The tax plights of U.S. taxpayers living abroad are gaining attention. While on the campaign trail in October 2024, President Trump pledged to eliminate what he called “double taxation” on these individuals. Buoyed by Trump’s reelection, House Ways and Means member Darin LaHood, R-Ill., introduced the Residence-Based Taxation for Americans Abroad Act (H.R. 10468) two months later. LaHood, whose legislation seeks to apply residence-based taxation to U.S. citizens living abroad, made it clear that he wants to work together with Democrats to ease those tax burdens.
Republicans on the House Budget Committee are also interested. They are considering a menu of top budget options, and exempting nonresident U.S. taxpayers from income tax happens to be one of them.
The Senate Finance Committee is also looking into the issue, but it’s mostly concerned with the administrative tax burdens that those Americans face.
On January 30 Senate Finance Committee Chair Mike Crapo, R-Idaho, and ranking member Ron Wyden, D-Ore., released a wide-ranging discussion draft of the Taxpayer Assistance and Service Act, which seeks to improve IRS administration and procedure.
The 163-page draft covers a wide array of topics, including tax administration, customer service, judicial reviews, and appeals. Most of its suggestions are based on recommendations that the national taxpayer advocate has made. International tax practitioners — and U.S. taxpayers living abroad — will be happy to see that one portion of the draft is devoted to expatriates.
Americans Abroad
Over the years, Congress has solicited and received extensive feedback about the tax concerns of Americans living abroad. In 2013 the House Ways and Means Committee hosted a series of tax reform working groups and released a report prepared by the Joint Committee on Taxation on international tax issues (JCS-3-13).
The report revealed that commentators had asked lawmakers to revise the Foreign Account Tax Compliance Act, adopt residence-based taxation, and create a bipartisan commission to study how U.S. laws and policies — especially financial disclosure rules — affect U.S. citizens living abroad.
January’s discussion draft can be viewed as an evolution in this yearslong data-gathering exercise. The discussion draft summarizes six of the legislation’s proposals concerning nonresident U.S. taxpayers:
- section 201 addresses combined tax and foreign bank and financial account reporting;
- section 202 calls for a study and reports on simplification;
- section 203 suggests simplifying currency exchange rules;
- section 204 proposes a threshold increase for simplified foreign tax credit rules and reporting;
- section 205 proposes an extension of time for persons outside the United States to request abatement of math errors; and
- section 206 calls for a reduced burden for low-income, dual-citizen expatriates and for a clarification of the limitations period.
This article focuses on section 201, regarding foreign bank and financial account reporting, and section 202, which requires a study on simplification. The two proposals reflect promising steps to change the status quo, and taxpayer feedback could help sharpen both.
State of Play
Part of the discussion draft focuses on foreign bank and financial account reporting because Americans living abroad have made it clear that they face confusing and sometimes onerous reporting requirements through foreign bank account reporting under the Bank Secrecy Act and reporting under FATCA. Under the Bank Secrecy Act, any U.S. person who has a financial interest in, or authority over, a foreign bank account, securities, or other financial account must report them if their aggregate balance exceeded $10,000 during the previous calendar year (31 U.S.C. section 5314). Taxpayers file that information with the U.S. Financial Crimes Enforcement Network under FinCEN Report 114.
Second, under FATCA, U.S. taxpayers with certain kinds of foreign financial assets are required to report them to the IRS on Form 8938, “Statement of Specified Foreign Financial Assets.” The Form 8938 thresholds are much higher than FBAR’s $10,000 one, and they differ depending on whether a taxpayer lives inside or outside the United States.
For example, taxpayers living outside the United States who are unmarried or married filing separately must file Form 8938 if the total value of their specified foreign assets exceeded $200,000 on the last day of the year or held $300,000 at any time during the year. For similar taxpayers living in the United States, the numbers are $50,000 and $75,000, respectively.
We have both FBAR and FATCA because they fulfill different goals. As National Taxpayer Advocate Erin Collins noted in the most recent purple book, the government uses FBAR information to combat money laundering and financial crimes, while it uses FATCA information to ensure taxpayer compliance and assess whether taxpayers have income from foreign sources. And the differing FBAR and FATCA reporting thresholds mean the two reporting standards cannot be consolidated, according to the government.
The Taxpayer Assistance and Service Act wouldn’t address consolidation, but according to a section-by-section summary of the discussion draft, it would streamline FBAR and FATCA filing:
“Sec. 201. Combined Tax and Foreign Bank and Financial Account Reporting.
A person with a foreign bank account may have to report the account to the Financial Crimes Enforcement Network (FinCEN) on a Foreign Bank Account Report (FBAR) Form 114 and to the IRS on a tax return (e.g., Form 8938, Statement of Specified Foreign Financial Assets). The IRS enforces FBAR compliance but does not accept FBAR forms. FBAR forms must be filed with FinCEN.
To reduce burden and confusion, the provision would require a person to file both the FATCA and FBAR forms with the IRS with a tax return (or, if no return is filed, at the same time and in the same manner as such a return) by the due date of the tax return. The IRS would then transmit the FBAR to FinCEN. The provision applies to returns and reports required to be filed after the date that is 24 months after the date of the enactment.”
