Foreign Account Tax Compliance Act (FATCA)
What is the Foreign Account Tax Compliance Act (FATCA)?
Preventing tax evasion is a global priority. It was estimated that around $40 to $70 billion is lost each year to international individual tax evasion. It is a financial crime that needs international regulations to combat. Along with efforts at the international level, the U.S. government has developed The Foreign Account Tax Compliance Act (FATCA) to prevent tax evasion. It requires U.S. citizens who hold their accounts and financial assets offshore to report them to the IRS. The legislation is not about taxing citizens, but detecting their financial assets outside the U.S. It is designed to control that every American taxpayer pays the right amount of tax, whether they choose to earn an income or store their financial assets abroad.
The law affects many U.S: citizens with financial assets abroad, and some financial or non-financial entities with American account holders. Within the scope of compliance with FATCA legislation, bilateral agreements were signed between the USA and other countries, providing a mutual exchange of information. The Foreign Account Tax Compliance Act is currently implemented in more than 110 countries and 300,000 foreign financial institutions.
Foreign Account Tax Compliance Act (FATCA) Filing Requirements
Foreign financial assets must be reported using Form 8938 and taxpayers must submit the form by attaching it to their annual tax return. Individuals that must file the Foreign Account Tax Compliance Act form are:
- U.S. citizens who have an interest in foreign financial assets (whether or not residing in the U.S.) with a total value of more than $50,000 (the threshold can be higher in some special cases such as married taxpayers filing a joint annual income tax return or certain taxpayers living abroad)
The Foreign Account Tax Compliance Act filing requirements may seem complicated, but here are some foreign financial assets that need to be reported:
- Financial accounts held at abroad financial institutions
- Foreign stock or securities (if not held in financial accounts)
- Foreign partnership interests
- Foreign mutual funds
- Foreign-issued life insurance
- Foreign real estate through a foreign entity (if a foreign entity itself is a foreign asset)
Financial accounts held at a U.S. branch of a foreign financial institution, directly held real estate, directly held foreign currency, and personal properties (art, antiques, cars, jewelry, etc.) do not need to be reported.
Foreign Account Tax Compliance Act (FATCA) for Financial Institutions
Under Foreign Account Tax Compliance Act, foreign financial institutions and certain non-financial entities must report the foreign assets held by their U.S. account holders. Besides banks, investment companies, insurance agents, brokers are examples of financial institutions that need to make a Foreign Account Tax Compliance Act reporting.
Foreign financial institutions that have an agreement with the IRS to report on their U.S. account holders, may provide third-party information about financial accounts, including the identity and certain financial information associated with the account. Information such as your birthplace in the USA, your phone number, and your tax number are considered findings for reporting.
Non-Compliance with Foreign Account Tax Compliance Act Reporting
Both individuals and financial institutions will face serious penalties if they do not make reporting:
- Failure to report foreign financial assets may result in a penalty of $10,000, and an additional penalty of up to $50,000 for continued failure to file after IRS notification.
- If U.S: financial institutions are unable to document such assets for purposes of the Foreign Account Tax Compliance Act, they are required to withhold 30% on certain U.S. source payments made to foreign assets.
