Dear Chairman Crapo, Ranking Member Wyden, and Members of the Committee:

Democrats Abroad greatly appreciates your release of proposed legislation to make common-sense fixes to IRS procedures and administration. It would address many longstanding proposals from the National Taxpayer Advocate (NTA), and we are particularly encouraged to see the inclusion of a title which specifically addresses the unique challenges faced by taxpayers residing outside the United States. As the largest and oldest Americans abroad organization in the world, we welcome the opportunity to submit comments.

Summary of our comments:

• Sec. 201:  Rather than attaching the FBAR to tax returns, we suggest adopting the NTA’s recommendation to reduce maximum penalty amounts and modify the definition of “willful” for the purposes of determining FBAR violations. Attaching the FBAR to the 1040 could have unintended consequences.
• Sec. 202:  We welcome the proposed GAO study and Treasury proposal to identify and address the costs and burdens of tax compliance for Americans abroad.
• Sec. 203:  We greatly appreciate the simplification of foreign exchange rules, especially allowing the offset of currency gains or losses related to the sale of a home vs. the corresponding currency loss or gain on the refinance or discharge of a mortgage outside the United States.
• Sec. 204:  While we agree with the proposed adjustment to the threshold for simplified foreign tax credits, we advocate raising the $5 filing threshold for Married Filing Separately, which applies to many Americans abroad with a non-citizen spouse.
• Sec. 205:  This is a technical fix which will benefit those impacted.
• Sec. 206:  This attempts to ease a paperwork filing burden, but Congressional efforts are better focused on addressing the causes of citizenship renunciation.

Additional recommendations:

• Eliminate penalties for non-filed or incomplete-information returns by rolling those penalties into the penalties for tax evasion, so that someone is penalized only if tax is actually evaded.
• Amend the code to clarify that foreign taxes must be allowed as credits against the Net Investment Income Tax, in line with the Bruyea and Christensen court rulings.
• Mandate that the IRS direct deposit refund payments to non-U.S. bank accounts.
• Allocate funding to improve IRS service for Americans abroad.

Detailed commentary: 

Section 201.  Combined Tax and Foreign Bank and Foreign Financial Account Reporting

The requirement to file FinCEN Form 114 – the Report of Foreign Bank and Financial Accounts (FBAR) – disproportionately impacts Americans abroad due to the legal or practical need to have a bank account in one’s country of residence. FBAR filing requirements are also difficult for everyday Americans abroad to understand. The majority of FBAR violation cases that the IRS has pursued have been for domestic taxpayers, but the fear and worry of filing an FBAR with errors is exacerbated by FBAR penalty horror stories (see Annex II). We support the National Taxpayer Advocate’s recommendations to increase the burden of proof on the IRS for declaring a failure “willful” and to reduce the maximum penalty for willful violations involving small accounts as a better solution for FBAR enforcement.

The proposed legislation requires the FBAR to be attached to the tax return rather than having it separately filed with FinCEN. This would likely improve awareness of the reporting requirement and increase the number of FBAR forms filed; however, it would not relieve the extensive duplication across FBAR and Form 8938 (the Statement of Foreign Financial Assets required under FATCA). We are also concerned that the statute of limitations in the draft are unclear, which could lead to a tax return being open to audit indefinitely. Moreover, tax preparers will likely compel their clients to include FBAR preparation in the scope of the overall tax return preparation engagement. Many individuals today are able to complete and file the FBAR without professional assistance, but incorporating FBAR into the tax return would unnecessarily drive up American abroad tax preparation costs. On average, preparation and filing from abroad costs ten times more than filing domestically. Some expat tax professionals charge $100 per account to prepare the FBAR for clients. Adding the FBAR to already high tax preparation costs is not financially manageable for the majority of low and middle income Americans living abroad.

