What is the US Foreign Account Tax Compliance Act (FATCA)? US Foreign Account Tax Compliance Act (FATCA) Review

The Foreign Account Tax Compliance Act (FATCA) is a 2010 federal law in the United States. Foreign financial institutions (FFIs) search their records for clients with ties to the United States, including records of birth or prior residence in the United States, or similar indications, and report the assets and identities of those persons to the U.S. Treasury. FATCA also requires those persons to report their non-U.S. financial assets annually on Form 8938 to the Internal Revenue Service (IRS), which is an older, further redundant requirement to file Form 114 (also known as the “FBAR”) annually with the Financial Crimes Enforcement Network (FinCEN). Like U.S. income tax law, FATCA applies to U.S. residents, as well as U.S. citizens and green card holders living in other countries.

FATCA is the revenue-raising portion of the 2010 U.S. jobs stimulus bill, the Hiring Incentives to Restore Jobs Act (HIRE), enacted as Subtitle A of Title V of the Act (sections 501 to 541). According to the IRS, “FFIs that have entered into an agreement with the IRS to report their account holders may be required to withhold 30% of payments to foreign recipients when certain payments do not comply with FATCA.” The United States itself has not yet complied with FATCA because, as of 2017, it has not provided promised reciprocity to partner countries and has not signed up to the Common Reporting Standard (CRS). FATCA has also been criticized for its impact on Americans abroad and has involved a record number of U.S. citizen waivers in the 2010s and 2020s. Bills to repeal FATCA have been introduced in both the U.S. Senate and the House of Representatives.

Regulation

FATCA has the following important provisions:

• Requires non-U.S. financial institutions such as banks to agree to search customer databases to identify suspected U.S. persons and to disclose the names, TINs, and addresses of account holders and accounts for most types of transactions. Certain types of accounts, particularly retirement savings and other tax-advantaged products, may be excluded from country-by-country reporting. U.S. entities that make payments to non-compliant foreign financial institutions must "withhold taxes equal to 30% of the amount."

A foreign financial institution that is itself the beneficial owner of such payments is not entitled to a credit or refund for the withheld taxes in the absence of treaty override.

U.S. persons are identified by a “FATCA badge.” Bank officials who know the identity of a U.S. person by other means are also required to determine the identity of that person for FATCA purposes. Once identified, the FFI is responsible for further questioning of the individual as required by law.

• To implement this requirement, the IRS issued Form W-8BEN in February 2014. Since then, the IRS has required all foreign account holders to certify their identity on Form W-8BEN unless an intergovernmental agreement authorizes another method of authentication.

In other words, all FFI account holders are subject to FATCA reporting requirements.

U.S. persons who own or have authority over these foreign accounts or assets must report them on a new IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the person's U.S. tax return if the value of these accounts is generally more than U.S. $50,000. The higher reporting threshold applies to U.S. persons who are residents abroad and file jointly. Account holders who underreport income in[clarification needed] undisclosed foreign financial assets are subject to a 40% penalty. The statute of limitations is extended to six years for underreporting gross income by more than 25%. It also requires taxpayers to report financial assets in noncustodial accounts, i.e., physical stock or bond certificates.

• In cases where foreign investors do not receive U.S. dividends, the law introduces a method to convert them[clarification needed] into "dividend equivalents" through swap contracts.

• FATCA also increases penalties and imposes certain negative presumptions on U.S. persons with accounts outside the U.S.

The reporting requirement is in addition to the requirement for all U.S. persons to report non-U.S. financial accounts to the U.S. Financial Crimes Enforcement Network (FinCEN). This includes, in particular, Form 114, Report of Foreign Bank and Financial Accounts (FBAR), for foreign financial accounts exceeding $10,000, issued under the Bank Secrecy Act by FinCEN.

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Banks performing functions under FATCA legislation will conduct searches based on FATCA markers, which include:

• Place of Birth in the United States

• Identify the account holder as a U.S. citizen or resident

• Current U.S. residential or mailing address (including U.S. P.O. Boxes)

• Current US phone number

• General Instructions for Payments from Foreign (i.e. Non-U.S.) Accounts to U.S. Accounts

• Current power of attorney or signing authority granted to a person with a U.S. address

• A U.S. "care of" or "hold mail" address that is unique to the account holder

• Special note: Others affected by FATCA include

• Any non-U.S. person who shares a joint account with a U.S. person or otherwise allows a U.S. person to have signing authority over the account.

• Any business or nonprofit organization that allows U.S. persons to have signing authority on financial accounts.

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