The Foreign Account Tax Compliance Act, better known as FATCA, has been around since 2010. It has been hailed as one of the Treasury Department’s greatest successes and, despite being a global undertaking, you still may never have heard of it.
The full force of FATCA went into effect on July 1, 2014. Starting then, foreign financial institutions (FFIs) were required to report to the US government information on accounts held by U.S. customers. FATCA also resulted in the creation of a new tax document, Tax Form 8938, to be submitted each year by U.S. citizens with $50,000 or more in foreign financial assets. With this information in hand, the IRS will be able to compare the FATCA-obtained numbers with the U.S. customer’s corresponding tax return to see who is (or is not) paying the taxes they owe. Failure to comply with FATCA regulations comes with a hefty “stick”: non-compliant FFIs are subject to withholdings of 30% of payments from U.S. sources in forms of interests and dividends.
The goal of FATCA, like most IRS initiatives, is to ensure reporting compliance. With the vast sums of money deposited into foreign accounts each year, it is important that the IRS have a way to determine just how much money has been placed in offshore accounts. The growing web of countries working together under the FATCA coalition helps to prevent wealthier Americans from shielding their money from the reach of the IRS and, in some cases, the ability to get away with tax evasion.
There are, however, some less cynical instances in which FATCA plays an important part in the tax responsibilities of the average American. Almost 7.6 million Americans currently live abroad and, presumably, make use of their friendly (and foreign) neighborhood bank for their everyday financial needs. Or, consider the millions of people holding green cards who are, therefore, required to abide by U.S. tax law. The FATCA net also sweeps this subset of Americans with foreign accounts into its weave, and mandates their individual compliance just as much as that required of the larger and more powerful foreign institutions.
The aftermath of FATCA has resulted in what has been called a bank “lock-out” for US customers attempting to make use of foreign financial institutions.The increase in paperwork and the attention that must be given to these special accounts to ensure FATCA compliance have become onerous and burdensome, leading some FFIs to simply refuse to service American accounts.