The Foreign Accounts Tax Compliance Act (FATCA) is a law that was enacted by the United States government in 2010. The purpose of the law is to prevent U.S. taxpayers from avoiding U.S.-based taxation on their income and assets that are held in bank and financial accounts outside of the United States. FATCA requires American citizens to report these financial accounts annually to the Internal Revenue Service (IRS).
FATCA applies to a large number of U.S. citizens living abroad, green card holders as well as to family members or business partners who share financial accounts with U.S. citizens and have signatures on those accounts. The main goal of FATCA is to detect assets, not income, and it serves as a tool for government personnel to detect the indicia of U.S. persons and their assets. This information is then cross-checked with data that individuals have self-reported to the IRS or to the Financial Crimes Enforcement Network (FinCEN).
In addition to reporting their assets to FinCEN, U.S. citizens, regardless of their country of residence, are also subject to U.S. tax laws. These laws require U.S. citizens to report and pay U.S. federal income tax on income from all sources worldwide.
FATCA has significant implications for U.S. citizens living abroad, as well as for foreign financial institutions. It is important for U.S. citizens to be aware of their reporting obligations under FATCA and to ensure they achieve FATCA compliance, including registering with the IRS and reporting information on U.S. account holders.
The implementation of FATCA has been challenging for both U.S. citizens living abroad and for foreign financial institutions. However, it has also been seen as a positive step towards greater transparency in the global financial system and a means of preventing tax evasion. FATCA has been instrumental in encouraging greater cooperation between countries in sharing financial information, leading to a more robust and effective system for detecting tax evasion and other financial crimes.
It is a complex piece of legislation with far-reaching implications, but it is important for all affected parties to understand their obligations under the law and take steps to ensure compliance. By working together, U.S. citizens, foreign financial institutions, and government agencies can create a more transparent and accountable global financial system through intergovernmental agreements.
What Exactly Needs to be Reported for FATCA?
Under the Foreign Accounts Tax Compliance Act (FATCA), U.S. citizens must report information about their foreign financial accounts to the Internal Revenue Service (IRS) annually. The information required to be reported includes:
- Account Information: Information about each foreign financial account held by the taxpayer, including the name of the financial institution where the account is held, the account number, and the maximum value of the account during the year.
- Taxpayer Identification Number: The taxpayer's U.S. taxpayer identification number could be their Social Security number or taxpayer identification number.
- Country of Residence: The taxpayer's country of residence and the countries where the foreign financial accounts are located.
- Signature Authority: Information about whether the taxpayer has signature authority over the foreign financial accounts.
- Assets: Details of foreign assets, including foreign pensions, stockholdings, partnership interests, financial accounts, mutual funds, issued life insurance, hedge funds, and real estate held through a foreign entity, must also be reported to the IRS. However, a taxpayer's foreign home does not need to be reported.
The information reported under FATCA must be filed annually with the IRS, typically on Form 8938, "Statement of Specified Foreign Financial Assets." U.S. citizens who are required to report their foreign financial accounts must ensure that they comply with the fatca reporting requirements, as failure to do so can result in significant penalties and fines. Determining which assets need to be reported is the hardest part of FATCA and one of the most confusing aspects of the law.
How Does FATCA System Work?
FATCA works by requiring foreign financial institutions to report information about financial accounts held by U.S. citizens to the Internal Revenue Service (IRS). The law applies to all foreign financial institutions, including banks, insurance companies, investment funds, and pension plans, and requires them to enter into an agreement with the U.S. government to report information about their U.S. clients to the IRS.
FATCA requires foreign financial institutions to identify and report U.S. accounts, defined as financial accounts owned by U.S. citizens or by foreign entities in which U.S. citizens hold a substantial ownership interest. The financial institutions must then report certain information about these accounts, including the account holder's name, address, tax identification number, and the account balance or value.
The information reported by the foreign financial institutions is used by the IRS to detect U.S. citizens who may be evading taxes on their foreign income or assets. The law also includes penalties for foreign financial institutions that fail to comply with the reporting requirements, providing an incentive for institutions to comply.
What Are The Implications For Non-Compliance?
The implications of non-compliance with the FATCA are severe for both foreign financial institutions and individuals. For foreign financial institutions, failing to enter into a legally binding agreement with the IRS to disclose information about their U.S. clients may result in a 30% withholding tax rate on all related payments received. This means that 30% of all deposits, dividends, or interest payments may be withheld from investors. In addition, the foreign financial institution may be subject to penalties for failing to report correctly.
For individuals, failure to report non-U.S. financial accounts or foreign financial institutions (FFI) with a value over $10,000 using the FBAR form can result in substantial fines and penalties, including civil and criminal penalties. In some cases, individuals may also face criminal charges for tax evasion or other financial crimes.
How to Comply With FATCA?
To comply with the Foreign Accounts Tax Compliance Act (FATCA), companies must take the following steps:
- Determine FATCA status: Companies must first determine their status as either a foreign financial institution or a non-financial foreign entity under FATCA.
- Register with the IRS: Foreign financial institutions must register with the IRS and obtain a Global Intermediary Identification Number (GIIN).
- Conduct due diligence: Companies must conduct due diligence on their UBO, existing clients, and future clients to identify U.S. clients and reportable accounts. This may involve reviewing client documentation and records, such as passport or tax identification numbers.
- Report information: Companies must report the required information about their U.S. clients and reportable accounts to the IRS annually.
- Implement withholding tax: Companies must withhold 30% of payments made to non-compliant foreign financial institutions.
- Stay current with updates: Companies must stay current with any updates to FATCA regulations and reporting requirements, as the law is subject to change.
