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Taxpayer Advocate Urges IRS to Ease FATCA Rules for Americans Abroad

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The IRS’ taxpayer advocate is urging the tax service to simplify rules for Americans living overseas.

Currently, foreign bank accounts must be reported both to the Treasury, in a Report of Foreign Bank and Financial Accounts (FBAR), and to the IRS, on Form 8938 under the Foreign Account Tax Compliance Act (FATCA). (The FBAR, officially called Financial Crimes Enforcement Network Report 114, must be filed on accounts holding at least $10,000.)

Advocates for taxpayers abroad argue that the two forms have duplicative requirements and that FATCA rules, in an attempt to stop taxpayers from hiding money overseas, have made it difficult for Americans living abroad to maintain legitimate bank accounts.

The National Taxpayer Advocate, an independent IRS unit, recently suggested fixing this problem by merging certain duplicative requirements of the FBAR and IRS Form 8938.

Specifically, the advocate recommended April 13 that the Internal Revenue Service merge the rules for reporting bank accounts on Form 8938, the Statement of Specified Foreign Financial Assets, and that it change the FATCA rules for identifying and reporting accounts of Americans abroad, where the accounts are in the country where the taxpayer resides.

The National Taxpayer Advocate notes in its recommendation concerns about the “overlap and duplicative disclosure requirements” of the FBAR and the Form 8938, which must be filed with annual federal income tax returns.

The two forms are “significantly duplicative, which increases confusion and adds to the compliance burden for taxpayers,” the National Taxpayer Advocate states.

Marylouise Serrato, executive director of Washington-based American Citizens Abroad, noted in a statement that while the advocacy group is “very happy to see progress” in this area, “we cannot rest in our efforts to get these changes actually made.” She noted that an exemption for Americans overseas with accounts in their local countries “could be put in place almost immediately; it does not require Congressional action. It is a change that everyone, including Treasury Department and the IRS, should be enthusiastic about.”

ACA told Treasury in a recent letter that the FATCA regulations and “the regulations under section 6038D, which mandates Form 8938, should be amended by Treasury Department to provide a simple ‘same country’ exemption.”

The Taxpayer Advocate noted in its recommendation that “organizations representing U.S. taxpayers abroad and the press have voiced concerns about unintended consequences of new FATCA rules for foreign financial institutions, which make it harder for U.S. taxpayers living abroad to open and maintain legitimate bank accounts overseas.”

Some foreign financial institutions like Deutsche Bank, HSBC and ING, the recommendation says, “have reportedly been closing out foreign accounts of U.S. citizens in response to FATCA.”

The IRS can “significantly alleviate reporting burden for U.S. persons who are bona fide residents in foreign countries and facilitate their legitimate need for local banking services in their countries of residence” by eliminating the requirement to report specified foreign financial assets on the Form 8938 if such persons timely report the assets on the FinCEN Report 114 (FBAR), the Advocate recommendation states.

The Taxpayer Advocate also suggests to exclude from FATCA reporting the financial accounts maintained by a financial institution organized under the laws of the country of which the U.S persons are bona fide residents.

“Proposed regulatory changes will not inhibit the IRS’s ability to obtain information about financial accounts maintained by foreign financial institutions outside of the U.S person’s country of bona fide residency,” the recommendation states.