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There are terms used throughout the law of immigration and citizenship; indeed including the term “citizen” as found in the U.S. Constitution, which can seem ambiguous. The term “citizen” is found throughout the U.S. Constitution (e.g., in Articles I, II, III, IV and various Amendments). Nowhere is the term “national” used in the constitution.

A legal scholar wrote about the term citizen and national in an article several decades ago:

“Under the Immigration and Nationality Act 1952, a distinction is drawn between a national and a citizen of the U.S.A. Nationality is a broader concept than citizenship being based on permanent allegiance, and a national of the U.S.A. includes both an United States citizen and a non-U.S. citizen who owes permanent allegiance to the United States.”

Meher K. Master, United States Citizenship, 5 Int’l L. 324 (1971)

The example this author uses is of a British subject citizen of the U.K. and Colonies who becomes a naturalized United States citizen; thereby creating a person with dual citizenship (and dual nationality). In contrast, the author goes on to take the nearly identical example, except of a British subject, citizen of no country, may become a naturalized U.S. citizen. He would have dual nationality but not dual citizenship, as only a citizen of the United States.

To this author, this explanation leaves the distinction between a (i) “citizen” and (ii) “national” as clear as mud. A difference without a distinction? The example does not explain, what is the distinction between a national and a citizen of the United States? What makes them different? The statement only references a “U.K. subject” who is not a citizen of the U.K.

The D.C. Circuit Court opined on a narrow issue tied to this distinction asking these questions:

In our constitutional republic, Justice Brandeis observed, the title of citizen is superior to the title of President. Thus, the questions “[w]ho is the citizen[?]” and “what is the meaning of the term?” Aristotle, Politics bk. 3, reprinted in part in Readings In Political Philosophy 55, 61 (Francis W. Coker ed., 1938), are no less than the questions of “who constitutes the sovereign state?” and “what is the meaning of statehood as an association?” We are called upon to resolve one narrow circumstance implicating these weighty inquiries. 

Tuaua v. United States (788 F.3d 300, D.C. Cir., 2015)

The 1986 Immigration and Nationality Act (INA) was adopted with section 101(a)(22) that provides

“the term ‘national of the United States’ means (A) a citizen of the United States, or (B) a person who, though not a citizen of the United States, owes permanent allegiance to the United States.” 

That still does not answer the question of who is a national of the United States? It just provides that there is a category of persons who are nationals who are not necessarily also citizens. See the definition in (B).

The US Department of State has its own comments on this language and they state (based upon the statutory language of the INA – Section 101(a)(22) that “U.S. citizens are also [necessarily] U.S. nationals.”

Therefore, it must follow that not all U.S. nationals are necessarily U.S. citizens. But who then is a national and not also a citizen? The answer in part is found in Section 101(a)(20) of the INA that defines an “outlying possession” as American Samoa and Swains Island.

There are historical reasons related to the creation of American Samoa. Footnote 1. See,  Tuaua Id., for a discussion by the D.C. Circuit concluding that individuals born in America Samoa are nationals, but do not have “birthright citizenship”. This with reference to Section 101(a)(20) of the INA.

Hence, the statement by the US Department of State that – “Non-citizen nationality status refers only to individuals who were born either in American Samoa or on Swains Island to parents who are not citizens of the United States. ” See, FAM 308.2 – Acquisition by Birth in American Samoa and Swains Island.

This provides context for the statement that only individuals born in these two islands are nationals but not U.S. citizens of the U.S. Can someone who is not a citizen of the U.S., but a national (i.e., from American Samoa or Swains Island) become a dual national? Presumably yes – and the U.S. Department of State will also issue U.S. passports to these non-citizens (instead of a Certificate of Non Citizen Nationality).

For a more detailed discussion generally about dual nationals see, the US Department of State’s discussion regarding Dual Nationality which are consistent with the SCOTUS decision in Afroyim v. Rusk,  387 U.S. 253 (1967) discussed in a prior post:

U.S. law does not impede its citizens’ acquisition of foreign citizenship whether by birth, descent, naturalization or other form of acquisition, by imposing requirements of permission from U.S. courts or any governmental agency. If a foreign country’s law permits parents to apply for citizenship on behalf of minor children, nothing in U.S. law impedes U.S. citizen parents from doing so.

