Foreign Account Tax Compliance Act (FATCA)
Candlefocus EditorUnder FATCA, foreign financial institutions - such as banks, broker-dealers, mutual funds, certain insurance companies, and other institutions - are required to provide information about their U.S. account holders, or “U.S. persons” (citizens, residents, and entities), to the Internal Revenue Service (IRS). To fulfill their responsibilities under the act, many foreign banks and financial institutions may need to consider changes to their compliance systems and reporting processes.
Reporting on foreign accounts is done through a form called the Report of Foreign Bank Accounts, or FBAR. It is a separate form from be Form 1040 and is due to the Department of the Treasury on April 15th every year. In addition to filing the FBAR, taxpayers must also fill out Form 8938. This is reported with their Form 1040 and must be filed if total foreign assets are over a certain threshold.
The impact of the FATCA has been largely felt by foreign banks and financial institutions. Critics of the Act argue that there is an unfair burden on the foreign banks which are expected to report on the assets of their customers. They argue that the cost of compliance far exceeds what will be gained in terms of tax collection. Additionally, some claim that the Act violates privacy rights, as the required reporting may be viewed as overly invasive.
The United States government, however, strongly defends the Act for its effectiveness in stopping offshore tax evasion. According to the IRS, FATCA has already resulted in the collection of more than $10 billion in taxes from Americans previously hiding their money abroad. The resulting tax revenues from FATCA allow the US to fund incentives meant to spur economic activity.
In summary, the Foreign Account Tax Compliance Act (FATCA) is an important law that helps ensure U.S. citizens are paying their fair share of taxes on their foreign accounts. The tax money collected funds the business incentives in the HIRE Act and helps reduce offshore tax evasion. Although foreign financial institutions are tasked with much of the reporting under FATCA, the Act also requires U.S. citizens to file annual reports with the IRS and any taxes owed. Non-compliance can result in hefty penalties, so it is important to be familiar with the FATCA rules and filing requirements.