Texas CPAs Recommend Simplifying Foreign Financial Reporting

The Texas Society of Certified Public Accountants (TSCPA) is a nonprofit, voluntary professional organization representing more than 27,000 members. One of the expressed goals of the TSCPA is to speak on behalf of its members when such action is in the best interest of its constituency and serves the cause of CPAs in Texas, as well as the public interest. TSCPA has established a Federal Tax Policy Committee (FTP) to represent those interests on tax-related matters. The FTP has been authorized by TSCPA's Board of Directors to submit comments on such matters of interest to committee membership. The views expressed herein have not been approved by the Board of Directors or Executive Board and, therefore, should not be construed as representing the views or policies of the TSCPA.

Complex foreign financial asset reporting and severe penalties for noncompliance are restricting United States taxpayers from participating in the increasingly global economy. The U.S. government presently requires foreign bank account asset reporting on multiple forms that require duplicative information, and have differing filing dates, penalty structures and penalty abatement standards. Much of this reporting is new and the instructions and regulations are often unclear, leading to inadvertent noncompliance by taxpayers using their best efforts to submit accurate forms, and potentially exposing them to steep penalties.

It is estimated that 7.6 million Americans live overseas.¹ The compliance burdens on expatriates working abroad are often too complex and expensive for them to fulfill, leading many of them to renounce their citizenship. It was widely reported in May 2015 (e.g., MSN, CNN Money, Bloomberg, Business Insider) that Americans working abroad renounced their citizenship at a record pace in the first quarter of 2015² in part due to the increased reporting requirements and related penalties.

We offer several recommendations to simplify administration; reduce costs attributable to repetitive, burdensome and confusing reporting requirements; and provide relief from excessive penalties. To the extent these suggestions require legislative changes, we ask the Treasury Department to support these proposals before Congress.

FinCEN Requirements

Form 8938, "Statement of Specified Foreign Financial Assets," requests information largely duplicative of that reported on FinCEN Report 114, "Report of Foreign Bank and Financial Accounts" (FBAR). Thus, we support the National Taxpayer Advocate's recommendation to amend Regulation 1.6038D-7T(a) to eliminate this overlapping reporting.³ As the Taxpayer Advocate has pointed out, the Temporary Regulation under IRC section 6038D eliminated duplicate reporting for assets reported on Forms 3520, 3520A, 5471, 8621, 8865 or 8891. FinCEN Report 114 should be added to this list.

Several FinCEN Report 114 requirements are inconsistent with Form 8938. The deadline for the Form 8938 is the extended deadline of the taxpayer's income tax return, whereas the deadline for FinCEN Report 114 had been fixed at June 30 with no provision for an extension. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed this deadline to April 15, which generally aligns with the due date of individual tax returns. The act also provided for a possible six-month extension of time to file. However, taxpayers are accustomed to assuming an extension of time to file the individual income tax return constitutes an extension to present all information relevant to that return. We would encourage the Treasury Department to consider an implementing regulation that provides for an automatic extension of time to file FinCEN Report 114 to no later than the due date of the extended income tax return of the taxpayer without a need to separately extend the Report.

Additionally, unlike the deadlines for income tax returns, no "mailbox rule" applies to FinCEN Report 114. The deadline for the FinCEN Report 114 is the "arrival" date rather than the postmark date. This increases potential for inadvertent error by taxpayers sincerely attempting to comply with the law. Mandatory e-filing may suggest the mailbox rule confusion has been remedied, but many taxpayers have good reason to object to e-filing their information. Recent infiltrations of the IRS website and other government databases have made these taxpayers less confident about sharing sensitive account information online. It is in the taxpayers' and government's best interests to conform the deadline for the FinCEN Report 114 with the associated federal income tax return, applying the mailbox rule to both. In addition, if a separate extension should be required (i.e., separate from the income tax extension as recommended above), we recommend that the mailbox rule apply to it too.

Additional issues are presented, for example, by taxpayers with signature authority over foreign accounts with FBAR filing requirements of which they may be unaware because they do not have an ownership interest in the account, and by taxpayers authorized under a power of attorney who are unaware the authorization likely results in signature authority and consequent FBAR filing requirements.

Differing filing thresholds add to the confusion, exacerbating compliance errors. Form 8938 has differing thresholds that vary by filing status and whether the taxpayer resides in the U.S. There are also different thresholds for end of the year values versus the highest value during the year. In contrast, FinCEN Report 114 has a single threshold that applies to all taxpayers.

Differing filing methods increase the confusion. FinCEN Report 114 is not simple for taxpayers to file. FinCEN Report 114 is filed through the BSA E-Filing System and is not included with the taxpayer's federal income tax return. Form 8938 is included with the taxpayer's federal income tax return.