We also emphasize the duplicative information reporting between the FBAR and Form 8938. Having slightly different thresholds and rules for submitting substantially the same information on a tax return risks causing confusion and possible errors for taxpayers. We support consolidating the FBAR filing requirement into Form 8938, as proposed in Section 4 of the Tax Simplification for Americans Abroad Bill introduced as H.R. 5432 in the 118th Congress; however, changing forms creates difficulty and cost for the IRS, so reducing FBAR penalties would be a sufficient first step. Further recommendations for reforming FBAR are attached as Annex I.

Sec. 202.  Study and Reports on Simplification

Compared to domestic Americans, those residing abroad face materially higher costs and burdens in accessing IRS services, in timely and accurately filing U.S. tax returns and reports required under the Bank Secrecy Act, and in timely receiving, understanding, and responding to inquiries. The costs and burdens related to tax-filing and information-reporting requirements impact the ability of Americans abroad to save for retirement, purchase insurance protection, and obtain mortgages using financial products available in their country of residence.

We welcome the proposed GAO study on these issues and the requirement that the Secretary of the Treasury propose actions to address them. We would urge GAO and Treasury to focus on the areas in which citizens living abroad face greater complexity than domestic taxpayers, including the requirements for filing international information returns, the lack of clarity on the taxation of foreign retirement plans, and the taxation of small business owners.

Sec. 203.  Simplified Currency Exchanges Rules

We very much appreciate the proposal to simplify foreign currency conversions on the tax returns of Americans abroad and to eliminate the painful fact that “phantom” currency gains on retiring a mortgage cannot be offset by the corresponding loss on the sale of a home, or vice versa.

Sec. 204.  Increased Threshold for Simplified Foreign Tax Credit Rules and Reporting

This would help both U.S. residents who have a small amount of overseas passive income and Americans abroad who are not employed but have to file Married Filing Separately due to having more than $5 of interest or dividend income. It would be better to increase the threshold for Married Filing Separately, because many Americans abroad have non-U.S. spouses who are difficult to include in a joint return, and even those with very small amounts of income trigger the $5 threshold and must file as Married Filing Separately.

For Americans abroad who are married to a non-resident alien, we propose that the filing threshold for Married Filing Separately should be equal to the standard deduction amount. The filing threshold was previously set equal to the standard deduction, but that was changed to $5 a few years ago. The reasoning is that if one spouse filing Married Filing Separately itemizes deductions, then the other spouse cannot claim the standard deduction, and essentially might have to pay tax on all income. With a non-resident alien spouse who will not be filing a U.S. tax return, the American spouse filing Married Filing Separately can always claim the standard deduction, so the $5 threshold is meaningless. The current threshold does not result in more revenue, but it does criminalize non-filers.

Sec. 205.  Extension of Time for Persons Outside of the United States to Request Abatement of a Math Error

This is a technical fix addressing a recommendation from the NTA and will benefit those impacted.

Sec. 206.  Reduced Burden for Low-Income Dual-Citizen Expatriates; Clarification of Limitation Period

The United States suffers from a high number of citizenship renunciations due to its almost unique citizenship-based tax system. Rather than addressing the symptom (renunciations by non-resident citizens), we would prefer that Congress address the causes (complexity, cost, and burden of tax compliance). 

In addition, we propose adding the following tax administration reforms to further ease compliance for Americans abroad:

