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

Democrats Abroad greatly appreciates your holding this important hearing. We would like to highlight serious ongoing concerns from your constituents living abroad related to the Treasury Department’s interpretation and enforcement of the Currency and Foreign Transactions Reporting Act (more commonly known as the Bank Secrecy Act) and we would like to submit specific policy proposals for reform.

We recognize the importance of combating money laundering and terrorist financing. However, since passage of the Bank Secrecy Act in 1970, U.S. citizens living abroad (“non-residents”) have increasingly become unjustly targeted in efforts against financial crime. Substantial adjustments to FinCEN Form 114, the Report of Foreign Bank and Financial Accounts or “FBAR,” are needed to ensure that the impact on ordinary law-abiding citizens is proportional to the benefits of financial crime enforcement.

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

• Awareness of the FBAR filing requirement is low among ordinary middle class citizens who reside outside the U.S. Filing is a multi-step online process 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. Even dormant accounts with zero balance must be reported. This is clearly discriminatory against U.S. citizens abroad with accounts in their country of residence when Americans living inside the U.S. are not subject to similar requirements on their local accounts.
• Penalties are not subject to deficiency procedures as are many tax-related penalties, and the criteria for establishing “willfulness” have not been clearly established, with the result that the IRS often asserts terrifyingly ruinous penalties for unwitting, even accidental, noncompliance.
• FBAR filings largely duplicate 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 this duplicate reporting required of individuals, FATCA also 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 in which the U.S. citizen does not have a financial interest, but only has signature authority, causes misunderstanding and unintentional noncompliance. It also leads non-U.S. corporations and even volunteer organizations to deny U.S. citizens positions of authority over financial matters, thus limiting their job opportunities.

Americans abroad suffer from a number of outdated misconceptions when in fact:

• There are an estimated 9 million Americans living outside the U.S., a population greater than all but 11 states.
• Most moved abroad for family, work, or education, not to evade taxes or launder money.
• Few are rich: In fact, research shows that the overwhelming majority are working or middle class.

An April 2022 Democrats Abroad survey of 6,903 Americans living outside the U.S. found that confusion about FBAR abounds. Almost 30% were unaware of the requirement to report their local bank accounts. Survey findings related to FBAR are summarized below:

If all 9 million U.S. citizens who reside outside the U.S. actually complied fully with FBAR filing requirements, FinCEN would be inundated with 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.

The GAO has called attention to overlap and redundancy of information being fed to Treasury, and called for consolidation and simplification to relieve the burden on Americans abroad. “Challenges… complying with U.S. tax-reporting requirements on their foreign retirement savings” can be very onerous for Americans abroad, often requiring expensive professional assistance and inducing fear of punitive sanctions. Stress caused by forcing unwilling non-U.S. spouses and business associates into U.S. reporting further discourages compliance.

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

The statutory authority for the FBAR filing requirement is found in 31 U.S. Code § 5314(a), beginning with: “Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a … citizen of the United States … to keep records, file reports, or keep records and file reports, when the … citizen … makes a transaction or maintains a relation for any person with a foreign financial agency.”  

Under 31 USC 5314(b), the Secretary can prescribe:

• to which countries FBAR should apply;
• a “reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;”
• “the magnitude of transactions subject to a requirement or a regulation…;”
• “the kind of transaction subject to or exempt from a requirement or a regulation…;”
• “and other matters the Secretary considers necessary...”

These available authorities should be used to relieve the redundant burden on Americans abroad and FinCEN itself.  Treasury should modify regulations in 31 CFR § 1010.350 to help FinCEN achieve proportionality while simultaneously providing relief for non-resident citizens and improving FBAR’s effectiveness as a law enforcement tool. 

Policy Recommendations: 

• Eliminate the FBAR filing requirement for non-resident U.S. citizens altogether, or exclude reporting requirements for accounts held by individuals in their country of residence.  
  • 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 data shared between IRS and FinCEN as necessary. This has been a recurring point of feedback from the IRS National Taxpayer Advocate for many years.    
• Thresholds should be customized to take into account “geographic risk.”  The motivations and justifications for holding non-U.S. accounts differ greatly between resident and non-resident U.S. citizens. If the reporting requirement for non-resident citizens is continued, then the threshold for them should be raised to $200,000 (consistent with IRS Form 8938)
• Adjust FBAR reporting thresholds to $70,000 to account for inflation in the 50 years since FBAR’s introduction, followed by annual inflation adjustments. 
• Improve the proportionality of penalties for FBAR violations and clearly define willful vs. non-willful violations. The IRS National Taxpayer Advocate has also emphasized this point.
• Restore paper FBAR filings and improve e-Filing options. 
• Exclude accounts under a de minimis threshold, even when the reporting obligations are triggered based on aggregate foreign bank account balances. 
• For non-residents, exclude accounts where a U.S. Person only has signature authority but no financial interest. 

Summary:

FBAR reporting is redundant, disproportionate to risk, and fails to take into account the necessity of holding foreign bank accounts when residing outside the U.S.

FBAR has become obsolete due to the introduction of overlapping (and thus redundant) data-reporting mechanisms applicable to all Americans abroad: 

• IRS Form 8938, 
• reporting by Foreign Financial Institutions on Form 8966, and
• automatic data exchanges facilitated by FATCA Inter-Governmental Agreements (“IGAs”).  

At the time of FBAR’s introduction in the 1970s, automatic reporting was not yet a concept, nor was international tax cooperation in the advanced state that exists today.  For years the National Taxpayer Advocate has called for reduction of duplication and harmonization of reporting.

At the same time, enforcement of FBAR is generally disproportionate, with FinCEN exercising little discretion, and often pursuing statutory-maximum penalties even for infractions deemed non-willful. Though statutes may authorize high penalties, significant discretion should be exercised to take into account the financial means of the taxpayer and whether or not the individual is otherwise compliant with tax obligations.  FBAR enforcement should serve as a deterrence to non-reporting, not as a revenue driver, which results in highly regressive penalties that disproportionately harm the middle- and working-class Americans abroad. Fear of excessive penalties has even been cited by previous non-filers as a barrier to becoming compliant . 

Democrats Abroad has responded to FinCEN’s recent request for comment on the effectiveness of the Bank Secrecy Act. To a similar earlier comment about a proposed rule threatening time in jail for failure to file a form within 20 days, FinCEN merely noted that it “has considered statutory goals and potential negative impacts and done its best to mitigate the latter for United States residents and non-residents alike.” This demonstrates both FinCEN’s apathy to issues faced by ordinary Americans and its tendency towards regulatory overreach.

Ordinary Americans abroad require access to banking, investment, and pension products which may be “foreign” to the U.S. but are just part of ordinary life in their country of residence. Redundant reporting of such accounts, and disproportionate enforcement against inadvertent noncompliance, create major unnecessary hurdles. 

Ultimately, Democrats Abroad supports changing to a residency-based tax system so that everyday Americans abroad are not burdened with complex reporting and double taxation. Until that time, we appreciate your reviewing our proposals above.

The reforms we propose are intended to reduce paperwork burdens for both the public and FinCEN, to focus reporting on accounts large enough to pose a substantial risk if involved in financial crime, and to ensure that enforcement serves a public purpose. 

Sincerely,