Why are we required to file FBAR

Jan 1, 2014

So who’s the bad guy?

Thomas Jefferson explained the purpose of the government to “enable the people of a nation to live in safety and happiness. Government exists for the interest of the governed, not for the governors”. From first glance, it would seem that Thomas Jefferson would be a staunch opponent of current overseas compliance regulations. While in existence for years, the IRS’s recent focus on US citizens abroad to timely report all of their financial accounts appears to be solely for the “governors” interest while placing undue and unnecessary hardships on the “governed”.

Most taxpayers are quick to criticize the United States’ Big Brother approach and attack the IRS’s full disclosure requirements and compliance enforcements. “What right does the IRS have to know what’s in my bank?” and “Why does the IRS even care what accounts I have?” are two of the most common questions you hear in an expatriate US tax office. There is an interesting distinction between these two questions – the first is an exclamation of frustration, challenging the assertion that the US government has a right to an individual’s financial information, and is part of a much larger debate. The second question, however, is much simpler and more easily justified. Why should a US citizen living overseas whose annual salary is less than minimum wage be required to find their small bank balances and to gather up any irrelevant pension accounts for annual reporting to the IRS? Or in the words of many clients, “I’m so poor! What does the IRS really think I am hiding?” Or in accountancy terms, why aren’t these people deemed immaterial?

Congressional Research Service reports that U.S. citizens hiding money in foreign accounts cost the United States around $70 billion per year. Over a decade, tax losses total nearly $1 trillion! From this perspective, it is quite understandable that the IRS has increased enforcement of offshore disclosure requirements. In the words of Thomas Jefferson, the IRS has the responsibility to protect “the interest of the governed” by placing compliance regulations on those who are hiding money overseas and effective stealing hundreds of billions of dollars from innocent U.S. taxpayers.

However, this only addresses half the problem. While the FBAR requirements can be justified in theory, they still place an enormous burden on the average American taxpayer living overseas. Clearly there needs to be some sort of distinction between individuals living paycheck-to-paycheck and those fraudulently hiding millions of dollars in offshore accounts – both of whom are currently grouped together as illegally hiding money overseas.

Interestingly enough, one partial solution to this problem might come in the heavily criticized FATCA regulations. Currently, taxpayers are required to “double report” foreign financial accounts on both FBAR and FATCA; however it is very possible in the future that FBAR would be replaced entirely by FATCA. This change would drastically increase the filing threshold for those living overseas from the current $10,000 FBAR requirement to between $200,000 and $400,000. While many “innocent bystanders” will still be left with reporting requirements simply for having a financial account outside of the United States, the increased threshold would alleviate the pain to the lowest risk category of taxpayers, and be a step in the right direction towards protecting the safety of individuals from fraud while not impeding in their happiness of being able to live as a nation. Which according to Thomas Jefferson is the exact purpose of a government.

 

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