See, Dual Nationality has Been Permitted in the U.S.A. since 1967: U.S. Supreme Court Confirmed Constitutional Rights of Citizenship (Afroyim v. Rusk,  387 U.S. 253 (1967))

As a final note, the “U.K. subject” discussion explains how other countries might have different legal definitions of a “citizen” versus a “national” versus a “subject”? At least in the U.S. the distinction between a citizen and a national of the United States seems more clear.

Footnote 1. See, Villazor, Rose Cuison (March 2017). “American Nationals and Interstitial Citizenship”Fordham Law Review. New York, New York: Fordham University School of Law. 85 (4): 1673–1724.

Dual Nationality is Permitted by the U.S.; not all Countries Have Similar Rules

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The July 23, 2023 post explained there is a common myth that still persists about U.S. citizenship. It is often stated (erroneously) that someone becoming a U.S. naturalized citizen must forsake citizenship to another country. See, Dual Nationality has Been Permitted in the U.S.A. since 1967: U.S. Supreme Court Confirmed Constitutional Rights of Citizenship (Afroyim v. Rusk,  387 U.S. 253 (1967))

This is true, depending upon the laws of the other country. The United States will not require the individual to forsake citizenship to the other country.

However, the laws of the foreign country may prohibit dual nationality. For instance, Germany has had a restriction that according to the Germany publication DW – is about to become easier. See, Dual citizenship in Germany set to become easier: Germany’s government is getting closer to allowing immigrants multiple citizenships after overturning a decades long ban. The idea, a long-standing tradition in many countries, is well overdue, say those affected. (May 2023)

Similarly, India has restrictions on dual nationality. According to the Indian Consulate in San Francisco –

Notice regarding Dual Citizenship (India)

Consulate wishes to clarify on the citizenship status of OCI cardholders. Constitution of India does not allow holding Indian citizenship and Citizenship of a foreign country simultaneously. The Government of India has decided to register Persons of Indian Origin of certain category as has been specified in the Section 7A of the Citizenship Act, 1955 as Overseas Citizenship of India (OCI) Cardholder. It is basically a life long Visa and with some other privileges attached which can be seen on the Ministry of Home Affairs’ website. It is reiterated that holding an OCI card in no way entitles its holders to claim the status of dual citizenship.

Indian Consulate in San Francisco –

The U.S. State Department explains U.S. dual nationality in some detail on its website – including the following statement (U.S. Department of State -Dual Nationality):

U.S. law does not impede its citizens’ acquisition of foreign citizenship whether by birth, descent, naturalization or other form of acquisition, by imposing requirements of permission from U.S. courts or any governmental agency. If a foreign country’s law permits parents to apply for citizenship on behalf of minor children, nothing in U.S. law impedes U.S. citizen parents from doing so.

U.S. law does not require a U.S. citizen to choose between U.S. citizenship and another (foreign) nationality (or nationalities).  A U.S. citizen may naturalize in a foreign state without any risk to their U.S. citizenship. 

U.S. Department of State -Dual Nationality

Dual Nationality has Been Permitted in the U.S.A. since 1967: U.S. Supreme Court Confirmed Constitutional Rights of Citizenship (Afroyim v. Rusk,  387 U.S. 253 (1967))

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There is a common myth that still persists about U.S. citizenship. It is often stated (erroneously) that someone becoming a U.S. naturalized citizen must forsake citizenship to another country. Or a U.S. citizen becoming a naturalized citizen of another country must forsake U.S. citizenship. There are good reasons for this “myth.”

First, the federal government used to have a policy that discouraged (if not outright prohibited) nationality in another country while being a U.S. citizen in various circumstances. This despite the language in the 14th Amendment of the Constitution which provides in

relevant part:

“All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside. No state shall make or enforce any

law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Section 1 of the 14th Amendment

Congress then imposed various restrictions on citizens and provided they would lose nationality in various circumstances. Specifically the Nationality Act of 1940 imposed a strict statutory rule that a:

  • ” . . . national of the United States . . . shall lose their nationality by: . . . “(e) Voting in a political election in a foreign state” [since repealed]
Section  § 401(e) of the Nationality Act of 1940

The Supreme Court in 1967 found that specific provision as violating the U.S. Constitution. In

that case, Mr. Afroyim was Polish born and become a U.S. naturalized citizen in 1926. The Court concluded he had voted in elections in Israel (after emigrating from the U.S. to Israel in 1950 – without formally renouncing his U.S. citizenship). The opinion of the Court concluded:

 We hold that the Fourteenth Amendment was designed to, and does, protect every citizen of this Nation against a congressional forcible destruction of his citizenship, whatever his creed, color, or race. Our holding does no more than to give to this citizen that which is his own, a constitutional right to remain a citizen in a free country unless he voluntarily relinquishes that citizenship.

