The complexities of U.S. tax laws for Americans living abroad are under review. This comes after President Trump pledged to eliminate what he termed “double taxation” for these individuals during his 2024 campaign. Following Trump’s reelection, Representative Darin LaHood introduced the Residence-Based Taxation for Americans Abroad Act. LaHood aims to apply residence-based taxation to U.S. citizens living abroad and seeks bipartisan support to reduce their tax burdens.
Republicans on the House Budget Committee are also exploring options. One proposal involves exempting nonresident U.S. taxpayers from income tax.
The Senate Finance Committee is examining the administrative tax challenges faced by Americans abroad.
On January 30, Senate Finance Committee Chair Mike Crapo and ranking member Ron Wyden released a discussion draft of the Taxpayer Assistance and Service Act. This act aims to improve IRS operations and procedures.
The 163-page draft addresses various topics, including tax administration, customer service, and appeals. Many suggestions are based on recommendations from the national taxpayer advocate. A section of the draft focuses on expatriates, which is welcome news for international tax professionals and U.S. taxpayers abroad.
Streamlining Foreign Account Reporting
A key part of the discussion draft addresses foreign bank and financial account reporting. Americans abroad have expressed concerns about confusing and burdensome reporting requirements under the Bank Secrecy Act and the Foreign Account Tax Compliance Act (FATCA).
Under the Bank Secrecy Act, U.S. persons with a financial interest in or authority over a foreign bank account must report it if the total balance exceeded $10,000 during the year. This information is filed with the Financial Crimes Enforcement Network (FinCEN) using FinCEN Report 114.
FATCA also requires U.S. taxpayers with certain foreign financial assets to report them to the IRS on Form 8938. The thresholds for Form 8938 are higher than the $10,000 threshold for FBAR.
For example, unmarried taxpayers living outside the U.S. must file Form 8938 if their foreign assets exceeded $200,000 at the end of the year or $300,000 at any point during the year. For similar taxpayers living in the U.S., the thresholds are $50,000 and $75,000, respectively.
FBAR and FATCA serve different purposes. FBAR is used to combat money laundering, while FATCA ensures taxpayer compliance and identifies income from foreign sources, according to National Taxpayer Advocate Erin Collins. The differing reporting thresholds prevent the consolidation of these standards.
Proposed Changes to Filing
The Taxpayer Assistance and Service Act aims to streamline FBAR and FATCA filing.
The proposed changes would require taxpayers to file both FATCA and FBAR forms with the IRS along with their tax return. The IRS would then transmit the FBAR data to FinCEN. This provision would apply to returns and reports filed 24 months after the enactment date.
This change would simplify the filing process by reducing the number of agencies involved. However, it does not address the issue of duplicative information on the two forms.
For instance, both FATCA and FBAR require disclosing the maximum value of foreign financial assets, leading to overlap in reporting requirements. The national taxpayer advocate has recommended that Congress update the FBAR and FATCA statutes to eliminate this redundancy.
Collins suggests amending the law to avoid duplicate reporting on Form 8938 when a foreign financial account is correctly reported on an FBAR. She also recommends excluding accounts maintained in the country where the U.S. person resides from FATCA reporting. Additionally, she advises authorizing the Treasury Secretary to harmonize FATCA and FBAR reporting requirements through regulations issued within one year.
Government Accountability Office (GAO) Investigation
The Taxpayer Assistance and Service Act requires the GAO to investigate federal tax laws affecting Americans abroad. The GAO will report to the Treasury and Congress within one year on the challenges faced by citizens living abroad, especially those with low to moderate incomes. This includes the difficulties of filing returns, understanding agency inquiries, accessing services, and obtaining financial services abroad.
The Secretary of the Treasury must then report to Congress on actions taken to address these problems and recommend any necessary legislation.
The GAO has previously reported on FATCA and FBAR filing requirements. A 2012 report found these requirements to be duplicative and recommended updating filing instructions and considering a streamlined reporting process.
While the IRS has provided a side-by-side comparison of the two filing requirements, it has not implemented a streamlined process. A 2019 GAO report found that many Form 8938 filings contained amounts below the FATCA threshold, indicating confusion among taxpayers.
Critics have long argued that FATCA reporting should not duplicate FBAR reporting. The Organization for International Investment (now the Global Business Alliance) raised this issue in 2009, emphasizing the need to reduce administrative burden and complexity.
The Senate Finance Committee is seeking comments on the discussion draft until March 31. This presents an opportunity for stakeholders to influence the GAO’s investigation. More data is needed on FBAR and FATCA compliance and how streamlined reporting could improve it. The Taxpayer Assistance and Service Act offers a platform for these discussions.
Historically, FBAR compliance has been a challenge. A 2003 Treasury report estimated compliance to be as low as 20 percent. While FBAR filings have increased since then, further information is needed on how to enhance compliance through streamlined reporting.
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