10 Things to Know About FATCA (Foreign Account Tax Compliance Act)

The new FATCA law (Foreign Account Tax Compliance Act) directly impacts US citizens abroad, and US citizens with money held in foreign bank accounts. FATCA was passed into law in 2010 and is a
wide-reaching, complex collection of regulations and rules that are designed to improve levels of tax compliance by US citizens with assets in financial institutions outside of America.

What do you need to know about FATCA? Here we bring you up to speed on the key issues surrounding FATCA and its implications.

  1. Reasons for FATCA

FATCA was brought into being because US authorities are concerned at the amount of money lost to the economy in tax evasion. The rules were drawn up following the UBS banking issue in 2009 where it was revealed that Americans had significant amounts of money in Swiss bank accounts which were not taxed by
the US. According to estimates, there is around $100 billion lost every year, in part because Americans are hiding money in offshore or foreign bank accounts. FATCA is expected to raise around $7.2 billion in tax revenue over the period of 10 years, according to the IRS.

  1. How FATCA Works

The regulations state that any global bank or financial institution is required to register with the IRS and then to send the IRS information on the bankaccounts belonging to US citizens. This applies when the US citizens do not live in the US but reside in the foreign country where the bank is located. TheIRS has a list of “compliant organizations” which have signed up to be part of the FATCA regulatory code.

  1. Who FATCA Covers: Financial Institutions

The FATCA regulations have a wide reach. The rules apply to any global bank or financial institution that has US-citizen clients or clients with links to the US, and to the US citizens themselves with more than $50,000 in an overseas account. Under FATCA, practically any financial institution is covered, from banks to brokerage firms, insurance companies to mutual fund companies. Any type of financial institution with US citizens under its control comes under FATCA.

  1. Who FATCA Covers: US Clients

A US client is defined as a US taxpayer who would normally, or currently is, paying tax to the US government is defined as a US client – even when the US citizen does not live in the US. US residents, US green card holders, and trusts controlled by US clients are all covered under the Act. It is the responsibility of the bank or financial institution to screen clients to find out which are deemed to be US clients.

  1. What Banks Report

Financial institutions are required to give the IRS the account number, name, and address of the US client and the highest daily value of the account in US dollars over the course of the year.

  1. FATCA and Americans Abroad

Americans living abroad now have to pay close attention to the tax regulations under FATCA in order to avoid non-compliance. The system is self-reporting, and failure to declare investments and holdings in foreign banks can lead to penalties. Similarly, Americans living abroad who have previously not had to deal with certain tax forms and filings will now have to pay attention to them.

  1. Forms for FATCA

IRS Form 8938 must be filled and filed by US citizens or residents with assets over $50,000. For Americans living abroad the threshold is raised to $200,000 in an overseas bank account. In addition, you need the FBAR (Foreign Bank and Financial Accounts Report) and form 8621 (Passive Foreign Investment Company –PFIC.

  1. Penalties for Non-Compliance: Banks

Financial institutions that do not register for FATCA and give information on US clients are forced by the IRS to withhold 30 percent of any US client’s income.

  1. Penalties for Non-Compliance: Individuals

Failure to file form 8938 is a minimum fine of $10,000 but could go up to meet 40 percent of the account’s value – if the compliance is deemed “non-willful”.For “willful” offences, the penalty could be criminal charges.

  1. Impact of FATCA Rules

Some commentators believe that financial institutions will withdraw their services to US clients, or tell US clients that they can no longer hold their accounts. However, it remains to be seen how many financial institutions will do this, and which will comply with the new rules.

If you are unsure whether you are affected by FATCA, it is vital to seek financial advice to avoid falling into problems with the IRS. There have been many cases where individuals have not known about the FATCA regulations but have been affected by penalties for not registering or declaring overseas accounts.

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