So states the 2025 report of the Taxpayer Advocate!
A January tradition
January is the month that the IRS Taxpayer Advocate release its report for the previous year. In keeping with tradition the Taxpayer Advocate released the 2025 report this week.
Bottom Line:
The report is extraordinary in its recognition of the problems of Americans abroad. The problems are recognized as one of the ten most significant categories of problems experienced by taxpayers generally. The Taxpayer Advocate does a wonderful and powerful job of recognizing the injustices of the U.S. tax system as it applies to taxpayers living outside the United States. The report is available here.
A pdf version of the Taxpayer Advocate report is here:
<a href=”http://citizenshipsolutions.ca/wp-content/uploads/2026/01/ARC_Publication-2104_2025_Web.pdf”>ARC_Publication-2104_2025_Web</a>
Podcast discussing the report
A condensed version of the podcast is captured in this AI generated video:
<!–more–>
The report includes the following description (sound familiar?) 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.”
Commenting on Sue’s circumstances the Taxpayer Advocate states:
Sue’s situation is not unlike that of many average domestic citizens who work, contribute to a retirement plan, and maintain bank accounts. Yet taxpayers living abroad face significant compliance challenges and potentially severe penalties that domestic taxpayers do not. To avoid bringing a non-citizen spouse’s income and property Taxpayer Advocate Service into the U.S. tax system, some taxpayers abroad may choose to file married-filing-separate (MFS).
Further, to avoid the burdens of the IIR requirements and potential penalties, some may choose not to participate in retirement plans or to transfer their income and assets into their non-U.S. citizen spouse’s name. This approach may reduce their U.S. filing obligations, but could also jeopardize their legal and financial independence and security.
Congress established the IIR penalty regime primarily to combat offshore tax avoidance and discourage U.S. taxpayers from hiding income and assets abroad. However, ordinary taxpayers like Sue, who are not offshore tax evaders the laws were designed to combat, are severely burdened by the IIR requirements. As a result, taxpayers living abroad may not be able to maintain joint bank accounts, hold stock, own property, or even contribute to their own retirement accounts. Further, because of the overwhelming requirements of these laws and severe financial consequences of running afoul of them, taxpayers abroad may simply decide not to file.
In summary:
The Taxpayer Advocate report is proof positive that the advocacy work of various Americans abroad and their advocates is slowly having an effect!!
This post is reposted from my Citizenship Solutions blog.