Pertinent recommendations for overseas Americans
The National Taxpayer Advocate has released its annual report to Congress, the National Taxpayer Advocate 2021 Purple Book, proposing legislative recommendations to resolve taxpayer problems. The National Taxpayer Advocate is an organization independent of the Internal Revenue service and tasked with assisting taxpayers in resolving problems and proposing changes to mitigate systemic problems.
The National Taxpayer Advocate 2021 Purple Book contains the following recommendations of particular interest for Americans living overseas:
1. Harmonize FBAR and FATCA
The harmonization of FBAR and FATCA by eliminating FATCA reporting of bank accounts for non-resident U.S. taxpayers where they live.
Amend IRC § 6038D to (i) eliminate duplicative reporting of assets on Form 8938, Statement of Specified Foreign Financial Assets, where an asset is reported or reflected on an FBAR, and (ii) exclude financial accounts maintained by a financial institution organized under the laws of the country of which the U.S. person is a bona fide resident from the specified foreign financial assets required to be reported on Form 8938.
Amend IRC § 1471 to exclude financial accounts maintained by a financial institution organized under the laws of the country of which the U.S. person is a bona fide resident from the definition of “financial account” subject to reporting by Foreign Financial Institutions.
2. Increase Filing Thresholds
Increase the filing threshold for the filing status Married Filing Separately (MFS) from $5 to $4,150 for tax year 2018, adjusted for inflation for tax years 2019-2025.
Many overseas taxpayers file using the status MFS because their spouses are non-resident aliens not subject to U.S. taxation.
Amend IRC § 6012(a)(1)(A) to provide that taxpayers for whom the basic standard deduction is not available are not required to file returns if their incomes do not equal or exceed $4,150 for TY 2018, adjusted for inflation for tax years 2019-2025.
3. Additional Time for Abatement
Allow additional time for Taxpayers to request abatement of a Math Error Assessment when the Math Error Notice is addressed to a person outside the United States. This is to take into account the additional time that overseas taxpayers often need because of delays in mail delivery, lack of access to records,
Amend IRC § 6213(b)(2)(A) to allow taxpayers 120 days to request an abatement of tax when a math error notice is addressed to a person outside the United States.
4. Modify FBAR Violations
Modify the definition of 'Willful' for purposes of finding FBAR violations and reduce the maximum penalty amounts. Account holders who do not file required FBAR forms due to negligence, inadvertence, or similar non-nefarious causes may be subject to penalties for non-willful violations (which have a reasonable cause exception). But they should not face uncertainty regarding the possible application of the extraordinarily harsh penalties for “willful” violations
Clarify that the government has the burden to establish actual willfulness (i.e., specific intent to violate a known legal duty, rather than mere negligence, gross negligence, or recklessness) before asserting a willful FBAR penalty and cannot meet this burden by relying primarily on the Schedule B attached to a return.
Reduce the statutory maximum civil penalty for a willful FBAR violation to the maximum penalty the IRM currently allows its examiners to assert without managerial approval (i.e., no greater than 50 percent of the highest annual asset balance in the unreported account during the years of noncompliance).
Establish a penalty for reckless FBAR violations and those due to willful blindness. The penalty should be greater than the penalty for non-willful violations, but less than the penalty for willful violations.
Prepared by Laura Snyder, member Taxpayer Advocacy Panel, AARO Board member