The Foreign Account Tax Compliance Act (FATCA) is a law intended to curb the practice of using offshore accounts and financial assets to evade U.S. taxes. Passed as part of the HIRE Act in 2010, FATCA requires U.S. persons, foreign financial institutions (FFIs), and other non-financial foreign entities (NFFEs) to provide the United States Department of the Treasury reporting on foreign assets or be subjected to serious penalties.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a federal law that requires U.S. citizens to disclose foreign account holdings annually to curb tax evasion via offshore accounts and assets. FATCA also places strict reporting requirements on foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs), requiring them to disclose the identities of U.S. citizens with foreign accounts and the value of those accounts.
FATCA is part of the Hiring Incentives to Restore Employment (HIRE) Act, a 2010 law designed to promote transparency in the global financial services sector.
What is a foreign financial institution?
A foreign financial institution (FFI) is defined by FATCA as any financial institution that is a foreign entity and accepts deposits in the ordinary course of banking or a similar business, holds financial assets for others as a substantial portion of its business, or is primarily engaged in the business of investing, reinvesting or trading securities, partnership interests, commodities or any interest (including futures and forward contracts) on the aforementioned assets.
These foreign financial institutions include, but are not limited to:
- Depository institutions like banks
- Custodial institutions like mutual funds
- Investment entities like private equity or hedge funds
- Certain types of insurance companies with cash value products or annuities
- Direct reporting non-financial foreign entities
- Sponsoring entities
The IRS provides free access to their FATCA FFI List Search and Download Tool which is updated monthly.
What are specified foreign financial assets?
Specified foreign financial assets are foreign financial accounts and foreign non-account assets held for investment (as opposed to being held for use in a trade or business), including:
- depository or custodial financial accounts maintained at foreign financial institutions, and
- to the extent not held in an account at a financial institution:
- stocks or securities issued by foreign corporations,
- any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person
- any interest in a foreign entity.
What is a withholding agent?
A withholding agent is any U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. A withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.
You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment.
How does FATCA work?
FATCA requires both certain U.S. taxpayers and certain foreign financial institutions (FFIs) to report specified foreign financial assets to the IRS. FATCA imposes withholding requirements on financial institutions and reporting requirements on specified persons.
If you are a U.S. taxpayer holding financial assets offshore and have an aggregate value of more than the reporting threshold, you must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. This requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
FATCA also requires certain FFIs to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest directly to the IRS.
An FFI must obtain the client's consent to submit such reports. A client who does not consent is considered a “recalcitrant account holder” – someone who has failed to provide the FFI maintaining its account with the required information listed under §1.1471-5(f). In the case of such clients, FFIs must withhold 30% on all U.S. withholdable payments as defined by the IRS FATCA regulations.
FATCA requires a 30% withholding tax on U.S. source payments of fixed or determinable, annual, or periodical income unless FATCAs requirements regarding payee documentation are met in full.
What are the exceptions to Form 8938 filing requirements?
- If you do not have to file a U.S. income tax return for the year, then you do not have to file IRS Form 8938, regardless of the value of your specified foreign financial assets.
- If you report interests in foreign entities and certain foreign gifts on other forms, you may just list the submitted forms on Form 8938, without repeating the details.
What happens if you do not file Form 8938?
If you do not file Form 8938, Statement of Specified Foreign Financial Assets, you may be subject to penalties, including:
- a $10,000 failure to file penalty
- an additional penalty of up to $50,000 for continued failure to file after IRS notification,
- a 40% penalty on an understatement of tax attributable to non-disclosed assets.
Which countries follow FATCA?
Currently, there are 113 countries worldwide that follow FATCA through FATCA model agreements, including the United Kingdom, Australia, and Singapore. There are 95 countries that have no FATCA agreements with the U.S. – including tax havens like Belize, Argentina, and Monaco.
Does FATCA apply to accounts and assets in Switzerland?
Yes, FATCA does apply to accounts and assets in Switzerland, as Switzerland has an intergovernmental agreement with the U.S. to facilitate the implementation of FATCA. Since Switzerland is a Model 2 jurisdiction, financial institutions are required to report specified information about U.S. accounts directly to the IRS.