This would allow taxpayers to file their FBAR and FATCA forms together with the IRS instead of with two separate agencies. It’s a promising start because it would reduce the number of administrative steps involved. However, the proposal doesn’t strike at the heart of the issue: Nonresident U.S. taxpayers sometimes must include duplicative information on the two forms.
For example, FATCA requires taxpayers to disclose the maximum value of specified foreign financial assets. Those assets include financial accounts held at foreign financial institutions. FBAR also requires taxpayers to disclose the maximum value of financial accounts held at FFIs. There is some overlap in the categories of foreign assets that must be reported under each regime. Of the 19 different kinds of assets listed on the IRS website, reporting requirements overlap for 13 of those categories.
For example, both regimes require reporting on custodial and deposit financial accounts held at FFIs, foreign mutual funds, and foreign-issued life insurance or annuity contracts with a cash value. Neither requires reporting on directly held personal property like art and jewelry. FATCA requires reporting on foreign partnership interests and foreign hedge funds and private equity funds, whereas FBAR does not.
The national taxpayer advocate has repeatedly flagged the issue and believes that Congress needs to update the FBAR and FATCA statutes. Collins presented three recommendations on page 17 of the most recent purple book:
“Amend IRC section 6038D and 31 U.S.C. section 5314 to eliminate duplicative reporting of assets on IRS Form 8938 when a foreign financial account is correctly reported on an FBAR, while ensuring each agency’s continued access to information.
Amend IRC section 6038D to exclude accounts maintained by a financial institution organized under the laws of the country of which a U.S. person is a bona fide resident from the specified foreign financial assets required to be reported on IRS Form 8938.
Authorize the Secretary of the Treasury to issue regulations under Titles 26 and 31 to harmonize the FATCA and FBAR reporting requirements and direct the Secretary to issue such regulations within one calendar year from the effective date of the legislation. [Internal citations omitted; emphasis in original.]”
Requiring taxpayers to file FATCA and FBAR forms with the IRS seems to meet Collins’s third recommendation, if only procedurally rather than substantively.
Streamlining the Law
Section 202 of the discussion draft requires the Government Accountability Office to investigate the federal tax laws as they apply to Americans abroad. The section-by-section summary of the draft says:
“This provision requires the GAO to provide a report to the Treasury and Congress within one year on the burdens of complying with federal tax laws on citizens living abroad, including problems specific to low- and moderate-income citizens, such as: filing returns and reports with the IRS and FinCEN in an affordable manner, understanding and responding to inquiries from these agencies, accessing services with respect to these returns and reports, and accessing financial services abroad. Within one year of GAO’s report, the Secretary is required to report to Congress on the actions taken by Treasury to address any problems identified by the GAO and any recommendations for legislation to address such problems.”
The GAO has investigated some of these issues in individual reports, but not in one dedicated to comprehensively surveying the tax burdens of Americans abroad.
In 2012 and 2019, the GAO released reports on FATCA and FBAR filing requirements. The 2012 report determined that those requirements are duplicative and should be addressed in two main ways. It called on Treasury, the IRS, and FinCEN to update FATCA and FBAR filing instructions and explain any duplicative requirements, as well as to consider whether a streamlined reporting process could be implemented.
The IRS fulfilled one of those recommendations and now maintains a side-by-side comparison of the two filing requirements. However, the IRS declined to follow up on the streamlining recommendation. According to the GAO’s reports, this is the main unresolved issue.
One key question is just how much duplicative reporting occurs, and the GAO partially researched that in its 2019 report. It reviewed roughly 277,000 Form 8938 filings and found that more than a quarter contained amounts below the FATCA threshold, suggesting taxpayers were having trouble interpreting the filing rules.
The duplication problem isn’t new. When FATCA was under negotiation in November 2009, the Organization for International Investment (now the Global Business Alliance) told the House Ways and Means Committee in a hearing on FBAR and tax compliance that reporting under FATCA should not duplicate FBAR reporting.
“One or the other regime, but not both, would allow filers to conform to a rational set of rules,” the organization said. “The administrative burden and complexity must be reduced as a matter of encouraging compliance.”
It’s an issue that also appeared in the legislative history of FATCA. A technical explanation issued by the JCT in February 2010 (JCX-4-10) explained that while the information sought by FATCA is similar to information disclosed on an FBAR, the two are “not identical.”
That this kind of criticism endures more than 15 years later suggests that it deserves closer attention. It remains to be seen whether Congress will finally act.
What the Report Should Consider
Section 202 of the Taxpayer Assistance and Service Act would provide a rare opportunity for the GAO to comprehensively study how the tax code affects Americans living abroad and a chance for stakeholders to influence its lines of inquiry. The Senate Finance Committee is seeking comments on its discussion draft until March 31. Since the GAO’s 2019 report, no other data has been released on the FBAR and FATCA duplication issue. Should the Taxpayer Assistance and Service Act advance, it could enable lawmakers and the public to better understand the scope of the problem.
Some data on compliance would be helpful. Over the years, the government has struggled with FBAR compliance. A 2003 Treasury report speculated that FBAR compliance at the time could be as low as 20 percent. The good news is that FBAR filings have risen every year since then, but more information is also needed on how streamlined reporting could enhance compliance. The Taxpayer Assistance and Service Act and the associated discussion draft provide a platform to foster those discussions. Stakeholders should answer the call.
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