On August 21, 2024 the IRS held a public hearing on proposed regulations in relation to Foreign Trust Regulations. Below is the statement as prepared and delivered at the hearing by Rebecca Lammers, Chair Taxation Task Force, Democrats Abroad.

Thank you for the opportunity to speak at this important hearing.

My name is Rebecca Lammers, I’m originally from Ohio and now live in London, United Kingdom. I’m a proud volunteer for an organization called Democrats Abroad and I lead our dedicated group called the Taxation Task Force. Just to introduce us, Democrats Abroad is a volunteer-led grassroots organization, with 200,000 U.S. citizen members all over the world and we are the largest American abroad organization.

Democrats Abroad conducted a survey in 2022 of nearly 7,000 Americans abroad and the inability to save and invest was one of the top three problems reported. We also get absolutely bombarded with emails and calls asking for help to resolve the tax and financial access problems. So in May, when the comment period opened for these proposed regs, we submitted our own comment but we also asked our members and all Americans abroad to submit comments on how they’ve been impacted by these reporting requirements, and we were surprised and happy to see an overwhelming grassroots response — we were the ones responsbile for the majority of the 1,500 comments submitted for the comment period.

All American citizens should have the right to save for their retirement, regardless of where they live, this includes Americans abroad. We are frequently and unfairly stereotyped as rich leaving the country to evade taxes. The reality is that the majority are low to middle class who mostly leave the country for work, family, or school. Unfortunately, Americans abroad get caught up in a complicated web of international tax and reporting requirements with the IRS. This creates barriers for Americans abroad to save for retirement. One of the biggest issues is that some non-U.S. pensions may be reportable as “foreign trusts” to the IRS, this triggers reporting on forms 3520 and 3520-A.  But our pensions aren’t foreign trusts, they’re just pensions!

Many of us do not understand why our retirement and savings accounts may be classified as a “trust” in the first place. Many countries don’t even have trusts, so for the US to view these financial products as trusts, just doesn’t make sense from the start. And what is foreign from a US perspective, is local for us. 

Many Americans abroad have no other choice than to save in a savings or retirement account in their country of residence. Some countries don’t even allow opting out of an employer pension plan, and sending retirement savings back to the U.S. is generally not legally possible due to local statutes and regulations. Because of the confusion about whether a local (to us) non-US retirement or savings plan is or isn’t deemed a foreign trust from the US side, many people end up putting off saving for their future retirement. This particularly disadvantages ​​low and middle income Americans abroad who are the least able to pay for professional advice and may end up without adequate savings at retirement.

For taxpayers abroad, the level of awareness of this obscure reporting requirement is minimal at best. An American abroad’s first port of call is frequently their local embassy or consulate, but they don’t provide ANY support, that’s the IRS’ job. But if you look at the quentisential guide for taxpayers abroad, IRS Publication 54, there is no mention of this. Many, file their tax return simply not knowing they are subject to reporting of their non-US pension. Or once they find out, live in fear given the lack of clarity around the reporting requirements and potential penalties. This is a breach of the first of the Taxpayer Bill of Rights — the right to be informed.

Not filing foreign trust forms also comes with the risk of devastating penalties — it’s like Russian roulette whether the IRS will take ⅓ of someone’s life savings for a genuinely innocent filing mistake.

So once you know about it, there’s still confusion on what’s reportable. For example, when a taxpayer seeks guidance on how to report their non-US savings or retirement accounts, one can speak to multiple different tax preparers and they will all have a different interpretation of whether a particular account is subject to foreign trust reporting or not. Tax professionals themselves admit not understanding these reporting requirements! They will disagree on whether MANY of these accounts fit the definition of a “trust” or not, and so some people go ahead and report them anyway in the abundance of caution due to fear about the risk of life-changing penalties. Nothing is clear; everything is ambiguous. 

If there is no consensus EVEN in the expat tax professional community, how is someone supposed to know if the way they’re advised to report is correct? This is at its core one of the major problems with both current practice and the proposed regulations.

Individual taxpayers do not have the capacity to determine whether their retirement plan would be considered a “qualified tax-favored foreign retirement trust.”  Their only option is to pay for an opinion from an accountant or a lawyer, which is not only an enormous financial burden, but also provides only an opinion, which may or may not be disputed later.

And, tax professionals tell us that individual taxpayers are typically unable to complete Form 3520 on their own because to being too complicated. This forces taxpayers into paying a professional and adds an additional $200-600 to their already complicated and expensive tax preparation costs.

Just to point out, that non-US savings and retirement accounts are already reported as “specified foreign financial assets” on Form 8938, so foreign trust reporting on 3520 and 3520-A adds no value from a tax administration perspective.  We believe that non-US retirement and savings have been accidentally caught up in the foreign trust regulations and it wasn’t intended for these accounts to be subject to foreign trust reporting in the first place. 

The Background section preceding the Proposed Regulations did a great job summarizing the legislative history.  Congress implemented foreign trust reporting to combat abusive tax schemes where U.S. resident taxpayers were using foreign trusts to transfer large amounts of assets to tax havens.  It was clearly not the intent of Congress to regulate or penalize non-U.S. pensions or retirement accounts. If they had intended that, they would have said so. The law is clear, but the regulations are not. Even the attempt in these proposed regs are unclear.

So the proposed regs aim to reduce reporting requirements by introducing exemptions for “tax-favored foreign retirement trusts” and “tax-favored foreign non-retirement savings trusts,”  - what a mouth full! But we still think the proposed regs will result in continued ambiguity and confusion. The uncertainty inherent in the statute and Proposed Regs is a major issue for taxpayers, professional preparers, and for the IRS itself.  We must ensure that pensions are treated as what they are, pensions!

So the proposed regs do not address the core of the problem - that non-US pensions shouldn’t be treated as a trust. These proposed regs are a good step in the right direction, but we still have some major concerns. On a high level, it feels like we’re trying to fit a square peg in a round hole, first because the proposed regs still treat non-US pensions as foreign trusts, when they’re not, but secondly because non-US pensions have rules and regulations that function in a way that makes sense for residents in that country.

For example, there’s an attempt in the proposed regs to allow limited contributions from unearned income, but it still limits Americans abroad from being able to contribute from certain other sources allowed in some countries. Another issue, it’s not clear if the various monetary thresholds apply on an individual basis, or based on the account limit. And then, how is someone supposed to stay within the contribution limits if they don’t control currency fluctuations? These areas need to be addressed to provide the clarity that Americans abroad are so desperately seeking from the IRS.

Additionally, we have two key recommendations that may fall out of the anticipation scope for these regulations but I think are worth mentioning here anyway - first, the regulations should state the general presumption that trust reporting is not required for non-US pensions and retirement accounts. All non-U.S. pensions are reportable on Form 8938 already, so the foreign trust reporting is duplicative, and can be eliminated without a material loss of transparency. The IRS can reserve the right to specify any particular schemes that are deemed to be problematic (like the Malta pension) and should be separately reported.

Secondly, clarify which accounts do and don’t need to be reported - if this is to arduous a task, then at least start with the top 10 countries with the largest US citizen populations - Mexico, Canada, the UK, Germany, Australia, Israel, South Korea, France, Japan, and Spain would be a great start.

This is the level of clarity that would be required for ordinary low to middle income Americans abroad to be able to understand and comply with the rules.

So, to summarize, we want clarity and we want to be informed. But more to the point, we want our pensions to be treated as pensions, and NOT caught up in these foreign trust reporting requirements.

Thank you again for holding this hearing, and I greatly appreciate your attention to the difficulties faced by Americans abroad.