Foreign Account Tax Compliance Act (FATCA)
FATCA is a 2010 U.S. federal law designed to combat offshore tax evasion by U.S. taxpayers by requiring reporting of specified foreign financial assets and imposing a 30% withholding on certain U.S.-source payments to non-compliant foreign financial institutions.
What is FATCA?
Enacted in 2010 as part of the HIRE Act, FATCA (26 USC §§ 6038D, 1471–1474) requires U.S. taxpayers to report specified foreign financial assets (generally via Form 8938) and obliges foreign financial institutions (FFIs) to identify and report U.S. accounts, typically through intergovernmental agreements (IGAs), or be subject to 30% withholding on withholdable payments.
Key Takeaways
Individuals
Report foreign financial assets via Form 8938 if thresholds are met.
Institutions
Identify U.S. persons; non-compliance may lead to 30% withholding.
Global Scope
Worldwide obligations with intergovernmental agreements (IGAs).
FATCA established a global reporting framework via widespread IGAs, shifting due diligence and reporting duties to FFIs. Reporting centers on U.S. indicia and tax identification numbers, with thresholds that vary by filing status and residency. Non-compliance can trigger $10,000–$50,000 penalties for individuals, a 40% understatement penalty on undisclosed assets, and 30% withholding for non-participating FFIs. The regime is credited with enhancing transparency but is also criticized for cost, complexity, and impacts on U.S. expatriates.
FATCA Requirements
Individuals: file Form 8938 when specified foreign financial assets exceed thresholds; disclose account details, maximum values, and income. Institutions: perform due diligence to identify U.S. accounts (collect self-certifications and TINs), classify entities, and report annually to the IRS or the local authority under a Model 1 IGA. Withholding agents must apply FATCA withholding to payments to non-compliant entities.
Form
Form 8938 for individuals; institutional reporting under FATCA/IGA.
Data
Balances, income, TINs, and account details with due diligence.
Timeline
Annual reporting; updates upon material changes.
Reporting Thresholds
U.S. resident (single)
Total foreign assets > $50,000.
U.S. resident (joint)
Total foreign assets > $100,000.
Living abroad
Threshold typically > $200,000.
Actual thresholds may vary by filing status and end-of-year vs. max during year.
Penalties for Non-Compliance
Penalties include a $10,000 fine for failing to file Form 8938, up to $50,000 for continued non-filing, and a 40% penalty for understating taxes attributable to undisclosed foreign financial assets. The statute of limitations may be extended for unreported income. FFIs that do not comply may be subject to a 30% withholding on certain U.S.-source payments.
Impact on Financial Institutions
Implementation has required major systems, onboarding, and data-governance changes across a large number of FFIs worldwide. Costs have been significant, and some institutions have adjusted product offerings or U.S. client onboarding strategies to manage compliance and withholding risk, influenced by local IGA terms and regulatory guidance.
Compliance Strategies
Align KYC/AML onboarding with FATCA due diligence, capture reliable self-certifications and TINs, maintain evidence of reasonableness checks, reconcile reports with core systems, and monitor changes in circumstances. Provide staff training and track updates to IGAs and local implementing rules.
Implementation Challenges
Challenges include cross-border data transfer and privacy constraints, divergent local IGA implementations, evolving schemas/validations and portal requirements, legacy data quality issues, and the operational burden of monitoring changes and remediating documentation.