International Tax Obligations Toward Expatriates Draw Attention Anew
The struggle of U.S. taxpayers residing abroad with their taxes is gaining traction. During his 2024 campaign trail, President Donald Trump promised to eradicate the so-called "double taxation" affecting these individuals. After Trump's reelection, Republican Representative Darin LaHood (R-Ill.) introduced the Residence-Based Taxation for Americans Abroad Act (H.R. 10468), advocating for residence-based taxation for citizens living abroad. LaHood also expressed his desire to collaborate with Democrats to alleviate these tax burdens.
Republicans on the House Budget Committee have likewise shown interest, considering the exemption of nonresident U.S. taxpayers from income tax as one of their budget options. Meanwhile, the Senate Finance Committee is primarily concerned with the administrative tax burdens faced by these Americans.
On January 30, 20XX, the Senate Finance Committee Chairman Mike Crapo (R-Idaho) and ranking member Ron Wyden (D-Ore.) unveiled a wide-ranging discussion draft, the Taxpayer Assistance and Service Act, aimed at improving IRS administration and procedure. This 163-page document tackles various topics, including tax administration, customer service, judicial reviews, and appeals, while addressing the concerns of expatriates.
Over the years, Congress has received feedback regarding the tax problems of U.S. citizens living abroad. In 2013, the House Ways and Means Committee hosted a series of tax reform working groups and published a report on international tax issues, which discussed suggestions for revising the Foreign Account Tax Compliance Act, adopting residence-based taxation, and creating a bipartisan commission to analyze the impact of U.S. laws and policies on expatriates.
January's discussion draft can be considered a progression in this years-long data-gathering exercise. The act outlines six proposals affecting nonresident U.S. taxpayers, including addressing combined tax and foreign bank and financial account reporting, calling for a study and reports on simplification, and proposing rule adjustments for currency exchange.
This article focuses on two of these proposals: section 201, related to foreign bank and financial account reporting, and section 202, which mandates a study on simplification. These proposals show promise in changing the status quo and could benefit from taxpayer feedback to further refine both.
Current Situation
The discussion draft focuses on foreign bank and financial account reporting due to the concerns expressed by U.S. residents abroad regarding the reporting requirements under the Bank Secrecy Act and FATCA. Under the Bank Secrecy Act, anyone with a financial interest in or authority over a foreign bank account, securities, or other financial account must report if their aggregate balance exceeds $10,000 during the previous calendar year. Taxpayers submit this information to the U.S. Financial Crimes Enforcement Network via FinCEN Report 114.
Simultaneously, FATCA requires U.S. taxpayers with specific foreign financial assets to report them on Form 8938. The reporting thresholds in FATCA are higher than in FBAR and differ based on whether a taxpayer lives within or outside the U.S.
The Taxpayer Assistance and Service Act does not address the consolidation of FBAR and FATCA reporting, but the act does propose streamlining FBAR and FATCA submissions. According to a section-by-section summary of the act, taxpayers would now file both FATCA and FBAR forms with the IRS rather than with two separate agencies.
This change is a promising move as it reduces the administrative steps involved but doesn't directly address the duplication of information required on these forms. For example, both FATCA and FBAR forms require reporting on specific categories of foreign assets. While the reporting criteria slightly differ, there is still some overlap, potentially creating confusion for taxpayers.
The national taxpayer advocate has raised concerns about this issue and advocates updating the FBAR and FATCA statutes to eliminate the duplicative reporting. They envision amending IRC sections 6038D and 31 U.S.C. section 5314 to eliminate redundancy while still ensuring each agency access to necessary information.
The Road Ahead
Section 202 of the discussion draft mandates the Government Accountability Office (GAO) to investigate the burden of complying with federal tax laws on U.S. expatriates. The GAO is tasked with providing a report to the Treasury and Congress within one year on the tax compliance burdens faced by citizens living abroad, including problems specific to low- and moderate-income individuals.
The GAO has previously looked into some of these issues but none have encompassed a comprehensive study on the tax burdens faced by Americans residing overseas. In 2012 and 2019, the GAO released reports on FATCA and FBAR filing requirements, revealing that they are duplicative. The reports urged the IRS, Treasury, and FinCEN to update filing instructions and explain the overlap, as well as to consider implementing a streamlined reporting process.
Sadly, the IRS did not take action on this recommendation. The GAO's 2019 report indicated that over a quarter of Form 8938 filings might contain information below the FATCA threshold, suggesting confusion in interpreting the filing rules.
The duplication problem is not a new issue; it was first raised during the negotiation of FATCA in 2009 when the Organization for International Investment (now the Global Business Alliance) recommended consolidating the filing requirements to reduce complexity and improve compliance.
The issue still persists today, and it remains to be seen whether Congress will eventually address it. This proposed study by the GAO could present an opportunity for stakeholders to shed light on the problem and influence its focus. The public has until March 31 to provide their input on the discussion draft.
- The Residence-Based Taxation for Americans Abroad Act, proposed by Representative Darin LaHood, aims to eradicate the double taxation faced by Americans abroad.
- The Taxpayer Assistance and Service Act, unveiled by the Senate Finance Committee, includes proposals to simplify tax reporting for expatriates, addressing concerns raised by the national taxpayer advocate.
- FATCA requires U.S. taxpayers with specific foreign financial assets to report them on Form 8938, leading to confusion due to overlap with FBAR reporting requirements under the Bank Secrecy Act.
- Section 202 of the discussion draft mandates the Government Accountability Office (GAO) to investigate the burden of complying with federal tax laws on U.S. expatriates, including low- and moderate-income individuals.
- The Gao's 2019 report revealed that over a quarter of Form 8938 filings might contain information below the FATCA threshold, indicating confusion in interpreting the filing rules, but no action was taken to address this issue.