In cases where a customer does not give consent, an anonymized and compiled report with select data is shared. The IRS can utilize this summary to request disclosure of customer and account details via administrative assistance, as allowed under the Switzerland-US double taxation agreement.
Given the evolving banking landscape and 100+ nations endorsing the automatic exchange of information (AEOI), Model 2 is becoming obsolete. Switzerland has approved a mandate for negotiations with the U.S. on changing to a reciprocal FATCA agreement under Model 1, however, they have yet to be finalized.
Who is required to report under FATCA?
Withholding agents and account holders are required to report under FATCA. However, different reporting requirements and forms apply to withholding agents and account holders.
Is FATCA only for U.S. citizens?
No, FATCA is not only for U.S. citizens. Specified persons who are not U.S. citizens are also subject to FATCA requirements. FATCA targets non-compliance by U.S. taxpayers using withholding requirements imposed on financial institutions and reporting requirements imposed on specified persons.
Specified persons include:
- any specified individual or
- a specified domestic entity if it is formed or availed of to hold specified foreign financial assets
For specified individuals
The FATCA filing requirement applies to specified individuals like U.S. citizens, green card holders, resident aliens of the U.S. for any part of the tax year, nonresident aliens who make an election to be treated as a resident alien for the purposes of filing a joint income tax return, nonresident aliens who are bona fide residents of Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, and the U.S. Virgin Islands. However, the reporting threshold differs for those residing in the United States vs. those living in a foreign country.
For specified domestic entities
FATCA filing requirements impact businesses (specified domestic entities) if they are formed or used to hold specified foreign financial assets. This includes certain domestic corporations, partnerships, and trusts considered formed or availed of for holding, directly or indirectly, specified foreign financial assets.
What is the threshold for FATCA reporting?
FATCA reporting thresholds vary based on whether you file a joint income tax return or live abroad. Taxpayers living outside the U.S. are considered to live abroad if they are a U.S. citizen whose tax home is in a foreign country, and they have been present in that foreign country or countries for at least 330 days out of a consecutive 12-month period.
FATCA filing threshold for taxpayers residing in the U.S.
- If single or filing separately from your spouse, you must submit a Form 8938 if you have more than $50,000 of specified foreign financial assets at the end of the year
- If filing jointly with your spouse, the reporting threshold doubles to $100,000
FATCA filing threshold for taxpayers living abroad
- If single or filing separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year
- If filing jointly with your spouse, the reporting threshold doubles to $400,000
Which foreign assets are exempt from FATCA reporting?
Foreign assets held by an FFI are not subject to FATCA withholding if the FFI:
- enters into an agreement with the IRS under which it assumes specific due diligence, reporting, and withholding obligations (a participating FFI),
- is treated as a deemed-compliant FFI, or
- is subject to, and complies with, an intergovernmental agreement.
The following assets are also exempt from the FATCA filing requirement because they are not considered specified foreign financial assets:
- A financial account maintained by a U.S. payor. A U.S. payor includes a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and certain foreign subsidiaries of U.S. corporations. Therefore, financial accounts with such entities do not have to be reported.
- A beneficial interest in a foreign trust or a foreign estate if you do not know or have reason to know of the interest. If you receive a distribution from a foreign trust or foreign estate, however, you are considered to have knowledge of your interest in the trust or estate.
- An interest in social security, social insurance, or other similar programs of a foreign government.
- A financial account is not a specified foreign financial asset if the mark-to-market accounting rules for securities dealers in Code Sec. 475(a) apply to all the holdings in the account or an election under Code Sec. 475(e) or Code Sec. 475(f) is made with respect to all the holdings in the account.
- An asset is not a specified foreign financial asset if the rules of Code Sec. 475(a) apply to the asset or an election under Code Sec. 475(e) for commodities dealers or commodity traders under Code Sec. 475(f) is made with respect to the asset.
This information was last updated on 11/16/2023.