Definition
The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law requiring foreign financial institutions (FFIs) to report information about financial accounts held by U.S. taxpayers or foreign entities with substantial U.S. ownership. Enacted in 2010 as part of the HIRE Act, FATCA aims to prevent tax evasion by increasing transparency around offshore assets.
Objectives of FATCA
- Curb offshore tax evasion by U.S. individuals and entities
- Improve compliance through third-party reporting
- Generate tax revenue to support hiring incentives under the HIRE Act
How FATCA Works
FATCA imposes obligations on both U.S. taxpayers and foreign financial institutions:
For U.S. Taxpayers
U.S. citizens, residents, and certain nonresident aliens must file Form 8938 with their annual tax return if the total value of specified foreign financial assets exceeds defined thresholds.
- Living in the U.S.:
- Single: > $50,000 (year-end) or > $75,000 (any time)
- Married filing jointly: > $100,000 or > $150,000
- Single: > $50,000 (year-end) or > $75,000 (any time)
- Living abroad:
- Single: > $200,000 or > $300,000
- Married filing jointly: > $400,000 or > $600,000
- Single: > $200,000 or > $300,000
For Foreign Financial Institutions (FFIs)
FFIs must report account details of U.S. persons to the IRS or a designated local authority via intergovernmental agreements (IGAs). Non-compliant institutions face a 30% withholding tax on certain U.S.-sourced payments.
Required information includes:
- Account holder’s name, address, and TIN
- Account number and balance
- Gross receipts and withdrawals
Who Is Considered a U.S. Person Under FATCA?
- U.S. citizens and residents
- Domestic partnerships and corporations
- Trusts with U.S. control
- U.S. government entities
- Individuals meeting the Substantial Presence Test
Certain visa holders (e.g., F1, J1) may be exempt under the Substantial Presence Test for limited periods.
Compliance and Penalties
Failure to comply with FATCA can lead to significant consequences:
- $10,000 minimum penalty for failing to file Form 8938
- An additional $50,000 for continued non-filing after IRS notification
- 40% penalty on underreported income tied to unreported foreign assets
- Extended statute of limitations (up to six years) on unreported foreign income
Penalties may be waived if non-compliance is due to reasonable cause, subject to IRS discretion.
FATCA vs. FBAR
FATCA and FBAR (Report of Foreign Bank and Financial Accounts) are often confused but have distinct requirements:
| Feature | FATCA (Form 8938) | FBAR (FinCEN Form 114) |
| Governing body | IRS | FinCEN (U.S. Treasury) |
| Reporting threshold | Starts at $50,000 (U.S. residents) | $10,000 across all foreign accounts |
| Assets covered | Broader range of financial assets | Bank and financial accounts |
| Filing deadline | With tax return (April 15) | April 15 (automatic extension to Oct) |
| Required for | Individuals | Individuals and entities |
Criticism of FATCA
FATCA has faced criticism from multiple fronts:
- High compliance costs for foreign institutions
- Increased account closures for U.S. expatriates
- Complex reporting burdens on individuals living abroad
- Potential deterrent to foreign investment in U.S. markets
Despite its intent, FATCA’s broad scope and administrative demands have made it controversial, especially among U.S. citizens residing overseas and foreign banks required to comply.
The Foreign Account Tax Compliance Act (FATCA) is vital to the U.S. government’s effort to combat offshore tax evasion. While it imposes complex reporting and compliance obligations on individuals and financial institutions, it also plays a central role in maintaining the integrity of the U.S. tax system. Those with foreign assets should understand their responsibilities under FATCA to avoid costly penalties.