• Eliminate penalties for non-filed or incomplete information returns by rolling those penalties into the penalties for tax evasion, so that someone is penalized only if tax is actually evaded:
  • Eliminate non-willful penalties for information returns and FBAR, which have not been a useful mechanism for increasing reporting compliance.
  • If non-willful penalties are not eliminated, make them subject to deficiency proceedings: Individuals notified of a non-willful reporting deficiency have the opportunity to rectify the issue without being subject to full penalties. This issue applies to FBAR Form 114, Form 8938, Form 5471, Form 8621, and Forms 3520/3520A. (From NTA 2020 Annual Report to Congress, MSP #8, p.119)
  • If willful penalties are not eliminated, clarify the criteria for establishing “willfulness”: Clarify that, before asserting a willful FBAR or information reporting penalty, the government must establish actual willfulness (i.e., specific intent to violate a known legal duty, rather than mere negligence, gross negligence, or recklessness) and that it cannot meet this burden by relying primarily on Schedule B attached to a return. (From NTA 2021 Purple Book, Legislative Recommendation #35, pg. 73, and NTA 2014 Annual Report, Legislative Recommendation #6, pg. 331-345) The current criteria for willfulness vary depending on which Federal circuit hears a case, and Treasury has taken an aggressive stance in the past (e.g., ignorance in general is willful negligence; it’s willful if someone files a 1040 with Schedule B attached; etc.).
• Amend the code to clarify that the IRS must allow foreign taxes to be credited against the Net Investment Income Tax, as per recent court decisions.
  Amend Sections 27 and 901(a) of the Internal Revenue Code by inserting ‘‘or chapter 2A’’ after ‘‘the tax imposed by this chapter’’ each place it appears. This would align the Code with the recent decisions by the United States Court of Federal Claims in Christensen v. United States (No. 20-935T) and Bruyea v. United States (Dec. 5, 2024), both of which found that foreign tax credits must be allowed to offset the Net Investment Income Tax. To date, the IRS has not updated its forms to facilitate using the Foreign Tax Credit in these situations, and Americans living in non-treaty countries cannot benefit from the court rulings.
• Mandate that the IRS support direct deposit refund payments to non-U.S. bank accounts.
  Present policy requires that the refund be at least $1M or that a TAS hardship case has been opened, resulting in inequitable treatment of taxpayers; only multimillionaires are guaranteed to be able to receive their refund payments, which violates Section Two of the Taxpayer Bill of Rights. A precedent exists: The Social Security Administration already allows benefits to be paid by direct deposit to non-U.S. bank accounts. There is no reason that the IRS shouldn’t do the same.
• Allocate funding to improve IRS services for Americans abroad:

• • Taxpayer Assistance Centers: Allocate funding and reopen Tax Attachés. There are currently no TACs available for U.S. taxpayers residing abroad. There were 15 Tax Attachés at embassies around the world up to 2015, when funding was reduced and they were subsequently closed.
  • VITA/TCE: There is currently no funding allocated through these programs to help taxpayers abroad who are an IRS recognized underserved community as per the Taxpayer First Act. Seniors and low-income taxpayers abroad would be eligible for these programs if they were living in the U.S. Since these vulnerable groups face multi-layered barriers, these programs are essential to aid and assist them from falling out of compliance. Alternatively, permit existing VITA/TCE service providers who are offering online assistance to extend services to taxpayers abroad.
  • Local Taxpayer Advocates: To better serve taxpayers abroad, place Local Taxpayer Advocates at each international tax attaché office. (2015 NTA recommendation)
  • International Individual Taxpayer Assistance (IITA): Reinstate and make permanent the IRS IITA team with representatives from Large Business & International, the Wage & Investment Division, the Office of Online Services, and TAS to specifically address the needs of international taxpayers. (2012 NTA recommendation)
  • Video meeting service: Allow taxpayers to book video phone calls in advance to speak with an IRS agent about specific account matters (2022 Strategic Operating Plan).
  • Online Help Chat Function via irs.gov: Increased online support for taxpayers would help Americans abroad, especially given that international calling is expensive. (2015 NTA recommendation)
  • Electronic Tax Law Assistance Program (ETLA): Reopen ETLA and R-mail services for Americans abroad  (closed in October 2015).
  • International Taxpayer Service Call Center: Increase support and training for the dedicated international call center.
  • Webcasts to assist taxpayers abroad: Increase outreach to educate taxpayers abroad on how to file from abroad.

We are grateful to the Committee for the opportunity to comment, informed by the first-hand experiences of our members. Thank you for your attention to the challenges facing Americans living abroad and for your consideration of our input.

Sincerely,