Realization Requirement, FBAR, FATCA, and Dual-Status Aliens

The Realization Requirement and Gross Receipts Requirement

Realization is a foundational trigger for income taxation. Under the decisive case in the field of tax law, realization can be classified as one of three core principles. The Supreme Court held that income traced for purposes of federal income tax is defined as an undisputable accession to wealth, clearly realized, with complete dominion in the hands of the taxpayer. In another formulation, the Court stated that gain realization need not take the form of cash proceeds from an asset sale.

Property exchanges may give rise to gain through the taxpayer's indebtedness for payment, relief of liability, and other profits that are realized when a transaction is completed. This list encompasses all the generators of realization, as illustrated by United States v. Cesarini (Norton, 2013).

The Gross Receipts Requirement, by contrast, will only be satisfied by a foreign tax whose predominant character is that it is imposed on the basis of gross receipts — calculated under formulas that may produce an amount not exceeding fair market value. The windfall tax in the U.K. fails this test simply because it does not require a realization event. A tax cannot be imposed on gross receipts where there has been no realization of income (Norton, 2013).

Differences Between FBAR and FATCA Regulations

FATCA differs from FBAR in that it is organized under Title 26 (the Internal Revenue Code), while FBAR requirements are organized under Title 31 of the United States Code. This distinction resolves many of the enforcement hurdles and administrative burdens that IRS faced under the Title 31 rules governing FBAR. The IRS has the power to assess civil penalties under the FBAR regulations, but before it can proceed with adverse collection action it must first reduce the assessment to a judgment. The IRS lien and levy authority granted by IRC §§ 6321 and 6331 does not extend to the collection of FBAR penalties; nor are FBAR matters covered by the IRS collection due process procedures outlined under IRC § 6211 (the deficiency procedures) or IRC § 6020. In 2008, the U.S. Tax Court examined these issues and held that it lacked jurisdiction over penalty assessments for FBAR (Patterson & Blackwell Reference Online, 2010).

The IRS has a broad array of tools provided by various IRC provisions available to enforce, assess, and administer FATCA compliance. This means that the IRS can declare a penalty immediately assessable under FATCA and exercise its lien and levy authority to collect the assessment. Nevertheless, because the penalties are immediately computable — meaning no statutory notice of deficiency is required — the U.S. Tax Court may still lack jurisdiction to review IRS FATCA assessments (Norton, 2013).

A further difference involves statutes of limitations. For FATCA violations, the limitations period is three years from the filing date of the return, meaning it does not begin to run until the required FATCA form is filed. For FBAR violations — specifically, failure to file Form TD F 90-22.1 — the limitations period is six years from the transaction date. Accordingly, the limitations period for FBAR violations ostensibly begins to run on the stated date of the FBAR return (Norton, 2013).

Any non-resident alien engaged in a U.S. business or trade must file a return, even if he or she does not have income from that business or trade conducted in the U.S., and even if he or she does not have any U.S.-source income. The incomes of dual-status aliens may be exempt from U.S. tax under the Internal Revenue Code; however, if the alien has no gross income, he or she will be excluded from U.S. tax liability altogether. When dual-status aliens compute their U.S. tax for a year in which they held two statuses, they are subject to very different rules for the portion of the year during which they were residents and the portion during which they were non-residents (Patterson & Blackwell Reference Online, 2010).