U.S. Supreme Court in Afroyim (1967)

The decision in Afroyim is in stark contrast to the earlier Supreme Court decision of Perez v. Brownell, 356 U.S. 44 (1958). In the earlier decision SCOTUS cited to the same 1940s Nationality Act – [Section  § 401(e) of the Nationality Act of 1940]. The Court explained that the petitioner was born in the U.S. (unlike Afroyim who was born in Poland per the Court); explaining the individual was born in Texas, yet found that he lost his citizenship by voting in political elections in Mexico. The odd notion in Perez is that although he was born in the U.S. the Court referred to him as a “native-born Mexican citizen”. The key facts summarized by that Court were as follows:

Petitioner was born in Texas in 1909. He resided in the United States until 1919 or 1920, when he moved with his parents to Mexico, where he lived, apparently without interruption, until 1943. In 1928 he was informed that he had been born in Texas. At the outbreak of World War II, petitioner

knew of the duty of male United States citizens to register for the draft, but he failed to do so. In 1943 he applied for admission to the United States as an alien railroad laborer, stating that he was a native-born citizen of Mexico, and was granted permission to enter on a temporary basis. He returned to Mexico in 1944 and shortly thereafter applied for and was granted permission, again as a native-born Mexican citizen, to enter the United States temporarily to continue his employment as a railroad laborer. Later in 1944 he returned to Mexico once more. In 1947 petitioner applied for admission to the United States at El Paso, Texas, as a citizen of the United States. At a Board of Special Inquiry hearing (and in his


subsequent appeals to the Assistant Commissioner and the Board of Immigration Appeals), he admitted having remained outside of the United States to avoid military service and having voted in political elections in Mexico. He was ordered excluded on the ground that he had expatriated himself; this order was affirmed on appeal. In 1952 petitioner, claiming to be a native-born citizen of Mexico, [356 U.S. 44, 47]   was permitted to enter the United States as an alien agricultural laborer. He surrendered in 1953 to immigration authorities in San Francisco as an alien unlawfully in the United States but claimed

the right to remain by virtue of his American citizenship. After a hearing before a Special Inquiry Officer, he was ordered deported as an alien not in possession of a valid immigration visa; this order was affirmed on appeal to the Board of Immigration Appeals.

It does not seem that either Mr. Perez of Mr. Afroyam were much concerned about U.S. federal

tax consequences of their U.S. citizenship. Indeed, Mr. Perez was only a boy of about 10 years old when his parents left Texas to reside in Mexico where he remained for about 23 years before returning to the U.S. Afroyam tried to return to the U.S. apparently after his marriage failed in Israel.

Today, the U.S. Department of State articulates their policy and law of dual nationality for U.S. citizens seeking foreign citizenship. See, U.S. Department of State website:

U.S. law does not impede its citizens’ acquisition of foreign citizenship whether by birth, descent, naturalization or other form of acquisition, by imposing requirements of permission from U.S. courts or any governmental agency. If a foreign country’s law permits parents to apply for citizenship on behalf of minor children, nothing in U.S. law impedes U.S. citizen parents from doing so.

Dual Nationality

With that said, see Survey of the Law of Expatriation from 2002: Department of Justice Analysis (Not a Tax Discussion)

Too Much? – Treasury Proposes Changes in the Expatriation Tax Law – per Green Book (2023 Fiscal Year) – Part I of II

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The Administration made specific proposals in its Fiscal Year 2023 Revenue Proposals to modify key provisions in the law associated with “covered expatriates.” Importantly, they proposed two key concepts that can have far reaching consequences –

  1. Creating, in effect, a new monitoring system of those who become “tax expatriates” – specific to filing of IRS Form 8854 – and
  2. Extending the statute of limitations period indefinitely in the event IRS Form 8854 is not filed by the “tax expatriate”.

What does this mean from a practical perspective to individuals around the world? Specifically, to (i) citizens who formally renounce their citizenship, and (ii) lawful permanent residents who have left the U.S. and did not formally abandon their immigration status with USCIS?

See, Few LPRs Who Leave (Emigrate from) the U.S. Formally Abandon their Immigration Status: Important Tax Consequences (Part I)

First, anyone who fails to file IRS Form 8854 with their tax return or files a false or inaccurate form has to be concerned under current U.S. tax law.

