The Foreign Account Tax Compliance Act, better known as FATCA, was enacted into law on March 18, 2010 as part of the ‘HIRE’ bill (Hiring Incentives to Restore Employment Act). FATCA establishes a new information reporting regime that is designed to detect and discourage US tax evasion by Americans holding money outside the United States. The law was developed mainly as a response to the 2009 UBS offshore accounts scandal.
What is FATCA compliance and how does it affect you?
FATCA requires US citizens to report their non-US financial assets to the IRS every year. US taxpayers living abroad are also required to report this. The Statement of Specified Foreign Financial Assets (form 8938) must be attached to US taxpayers’ income tax return, regardless if the assets do not affect their tax liability for the current year.
FATCA compels non-U.S. financial institutions, known as FFIs, to investigate and report the personal information and assets of those people meeting certain red flag criteria to the U.S. tax authority, thus creating an administrative burden for tax payers. Banks that fail to comply with the FATCA are subject to a 30% withholding tax on every transaction that enters, exits, or transits through the U.S. This may seem extortionate, but even the Vatican City has agreed to share information with the U.S. on Vatican bank accounts held by American citizens.
Why FATCA is the last straw for many Americans and foreigners
1. While the FATCA was created with the intent of tracking down wealthy individuals, ordinary taxpayers have suffered the most from this legislation as they are administratively burdened with unnecessary and time consuming forms. IRS estimates that the average time it takes to complete and file Form 8938 is approximately 4 hours and 37 minutes. However, in reality, it takes a lot longer than that for most taxpayers.
2. Many of these individuals are required to complete their annual FBARs. This combined with Form 8938 will result in each taxpayer having to spend around 6-7 hours to complete these forms.
3. Every U.S citizen has to adhere to the FATCA reporting requirements. This includes individuals who are unaware that they hold U.S citizenship. Under the new rules on financial reporting from the FATCA, all people born abroad to a parent holding U.S. citizenship are technically liable for U.S. taxes under the Act.
4. Even non-US citizens are not spared from the requirements under the FATCA. These individuals have to self-certify their status to financial institutions with whom they maintain accounts with or if they want to open a bank account at any FFI. Failure to do so would result in the FATCA withholding funds or denying a bank account at that particular FFI institution.
5. The FATCA is invasive and unethical, forcing banks and foreign governments to share critical financial information with the U.S. For financial institutions abroad, it is estimated that the cost of implementing FATCA could be anywhere between $200 billion to more than $1 trillion.
IRS Global Tax Law is here to stay
Despite the backlash, FATCA is here to stay. You have to accept the inevitable; otherwise you can be subjected to extremely high fines and penalties. Navigating the FATCA rules and regulations is a challenging task for many individuals seeking to be compliant. If you have received a FATCA letter and you are not sure how to proceed, help is available to you. Don’t hesitate to ask for help as having someone knowledgeable by your side can be invaluable. Contact an experienced tax lawyer today to discuss your specific FATCA issues and figure out the best solution to become FATCA compliant.