Dear Chairwoman Waters, Ranking Member McHenry, and Members of the Committee:

Democrats Abroad greatly appreciates your holding this important hearing. We recognize the importance of the Financial Crimes Enforcement Network’s mission to combat money laundering and terrorist financing.  Today we are submitting policy proposals based on the firsthand experiences of our 200,000 members.

Since the passage of the Currency and Foreign Transactions Reporting Act (more commonly known as the Bank Secrecy Act) in 1970, U.S. citizens living abroad (“non-residents”) have increasingly become  caught up in ongoing efforts against tax evasion and malicious actors. While we recognize that battling money laundering and terrorist financing are critical priorities, substantial adjustments to FinCEN Form 114, the Report of Foreign Bank and Financial Accounts or “FBAR,” are needed to ensure that the impact to ordinary law-abiding citizens is proportional to the financial law enforcement benefits.

The FBAR is a duplicative, burdensome and confusing information report, which no longer serves a meaningful purpose given the availability to the Treasury Department of similar information from multiple other sources.  FBAR information collection from U.S. citizens who reside outside the United States is an undue burden for the following reasons:

• Awareness of the FBAR filing requirement is low among ordinary middle class citizens who reside outside the United States.  Filing follows a multi-step online process which is completely separate from tax return preparation and filing, and many professional tax preparers do not routinely ask questions that would identify whether an individual has a filing requirement.
• The filing requirements and definitions are difficult to understand.  For an ordinary individual reading the instructions provided with the form, it is difficult to determine whether reporting of certain account types (such as non-U.S. pensions, prepaid transit cards, or cashless payment apps) is required or not.  Professional tax preparers are often hesitant to offer advice on these questions, other than to say that conservatism is prudent given the extraordinarily high penalties for compliance failures, even if non-willful.
• Filing thresholds have not been revised in almost 50 years and are inordinately low.  Once an individual has triggered the filing requirement as a result of having aggregate financial assets greater than $10,000, then all non-U.S. financial accounts must be declared, with no de minimis exemption.  For instance, even dormant accounts with zero balance must be reported.
• The fact that penalties are assessed on a per-account, not a per-form, basis and the fact that the per-account penalty often exceeds the balance of the account means that accidental non-compliance comes with terrifying consequences.  
• FBAR filings are largely duplicative with the information collected on other IRS forms such as Form 8938 (“Statement of Foreign Financial Assets”), Form 8621 (“Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”) and Form 3520A (“Annual Information Return of Foreign Trust with a U.S. Owner”).  In addition to the duplicative information reporting required of individuals, FATCA requires Foreign Financial Institutions to file Form 8966 disclosing balances and income associated with accounts owned by U.S. citizens.
• Finally, FBAR’s requirement for information on accounts for which the U.S. citizen does not have a beneficial interest but only signature authority is also a major cause of misunderstanding and unintentional compliance failures.  It also leads overseas corporations to remove U.S. citizens from positions of authority over financial matters, limiting the career opportunities for those impacted.

If all of the 9 million U.S. citizens who reside outside the United States actually complied fully with the FBAR filing requirements, FinCEN would be inundated with an overload of useless information about the everyday financial activities of ordinary people.  This would not support FinCEN’s mission of combating money laundering, but rather drown out actual indicia of risk in a tidal wave of unnecessary information.

The GAO has called attention to the overlap and redundancy of information being fed to Treasury and called for consolidation and simplification to relieve the burden on Americans abroad.  In addition, the “challenges” identified by the GAO in 2018 with “...complying with US tax reporting requirements on their foreign retirement savings” can be very onerous, often requiring expensive professional assistance, which further induces fear of punitive sanctions and stresses caused by forcing unwilling non-US spouses and business associates into US reporting further discourage compliance.

Without evidence of serving any purpose for combatting money laundering and terrorist financing activities, administering the FBAR regime is consuming resources which could be deployed to other activities, and has not shown the practical utility that is required to justify its continuation.

Our recommendations are intended to help FinCEN achieve proportionality while simultaneously improving FBAR’s effectiveness as a law enforcement tool. 

Policy Recommendations: 

• A one-time adjustment of FBAR reporting thresholds to $70,000, which accounts for inflation in the 50 years since FBAR’s introduction, followed by annual inflation adjustments thereafter. 
• Thresholds should be customized to take into account “Geographic Risk.”  The motivations and justifications for holding non-US accounts differ greatly between resident and non-resident US citizens.  Specifically, either:
  • An exemption of non-residents from reporting OR
  • A significantly higher reporting threshold for non-residents on the order of $400,000 (consistent with IRS Form 8938)
• Given Form 8966 reporting by financial institutions, it is not clear why individual filings are required at all. At a minimum, the two individual bank account filing requirements (FBAR and Form 8938) should be consolidated and shared between IRS and FinCEN as necessary.  Please note that this has been a recurring point of feedback from the IRS National Taxpayer Advocate for multiple years.
• Improving the proportionality of enforcement/penalties for FBAR violations and clearly defining willful vs. non-willful recommendations. We note that this has also been a point of feedback from the IRS National Taxpayer Advocate.
• Restoration of paper FBAR filings and improvement of e-Filing options to allow popular tax-filing software to include FBAR e-filing. 
• Exclusion of accounts under a de minimis threshold, even when the reporting obligations are triggered based on aggregate foreign bank account balances. 
• For non-residents, exclusion of accounts where a US Person only has signatory authority on the account but in which they have no beneficial interest. 

At the present, FBAR reporting is redundant, disproportionate to risk, and it fails to take into account the necessities of holding foreign bank accounts when residing outside of the United States. At the same time, enforcement efforts are generally disproportionate, with FinCEN exercising little discretion and often pursuing statutory-maximum penalties even for infractions deemed non-willful. This results in highly, highly, regressive penalties that disproportionately harm the middle and working class. In some cases, fear of excessive penalties is cited as a barrier to becoming compliant for previous non-filers. 

Our proposals for reform are intended to reduce paperwork burdens for both the public and FinCEN, align reporting to accounts that are large enough to pose a substantial risk relating to financial crimes, and to ensure that enforcement serves a public benefit. 

We thank you for the opportunity to provide commentary and recommendations, and we encourage you to read our responses to specific questions in the annex included with our letter. 

Thank you for the opportunity to provide this testimony.

Please do not hesitate to contact Rebecca Lammers of our Taxation Task Force on [email protected] with any questions about the information and recommendations provided.

Sincerely,