The U.S. federal tax law has a specific crime, for making a false statement or signing a false tax return or other document – which is known as the perjury statute (IRC Section 7206(1)).  This is a criminal statute, not civil.  Some people are also under the misunderstanding that a false tax return needs to be filed.  The statute is much broader and includes “. . . any statement . . . or other document . . . “.

(1) Declaration under penalties of perjury

Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or . . .

The  IRS Form 8854 has a specific penalty of perjury signature requirement independent of any U.S. federal income tax return to be filed. See the current language below:

See a prior post –

* Filing False Expatriation Tax Form – IRS Form 8854

Filing a false IRS Form 8854 . . . becomes problematic quickly for any individual who carelessly discloses inaccurate asset information (or no asset information at all). See, the 2016 indictment of a NY business professor discussed previously here: Expatriation Tax Form 8854 is Part of Criminal Tax Case

Whether criminally or civilly, taxpayers should never underestimate the importance of filing complete and accurate tax returns; specifically including IRS Form 8854, Initial and Annual Expatriation Statement.

In addition to these cases, the Department of Justice has been actively involved in pursuing criminal charges against various individuals associated with tax expatriation cases. See the U.S. Supreme Court of last year to take up a criminal case – Regarding an Unnamed Law Firm that Advises International Tax & Expatriation Matters. A petition for a writ of certiorari to the U.S. Supreme Court was unsealed regarding the 9th Circuit case, In re Grand Jury, case Nos. 21-55085, 21-55145. In that case a law firm and a company was held in contempt of court: Re: a Grand Jury Subpoenas –

The panel affirmed the district court’s orders holding
appellants, a company and a law firm, in contempt for failure
to comply with grand jury subpoenas related to a criminal
investigation, in a case in which the district court ruled that
certain dual-purpose communications were not privileged
because the “primary purpose” of the documents was to
obtain tax advice, not legal advice.

Importantly, the IRS and the DOJ currently have extensive legal tools at their disposal to pursue taxpayers who may owe taxes as a result of becoming a “covered expatriate.” The above criminal cases reflect their interest and appetite in pursuing such cases. 


In addition to criminal exposure, the civil tax exposure can be extensive and the IRS is not shy about assessing tax and international information penalties (even if the assessment for penalties such as not filing IRS Form 5471 are unlawful, as determined by the U.S. Tax Court recently – ). See April 3rd, 2023 decision by the United States Tax Court (the “Tax Court”) – Farhy,[6] stating that the IRS does not have statutory authority to assess penalties under section 6038(b).

The next Part II post will discuss the details of the Administration’s proposed change.

Spoiler Alert: The Author thinks its highly unlikely these changes will be adopted by Congress!

Three Precedent Setting Cases in International Information Reporting (“IIR”) in 6 Weeks:  * Aroeste, * Bittner, and * Farhy: all Interconnected via Title 26, Title 31 and U.S. Income Tax Treaties

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In just over six weeks, there have been three key judicial precedents favorable to international individuals.  These cases have helped clarify the requirements of individuals and the limitations on the powers of the IRS in assessing IIR penalties.  These IIR decisions relate to –

  • Title 31 penalties for Foreign Bank Account Reports (“FBARs”),
  • How these two federal statutory regimes of Title 31 and 26 crossover into international law as set forth in U.S. income tax treaties negotiated with different countries around the world. 

Each of these three cases are interconnected and have significant impact to individuals with global lives, global assets, multi-national family members and those who have businesses or accounts in different parts of the world. 

  • Aroeste v. United States

First, on February 13th, 2023, the Southern District of California District Court (the “District Court”) made a key determination in a Joint Discovery Motion decision in Aroeste.[2] The District Court concluded in Aroeste that the IRS/DOJ[3] could not ignore the U.S.-Mexico income tax treaty (“Treaty”) and its application to a Mexican national who has resided almost all of his life in Mexico City and has maintained a “green card” for immigration purposes in the United States.  It is a non-willful FBAR case.  The District Court applied the interconnected statutes and regulations of Titles 31 and 26 to help determine who qualifies as a “United States person”; specifically with reference to international law and obligations set forth in the Treaty.  The key question in that case that remains to be answered is who (specifically Mr. Aroeste and by extension to a pool of millions of green card individuals residing outside the United States who are not citizens[4]) must file FBARs?

