The Foreign Account Tax Compliance Act (FATCA) is a 2010 U.S. federal law requiring all non-U.S. foreign financial institutions (FFIs) to search their records for customers with indicators of a connection to the U.S., including records of birth or prior residency in the U.S., and to report such assets and identities of such persons to the United States Department of the Treasury. FATCA also requires such persons to report their non-U.S. financial assets annually to the Internal Revenue Service (IRS) on form 8938, which is in addition to the older and further redundant requirement to report them annually to the Financial Crimes Enforcement Network (FinCEN) on form 114 (also known as 'FBAR'). Like U.S. income tax law, FATCA applies to U.S. residents and to U.S. citizens and green card holders residing in other countries.
FATCA applies to all subjects identified as a U.S. person. All U.S. citizens are U.S. persons by default, but a non-U.S.-citizen can be eligible as a U.S. person for tax purposes, for example, Green Card holders and corporations under certain criteria. Inhabitants of unincorporated U.S. territories (American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico or the U.S. Virgin Islands) have a Resident Based Taxation. However, financial institutions are notified that U.S. taxpayer identification number (TIN) information is mandatory for all reportable accounts with FATCA reporting obligations, even residents of those territories do not pay taxes to the mainland U.S.A. Likewise, FATCA does not apply to Banks in Puerto Rico since they are classified as "Territory Financial Institutions". Nonetheless, customers in Puerto Rico must complete forms W-8BEN and W-8BEN-E as part of the account opening process and reportings are almost the same as other U.S. banks. However, Puerto Rico's Act 273 is that FATCA, Common Reporting Standards (CRS) and Intergovernmental Agreements (IGA) signed between the United States and a foreign country do not apply to International Financial Entities in Puerto Rico.
FATCA was the revenue-raising portion of the 2010 domestic jobs stimulus bill, the Hiring Incentives to Restore Employment (HIRE) Act, and was enacted as Subtitle A (sections 501 through 541) of Title V of that law. According to the IRS, "FFIs that enter into an agreement with the IRS to report on their account holders may be required to withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA." The U.S. has yet to comply with FATCA itself, because as of 2017, it has not yet provided the promised reciprocity to its partner countries and it has failed to sign up to the Common Reporting Standard (CRS). FATCA has also been criticised for its effects on Americans living overseas, and implicated in record-breaking numbers of U.S. citizenship renunciations throughout the 2010s and 2020s. Bills to repeal FATCA have been introduced in the U.S. Senate and House of Representatives.
Background FATCA was reportedly enacted for the purpose of detecting the non-U.S. financial accounts of U.S. resident taxpayers rather than to identify non-resident U.S. citizens and enforce collections. However, although there might be thousands of resident U.S. citizens with non-U.S. assets, such as investors, dual citizens, or legal immigrants, FATCA also applies to the estimated 5.7 to 9 million U.S. citizens residing outside of the United States and those persons believed to be U.S. persons for tax purposes. FATCA also affects non-U.S.-person family members and business partners who share accounts with U.S. persons or who have U.S.-person signatories of accounts. This feature allows the reporting of the assets of non-U.S. corporations, volunteer organisations, and any other non-U.S. entity where a U.S. person can be identified.
FATCA is used to locate U.S. citizens (residing in the U.S. or not) and "U.S. persons for tax purposes" and to collect and store information including total asset value and Social Security number. The law is used to detect assets, rather than income. The law does not include a provision imposing any tax. In the law, financial institutions would report the information they gather to the U.S. Internal Revenue Service (IRS). As implemented by the intergovernmental agreements (IGAs) (discussed below) with many countries, each financial institution will send the U.S.-person's data to the local government first. For example, according to Ukraine's IGA, the U.S.-person data will be sent to U.S. via the Ukrainian government. Alternatively, in a non-IGA country, such as Russia, only the Russian bank will store the U.S.-person data and will send it directly to the IRS.
FATCA is used by government personnel to detect indicia of U.S. persons and their assets and to enable cross-checking where assets have been self-reported by individuals to the IRS or to the Financial Crimes Enforcement Network (FinCEN). U.S. persons, regardless of residence location and regardless of dual citizenship, are required to self-report their non-U.S. assets to FinCEN on an annual basis. According to qualification criteria, individuals are also required to report this information on IRS information-reporting form 8938. FATCA will allow detection of persons who have not self-reported, enabling collection of large penalties. FATCA allows government personnel to locate U.S. persons not living in the United States, so as to assess U.S. tax or penalties.
Under FATCA, non-U.S. ('foreign') financial institutions (FFIs) are required to report asset and identify information related to suspected U.S. persons using their financial institutions.
