What is Foreign Account Tax Compliance Act and How to Fill it?

by James Antonio Marketing Head

The Foreign Account Tax Compliance Act (FATCA) is a U.S. law that was enacted in 2010 to combat tax evasion by U.S. taxpayers who hold foreign financial accounts. FATCA is designed to ensure that U.S. taxpayers pay their fair share of taxes on income earned from foreign financial accounts. This article provides a detailed overview of FATCA, including its background, purpose, implementation, and impact.

About Foreign Account Tax Compliance Act FATCA

The U.S. tax system is based on citizenship, which means that U.S. taxpayers are required to pay taxes on their worldwide income regardless of where they live. However, until the enactment of FATCA, the U.S. government had limited ability to enforce this requirement with respect to foreign financial accounts.

As a result, some U.S. taxpayers with foreign financial accounts were able to evade taxes by not reporting the income earned on those accounts on their U.S. tax returns. In response, the U.S. Congress passed FATCA in 2010 to address this issue.

What is the Purpose of FATCA?

The purpose of FATCA is to combat tax evasion by U.S. taxpayers who hold foreign financial accounts. To achieve this goal, FATCA requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers to the U.S. government.

In addition, U.S. taxpayers with foreign financial accounts are required to report certain information about those accounts on their U.S. tax returns. Failure to do so can result in penalties.

Implementation

FATCA was implemented in stages beginning in 2014. The first stage required foreign financial institutions to register with the U.S. Internal Revenue Service (IRS) and agree to report information about their U.S. account holders.

The second stage required foreign financial institutions to begin reporting information about their U.S. account holders to the IRS. The third stage, which began in 2016, required foreign financial institutions to implement due diligence procedures to identify U.S. account holders.

What is the Impact of FATCA?

FATCA has had a significant impact on the global financial industry. Many foreign financial institutions have had to invest significant resources to comply with FATCA's requirements, including upgrading their information technology systems and hiring additional staff.

In addition, some foreign financial institutions have chosen to stop doing business with U.S. taxpayers rather than comply with FATCA's requirements. This has made it more difficult for U.S. taxpayers with foreign financial accounts to access certain financial services.

Who Files The Foreign Account Tax Compliance Act?

FATCA requires both foreign financial institutions (FFIs) and U.S. taxpayers to file certain reports and disclosures with the Internal Revenue Service (IRS).

Foreign Financial Institutions (FFIs): Foreign account tax financial institutions are required to file reports with the IRS disclosing information about their U.S. account holders. These reports are made on an annual basis and must include information about the account holder's identity, account balance, and income earned on the account.

U.S. Taxpayers: U.S. taxpayers who hold foreign financial accounts with an aggregate value of $10,000 or more at any point during the year are required to file a Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). In addition, U.S. taxpayers are required to report certain information about their foreign financial accounts on their U.S. tax returns using IRS Form 8938.

Steps of Filing Foreign Account Tax Compliance Act (FATCA)

The process of filing FATCA depends on whether you are a foreign financial institution (FFI) or a U.S. taxpayer.

Foreign Financial Institutions (FFIs): The process of filing FATCA for FFIs involves registering with the IRS and agreeing to comply with FATCA's requirements. This includes identifying and reporting on U.S. account holders, implementing due diligence procedures, and making annual reports to the IRS.

To register with the IRS, FFIs must create an account on the IRS FATCA Registration System and provide certain information, including their legal name, country of organization, and taxpayer identification number. After registering, FFIs are required to enter into a FATCA agreement with the IRS and comply with the terms of the agreement.

U.S. Taxpayers: The process of filing FATCA for U.S. taxpayers involves reporting certain information about their foreign financial accounts on their U.S. tax returns. This includes reporting the maximum value of the account during the year, the account number, and the name and address of the foreign financial institution where the account is held.

U.S. taxpayers who hold foreign financial accounts with an aggregate value of $10,000 or more at any point during the year are also required to file a Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). The FBAR must be filed electronically using FinCEN's BSA E-Filing System.

Criticism Faced by Foreign Account Tax Compliance Act

FATCA has been controversial, with critics arguing that it places a burden on foreign financial institutions and may infringe on the privacy of non-U.S. citizens. Some critics have also argued that the costs of compliance with FATCA are higher than the revenue generated from increased tax compliance.

Conclusion

The Foreign Account Tax Compliance Act (FATCA) is a U.S. law that was enacted in 2010 to combat tax evasion by U.S. taxpayers who hold foreign financial accounts. FATCA requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers to the U.S. government, and U.S. taxpayers with foreign financial accounts are required to report certain information about those accounts on their U.S. tax returns. While FATCA has been controversial, it has had a significant impact on the global financial industry and is an important tool for combating tax evasion.