Second, on February 28th, 2023, the Supreme Court of the United States (“SCOTUS”) resolved in Bittner[5], that the applicable non-willful FBAR penalty is not measured by every foreign account of the individual as the Service has argued for years.  That case also dealt with non-willful filing of FBARs and the SCOTUS concluded the IRS cannot impose penalties of $10,000 on each and every account held; but rather the penalty is “per report” that was not correctly filed.  Hence, the total maximum penalty per year is $10,000.   A maximum penalty of $50,000 (x5 years) applied per the SCOTUS versus the IRS determined amount of US$2.7M+.

  • Farhy v. Commissioner

Lastly, on April 3rd, 2023, the United States Tax Court (the “Tax Court”) issued a decision in Farhy,[6] stating that the IRS does not have statutory authority to assess IIR penalties under section 6038(b). The IIR that is required by this statute is IRS Form 5471, which includes multiple filing categories. This has far reaching implications about how the government will be able to collect the IIR penalties the Service administratively determines are owed.[7]  The Taxpayer Advocate previously issued a report on point titled:  The IRS’s Assessment of International Penalties Under IRC §§ 6038 and 6038A Is Not   Supported by Statute, and Systemic Assessments Burden Both Taxpayers and the IRS[8]  In that report, the Taxpayer Advocate identified more than $310M of penalties just for the tax year 2014 the IRS “assessed” under Sections 6038 and 6038A.[9] We now know these “assessments” were invalid.

[1] See, footnote 19 regarding United States Tax Court’s Order in the case of Alberto Aroeste & Estela Aroeste vs. Commissioner.

[2] No. 22-cv-682-AJB-KSC, 2023 BL 46094 (S.D. Cal. Feb. 13, 2023).

[3] The “IRS” or the “Service” are used as shorthand for the Internal Revenue Service; and the Department of Justice; Tax Division is referred to as the “DOJ.” 

[4] See, the Homeland Security, Office of Immigration Statistics –  Estimates of the Lawful Permanent Resident Population in the United States and the Subpopulation Eligible to Naturalize: 2015-2019. According to the report, more than 1 million individuals become LPRs each year and 4.8 million are estimated to have died and/or emigrated.  The authors have extrapolated from these estimates in the report to conclude that more than 3 million of these individuals have emigrated and left the United States. The millions of individuals do not reside in the U.S. of which Mr. Aroeste is one of these individuals; although a tax treaty must exist in the country of residence for the analysis of the District Court in Aroeste v. United States to be applicable. 

[5] No. 31—1195 (U.S. Feb. 28, 2023); 598 U. S. ____ (2023); The majority opinion by Justice Gorsuch cited to the ACTEC amicus brief (where Patrick W. Martin, the author of and a fellow of ACTEC worked on the drafting of the brief) and concluded: 

Best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.”   The ACTEC brief was cited by the majority opinion- “ We see evidence, too, that the point of these reports is to supply the government with information potentially relevant to various kinds of investigations, criminal and civil alike. But what we do not see is any indication that Congress sought to maximize penalties for every nonwillful mistake (whether a late filing, a transposed account number, or an out-of-date bank address). See Brief for American College of Trust and Estate Counsel as Amicus Curiae 5–7.”

[6] 160 T.C. No 6 (April 3, 2023).

[7] See, Patrick W. Martin, Megan L. Brackney, Robert Horowitz, and Javier Diaz de Leon Galarza:   Problems Facing Taxpayers with Foreign Information Return Penalties, November 12, 2020.

[8] See, Annual Report to Congress 2020 (pp 119-131), citing –  Robert Horwitz, Can the IRS Assess or Collect Foreign Information Reporting Penalties? TAX NOTES TODAY (Jan. 31, 2019) 301-305; Erin Collins and Garrett Hahn, Foreign Information Reporting Penalties: Assessable or Not? TAX NOTES TODAY (July 9, 2018) 211-213 and 2 Frank Agostino and Phillip Colasanto, The IRS’s Illegal Assessment of International Penalties, TAX NOTES TODAY (Apr. 8, 2019) 261-269.

[9] Id.,  See, Figures 1.8.1, Systemic Assessments of IRC §§ 6038 and 6038A Penalties  & 8.2, Manual Assessments of IRC §§ 6038 and 6038A Penalties. 

