Table of Contents
- What Is FATCA?
- Key Takeaways
- How FATCA Affects U.S. Taxpayers and Foreign Institutions
- How FATCA Aims to Prevent Tax Evasion
- FATCA Compliance Requirements for Individuals and Institutions
- Foreign Institutions
- Individual Taxpayers Living Abroad
- Individual Taxpayers Living in the U.S.
- Who Is a U.S. Person Under FATCA?
- Consequences of Failing to Comply With FATCA
- Financial Burden of FATCA Compliance on Institutions
- Critiques and Controversies Surrounding FATCA
- What Is the Difference Between FATCA and FBAR?
- Is FATCA Only for U.S. Citizens?
- How Can I Avoid FATCA?
- The Bottom Line
What Is FATCA?
Let me tell you about FATCA, which stands for the Foreign Account Tax Compliance Act. Signed into law in 2010, it targets tax evasion by U.S. citizens using foreign financial assets. If you're a U.S. citizen or resident, whether you're living in the States or abroad, you have to report those assets annually. Foreign financial institutions must disclose details on U.S. account holders too. Fail to comply, and you're looking at heavy penalties, so you need to grasp these rules fully.
Key Takeaways
Here's what you should know right away: FATCA makes U.S. citizens and residents report foreign financial assets over $50,000 to the IRS each year to stop tax evasion. Foreign financial institutions have to report info on U.S. account holders or get hit with a 30% withholding tax on their U.S. financial income. Compliance isn't cheap for these institutions—it can cost large banks millions. Penalties are tough, starting with a $10,000 fine and more for ongoing failures. If you're a U.S. taxpayer abroad, your reporting threshold is higher, like over $200,000 for specified assets.
How FATCA Affects U.S. Taxpayers and Foreign Institutions
FATCA came about when President Barack Obama signed it into law in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. That act was meant to help businesses hire unemployed workers after the 2008 financial crisis drove up unemployment. HIRE offered tax credits for hiring and retaining new employees for at least 52 weeks, plus payroll tax holidays and higher deductions for new equipment bought in 2010.
How FATCA Aims to Prevent Tax Evasion
FATCA goes after tax evasion by Americans and businesses with income abroad. It's not illegal to have an offshore account, but you must disclose it to the IRS because the U.S. taxes all your global income and assets. Part of FATCA's purpose was to fund the HIRE Act's incentives. You, as a U.S. taxpayer, report all foreign financial assets annually and pay taxes on them. The revenue from this helps cover those hiring costs. If your foreign holdings exceed $50,000 in a year and you don't report them, penalties apply.
FATCA Compliance Requirements for Individuals and Institutions
If you're an American taxpayer with foreign assets over $50,000, file Form 8938. This covers bank accounts, stocks, bonds, and other instruments. There are exceptions, like assets in a foreign branch of a U.S. institution or a U.S. branch of a foreign one.
Foreign Institutions
Foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) must comply by reporting U.S. citizens' account details and asset values to the IRS or through a FATCA Intergovernmental Agreement (IGA). If they don't, they're cut off from the U.S. market and face 30% withholding on withholdable payments, like interest, dividends, and profits from U.S. assets. Compliant FFIs and NFFEs report each U.S. account holder's name, address, TIN, account number, balance, and yearly deposits and withdrawals.
Individual Taxpayers Living Abroad
If you're living abroad, the IRS requires Form 8938 under specific conditions. For married couples filing jointly, if your specified foreign assets total more than $400,000 at year-end or $600,000 anytime during the year, you file—even if only one spouse is abroad. You file a single form reporting both spouses' interests. If you're not married or filing separately, it's over $200,000 at year-end or $300,000 anytime. Thresholds double for joint filers, and you're considered abroad if your tax home is foreign and you've been there at least 330 days in a 12-month period.
Individual Taxpayers Living in the U.S.
For those in the U.S., file Form 8938 if unmarried and assets exceed $50,000 at year-end or $75,000 anytime; for married filing jointly, over $100,000 or $150,000; for married filing separately, over $50,000 or $75,000. Include half the value of jointly owned assets in calculations, but report the full value if filing the form.
Who Is a U.S. Person Under FATCA?
FATCA defines a 'United States person' or USP as a U.S. citizen or resident, domestic partnership, domestic corporation, certain estates or trusts under U.S. court supervision, or government entities. You might qualify as a resident via the substantial presence test based on days in the U.S. Students on F1, OPT, J1, Q visas are non-residents for up to five years, exempt from the test. Teachers and researchers on J1, Q visas get two years. For others like H1B or L1, it's 31 days in the current year plus 183 days over three years, with weighted counting. F and J students exclude five years; J non-students exclude two.
Consequences of Failing to Comply With FATCA
The IRS can hit you with a $10,000 fine for not filing, up to $50,000 for continued failure, and 40% on understated taxes from undisclosed assets. The statute of limitations extends to six years for unreported income over $5,000 from foreign assets, or three years beyond providing info if you fail to file Form 8938. Reasonable cause limits extensions to specific items, and if non-disclosure is reasonable, no penalty applies—judged case by case.
Financial Burden of FATCA Compliance on Institutions
Non-compliance costs a lot, but so does complying for foreign institutions. In 2017, estimates showed 250,000 institutions affected. A Spanish bank pegged costs at $8.5 million per local branch and $850 million globally. U.K. institutions faced $1.1 to $1.9 billion.
Critiques and Controversies Surrounding FATCA
Critics call FATCA imperialist, as banks must report on U.S. clients or withhold 30% on payments and send it to the IRS. Some say it's like a neutron bomb to the global economy, deterring U.S. investment. Costs might lead institutions to dump U.S. assets. Foreign banks see it as operationally burdensome. From the expat side, groups argue it discriminates against Americans abroad who need local accounts, unlike those in the U.S. who only report income. It could cost trillions in U.S. investment and hurt Americans overseas.
What Is the Difference Between FATCA and FBAR?
FBAR and FATCA overlap but differ. FBAR is for expatriates and others with foreign bank accounts, including trusts and entities. FATCA covers individuals, residents, and non-resident aliens. U.S. territory residents file FBAR but not FATCA. FATCA requires reporting foreign stocks, partnerships, hedge funds; FBAR covers foreign branches of U.S. banks, signatory authority, and indirect interests.
Is FATCA Only for U.S. Citizens?
No, FATCA hits all U.S. taxpayers with foreign assets—citizens, green card holders, U.S.-owned businesses, and those meeting substantial presence tests. Worldwide banks are affected if they hold U.S. taxpayers' assets.
How Can I Avoid FATCA?
You can't avoid FATCA if you're a U.S. taxpayer with foreign assets in institutions. Penalties for trying are severe.
The Bottom Line
FATCA requires you as a U.S. citizen, resident, or entity to report offshore assets, and foreign institutions to disclose your info. File Form 8938 annually based on your residency thresholds. Skip it, and face big penalties—stay compliant to avoid trouble.
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