Differing provisions for joint filing by spouses compound the confusion. Taxpayers who file a joint federal tax return can file one combined Form 8938 that includes property jointly held and property separately held. There is no provision for a combined FinCEN Report 114 for spouses with separately held property. Spouses must file separate FinCEN Report 114 unless the spouse who is not filing does not have any additional foreign financial assets that must be reported, the report is timely filed, and if both spouses sign the e-file authorization form. These rules and instructions completely fail to address issues relevant to spouses resident in the various states with community property laws.

Exception for Bank Accounts Held By Individuals Working Abroad

We also support the Taxpayer Advocate's recommendation to exclude individuals from the reporting requirements if they are bona fide residents of the countries where the accounts are located. Amending Temporary Regulation 1.6038D-7T could accomplish this objective.

However, we believe this exception may not go far enough. Many U.S. citizens work abroad in developing nations that may not have sound financial institutions. These workers must often maintain bank accounts in developed countries to better safeguard their funds. For example, an American citizen working for a British subsidiary company in a sub-Saharan African country may find it necessary to establish an account at a British bank. Accordingly, Treasury should consider amending Temporary Regulation 1.6038D-7T to exclude reporting requirements for foreign accounts not only in the country of residence, but also in the work location or the country of the employer's residence. Automatic abatement of the failure to file penalty, discussed in more detail below, would alleviate this problem if applied to foreign bank accounts held by U.S. citizens working in "full-time" positions requiring their presence abroad. If the concern is maintenance of accounts in jurisdictions with bank secrecy laws, that concern could certainly be dealt with in constructing the exception either by restricting its application to non-bank secrecy jurisdictions or requiring taxpayer waiver of the secrecy laws for federal tax purposes.

Further, some of our members are personally aware that some U.S. banks are wary of relationships with U.S. persons residing and doing business outside of the U.S. This wariness, which is primarily due to the increased reporting and restrictions placed on U.S. account holders, further restricts U.S. persons' ability to engage in international business.

Reduce or Consolidate Unnecessarily Excessive and Cumulative Penalties

Penalties for failing to file FinCEN Report 114 and Form 8938 are unnecessarily stringent. The $10,000 penalty for non-willful failure to file FinCEN Report 114 for foreign financial accounts is significantly greater than necessary to enforce the filing of these forms.⁴ The penalties apply regardless of whether there is any additional tax due related to the missed disclosure and are usually automatically assessed. Another $10,000 penalty could apply if the Form 8938 is not included with a timely filed income tax return.

Large penalties such as these are unjustified, excessive and have the effect of treating all foreign investments as if they are an attempt to evade taxation when most are held for legitimate purposes. It raises the cost, for example, to small businesses entering the export market that work through foreign entities for many non-tax reasons. We believe the potential for incurring these penalties unfairly discourages U.S. taxpayers from working abroad or having foreign financial interests in a global economy when worldwide diversification is prudent.

We welcome the updated IRS guidance published on June 12, 2015, on the Small Business/Self-Employed division's website for FBAR reporting, which provided penalty relief for delinquent FBAR submissions if certain conditions are met. We recommend such tax policy be memorialized in an official tax release that taxpayers can cite as authority.

Taxpayers incurring these penalties often take the position that their preparers should be responsible for paying them even where the penalty results from the taxpayer's own lack of timely information or communication. This greatly harms client relationships and can expose preparers to preparer penalties and possible Circular 230 sanctions. As a direct result, many of our members are now reluctant to accept work with U.S. citizens working abroad and resident aliens.

Conclusion

It is in the best interest of both taxpayers and the IRS to simplify the reporting of foreign financial investments, facilitate compliance and standardize enforcement.

We appreciate this opportunity to present our comments and would be happy to discuss this further with you. Please contact me at 972-419-8383 or kmh@gpm-law.com if you would like to discuss our comments.

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² Department of the Treasury 4830-01-P Report. Quarterly Publication of Individuals, Who Have Chosen to Expatriate, as Required by Section 6039G, quarter ending March 31, 2015 (May 8, 2015).

³ National Taxpayer Advocate in Recommendations for Published Guidance under IRC §§ 6038D and 147I: Eliminate Duplicative Reporting of Assets on the FATCA Form 8938 if the Asset is Reported or Reflected on the FBAR (FinCEN Report 114) and Exclude Financial Accounts Maintained by a Financial Institution in the Country of Which the U.S. Person is a Bona Fide Resident from FATCA Reporting (April 13,2015).

⁴ The IRS recognized this problem, in part, and released Interim Guidance for Report of Foreign Bank and Financial Accounts Penalties, Procedures to Ensure Consistency and Effectiveness in the Administration of Civil FBAR Penalties (May 13, 2015) with guidelines for an equitable approach to limiting the application of the FBAR penalties.