Few LPRs Who Leave (Emigrate from) the U.S. Formally Abandon their Immigration Status: Important Tax Consequences (Part II)

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U.S. federal immigration law (Title 8) sometimes has very important federal tax (Title 26) consequences. See an earlier post, Who is a “long-term” lawful permanent resident (“LPR”) and why does it matter?

Back in 2020, as the Corona-virus pandemic was hitting, I wrote a post titled Few LPRs Who Leave (Emigrate from) the U.S. Formally Abandon their Immigration Status: Important Tax Consequences (Part I) It’s now time to post Part II.

  • The Number of LPRs Declined in the Corona-virus Pandemic

Not surprisingly, the number of new LPRs into the U.S. dropped substantially in correlation with the Corona-virus pandemic. See, the Office of Immigration Statistics, 28 Sept. 2021: Fiscal Year 2021 U.S. Lawful Permanent Residents Annual Flow Report. The Figure 1 (highlighted by me) and that report notes:

Just over 700 thousand persons became LPRs in 2020, as reduced international travel during the
COVID-19 pandemic and policy changes brought new LPR admissions in 2020 to their lowest

level since 2003. The majority of these LPRs (62 percent) were already present in the United
States when they were granted lawful permanent residence. A little under two-thirds (63 percent)
were granted LPR status based on a family relationship with a U.S. citizen or current LPR. The
leading countries of birth of new LPRs were Mexico, India, and People’s Republic of China
(China). In 2020, there was a 31 percent reduction in U.S. grants of LPR status compared to

Largely due to the COVID-19 pandemic, LPR flows in 2020 were not representative of typical
trends (Figure 1). Travel restrictions and processing slowdowns generally resulted in fewer
inflows, while foreign-born residents within the United States also confronted immigration
status-specific COVID-19 vulnerabilities

The key tax question for LPRs who no longer live in the U.S. (or who are planning to leave the U.S. to live in another country) is: Are they (or will they become) a so-called “long-term resident” as defined in the federal “expatriation” tax law?

IRC Section 877(e)(1) and (2) define a “long-term resident” and these paragraphs are included below in their entirety:

(1) In general

Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.

(2) Long-term resident

For purposes of this subsection, the term “long-term resident” means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.

You will note this definition of “long-term resident” was added in 1996 to the original statute (Added Pub. L. 89–809, title I, § 103(f)(1), Nov. 13, 1966, 80 Stat. 1551) creating this concept of taxation to former U.S. citizens pursuant to the The Foreign Investors Tax Act of 1966 (“FITA”).  See an earlier post I made in 2014/2015 titled: The Foreign Investors Tax Act of 1966 (“FITA”) – The Origin of U.S. Tax Expatriation Law.

Notably, the “mark to market” taxation concept was only added in 2008 pursuant to a new code section 877A which cross references back to Section 877(e) for reference to the definition of a “long-term resident”. See, a prior post titled: The “Phantom” Gain Exclusion from the “Mark to Market” Tax – Increases to US$690,000 for the Year 2015.

The Next Post on this topic will break down the elements of –

(1) who will necessarily be a “long-term resident”?

(2) who may be “long-term resident”?

(3) what steps can be taken to necessarily avoid “long-term resident” status?

Finally, a discussion will be had in the last post in this series of some of the potential adverse tax consequences to “long-term residents” depending upon different factual scenarios.

Citizenship Renunciations Continue a Trend – Upward in 2020

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The total number of USCs who have renounced annually continues a trend upward; on a moving average basis.

The year 2020 was a record year (by far) of 6,705 total USCs reported by the Treasury to have renounced citizenship. That breaks the prior single year record of 5,409 for the year 2016. The number of USCs who renounced declined in 2019 substantially. Maybe the low reported numbers for the 3rd and 4th quarters for the year 2019 represented a backlog in cases that were not reported by the Treasury until the first two quarters in 2020?

The State Department provides the information to the Treasury who then publishes it publicly pursuant to the law.

I create these charts based upon the raw data and names published quarterly by the Treasury Department.

I will update these numbers through each quarter that is available for the year 2021. Currently that is through the 3rd quarter of 2021.

The type of additional data that would be valuable for those of us who have many cases and study this area of the law and practice are as follows:

  • How many renounced prior to the age of 18?

  • From which country did the USC reside?

  • How many applied specific benefits of a U.S. income tax treaty? The following is a list of the U.S. income tax treaties by country:

I create these charts based upon the raw data and names published quarterly by the Treasury Department. This information can be found online here:

Quarterly Publication of Individuals, Who Have Chosen to Expatriate