Below is a copy of the submission the Democrats Abroad Global Taxation Task Force submitted to the House Financial Services Subcommittee on Oversight and Investigations for hearing titled "Holding the Biden Administration Accountable for Wasteful Spending and Regulatory Overreach" that took place yesterday.
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:
Americans abroad suffer from a number of outdated misconceptions when in fact:
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:
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.
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:
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.