The Compliance Crisis: 2025 Report on Americans Abroad
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This transcript features a discussion among advocates regarding the 2025 National Taxpayer Advocate Report, which officially identifies the severe compliance burdens facing Americans living abroad as a major problem. The participants highlight how the U.S. citizenship-based taxation system creates “second-class citizens” who struggle with overwhelming reporting requirements, punitive penalties, and a lack of IRS support. A central focus is the report’s warning that the fear and frustration experienced by expats ultimately threatens the integrity of the entire U.S. tax system. The speakers emphasize the gross inequities of exit taxes, particularly regarding foreign pensions, which can make it financially impossible for many to either comply with the law or renounce their citizenship. Ultimately, the dialogue argues that the only true resolution is to separate citizenship from tax residency to end the extraterritorial reach of U.S. tax obligations.
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The report includes the following description of a hypothetical U.S. citizen abroad:
“Sue, a U.S. citizen, has lived and worked in Australia for many years after marrying her Australian husband, Sam. As a dual citizen, Sue pays Australian income taxes on her wages but also remains subject to U.S. tax laws. They have been advised their income is always less than the foreign earned income exclusion.
They have joint checking and savings accounts in an Australian bank, and on various paydays the combined balance of their joint accounts exceeds $10,000 USD. Sue participates in an Australian superannuation, a compulsory system for retirement savings. Three years ago, she inherited some stock shares from her Australian aunt, which she keeps in the same brokerage house that maintained her aunt’s account. Sue and Sam have not filed a U.S. income tax return or an FBAR. Sue eventually learns that because she is a U.S. citizen she must also file a U.S. tax return to report her Australian income, with Forms 3520, 3520-A, 8938, and 8621 (depending on the investment in the superannuation). They also must electronically file FinCEN Form 114 (FBAR) using FinCEN’s BSA E-Filing system. If they file tax returns, they may owe U.S. taxes and penalties thereon.
They would also be subject to foreign trust penalties for failing to disclose Sue’s Australian pension plan, FATCA and FBAR penalties, and possibly foreign gift penalties for failure to disclose her Australian inheritance that is not subject to tax.”