Under U.S. tax law, U.S. persons (regardless of country of residence) are generally required to report and pay U.S. federal income tax on income from all sources.See generally , The U.S. and Eritrea are the only two countries worldwide which tax non-resident citizens. The law requires U.S. citizens living abroad to pay U.S. taxes on foreign income if the foreign tax should be less than U.S. tax ("taxing up"), independently within each category of earned income and passive income. For this reason, the increased reporting requirements of FATCA have had extensive implications for U.S. citizens living abroad. Taxpayer identification numbers and source withholding are also now used to enforce asset reporting requirements upon non-resident U.S. citizens. For example, mandatory withholding can be required via FATCA when a U.S. payor cannot confirm the non-U.S. status of a foreign payee.See .
The IRS previously instituted a qualified intermediary (QI) program under which required participating foreign financial institutions to maintain records of the U.S. or foreign status of their account holders and to report income and withhold taxes. One report included a statement of a finding that participation in the QI program was too low to have a substantive effect as an enforcement measure and was prone to abuse. An illustration of the weakness in the QI program was that UBS, a Swiss bank, had registered as a QI with the IRS in 2001 and was later forced to settle in the UBS tax evasion controversy with the U.S. Government for $780 million in 2009 over claims that it fraudulently concealed information on its U.S. person account holders. Non-resident U.S. citizens' required self-reporting of their local assets was also found to be relatively ineffective.
The Hiring Incentives to Restore Employment Act (of which FATCA is a part) was passed on party lines: It narrowly passed the House, with no Republican members voting "yes" and passed the Senate with only one Democrat member voting "no". President Obama (D) signed the bill into law.
Senator Carl Levin (D-MI) has stated that the U.S. Treasury loses as much as US$100 billion annually to "offshore tax non-compliance" without stating the source of the data. On March 4, 2009, the IRS Commissioner Douglas Shulman testified before the subcommittee that there is no credible estimate of lost tax revenue from offshore tax abuse. In his book The Hidden Wealth of Nations, economist Gabriel Zucman estimates that U.S. persons hold US$1.2 trillion in financial wealth offshore. According to Zucman's analysis, this sheltering of assets results in US$36 billion in lost tax revenue annually in the United States.
Supplementing the reporting regimes already in place was stated by Senator Max Baucus (D-MT) to be a means of acquiring more financial data and raising government revenue.111 Cong. Rec. S10,778 (statement of Sen. Max Baucus) ("This bill [S. 1934] would improve tax compliance without raising taxes on anyone. These are taxes that are already legally owed.") After committee deliberation, Sen. Max Baucus and Rep. Charles Rangel (D-NY) introduced the Foreign Account Tax Compliance Act of 2009 to Congress on October 27, 2009. It was later added to an appropriations bill as an amendment, sponsored by Sen. Harry Reid (D-NV), which also renamed the bill the HIRE Act.111 Cong., S.A. 3310 The bill was signed into law by President Obama on March 18, 2010.
Provisions FATCA has the following important provisions:
Requires non-U.S. ('foreign') financial institutions such as banks to agree to search customer databases to identify those suspected of being US persons, and to disclose the account holders' names, TINs and addresses, as well as the transactions for most types of account. Some types of account, notably retirement savings and other tax-favored products, may be excluded from reporting on a country-by-country basis. U.S. entities making payments to non-compliant foreign financial institutions are required to "withhold... tax equal to 30 percent of the amount".
Foreign financial institutions which are themselves the beneficial owners of such payments are not permitted a credit or refund for taxes withheld, absent a treaty override.
US persons are identified by "FATCA indicia". A bank official who knows a U.S. person's status by other means is also required to identify that person for FATCA purposes. After identification, the FFI is responsible under the law for further questioning the individual.
To implement this requirement, the IRS put out Form W-8BEN in February 2014. Since then, the IRS has required FFIs to have all foreign account holders certify their status on Form W-8BEN unless an intergovernmental agreement is in place authorizing another method of certification.
In other words, all account holders of FFIs are expected to confirm whether they are US persons or not. In practice, since the introduction of the Common Reporting Standard, FFIs are required to confirm the residence of all account holders as well as their US status. U.S. persons who own or have signing authority on these foreign accounts or assets must report them on the new IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the person's U.S. tax returns if the accounts are generally worth more than US$50,000. A higher reporting threshold applies to U.S. persons who are overseas residents and/or file jointly.e.g., Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset. Understatements of more than 25% of gross income are subject to an extended statute of limitations period, six years.; the limitations period was presumably extended because it was determined that international audit cases can take an additional 500 days to fully investigate. It also requires taxpayers to report financial assets that are not held in a custodial account, i.e. physical stock or bond certificates.