What is FATCA (US Taxpayers with Foreign Accounts & Assets)

What is FATCA (US Taxpayers with Foreign Accounts & Assets)


FATCA refers to the Foreign Account Tax Compliance Act. The concept behind FATCA is to facilitate global tax compliance by having the United States enter into bilateral Intergovernmental Agreements with foreign countries, in order to work together to reduce offshore tax evasion and other crimes. To date, the US government has entered into more than 110 intergovernmental agreements (IGAs) with foreign countries across the globe — which is nearly double the number of bilateral income tax treaties. Most US taxpayers who have foreign bank and financial accounts may learn about FATCA when they receive a KYC or FATCA letter from one of their Foreign Financial Institutions asking them about their US Person status (US Citizen, Lawful Permanent Resident, or Substantial Presence Test). Let’s go through seven important facts about FATCA for individuals.

Individuals Report FATCA on Form 8938

In order for individuals to comply with US FATCA requirements, they are required to report their Specified Foreign Financial Assets annually on IRS Form 8938. IRS Form 8938 is similar (but not identical) to the annual FBAR filing requirement. And, while there is some crossover between these two different forms, some taxpayers may be required to file both forms in the same year, for the same asset. Also, just filing the FBAR is not sufficient to be considered compliant with US tax law if you were also required to file Form 8938 as well in the same year.

Your Foreign Bank May Think You Are a US Person

The main reason why your Foreign Financial Institution may have sent you a FATCA notice is that they believe that you are a US Person. If you are considered a US Person, then the FFI will require you to submit a W-9 (US Person) instead of a W-8 BEN (non-US Person) in order to facilitate the FFI’s compliance with FATCA.

Some Foreign Banks Report Before Contacting You

Not all FFIs will communicate with taxpayers before submitting their foreign account information to the IRS. For example, some Foreign Financial Institutions submit all of their customer information for anyone they presume is a US Person to the US government — without first giving the customer any notice or forewarning.

Foreign Banks Can Freeze, Suspend, or Close Accounts

For US Persons who do not comply with the FFI’s requirements, foreign banks have the ability to freeze, suspend, and/or close customer accounts. This could become a serious problem for US taxpayers — especially if they have a significant amount of money at the FFI and have not yet disclosed the information to the US government before the bank completed reporting.

FATCA Is Not the Same as CRS

CRS refers to the Common Reporting Standard and it is similar to FATCA reporting. While the United States has not yet agreed to participate in CRS, some countries require both CRS and FATCA compliance. Therefore, when you receive a KYC letter from your foreign bank, it may be referred to as a FATCA and CRS self-certification letter.

FATCA Penalties

It is important to note that the Internal Revenue Service has begun increasing enforcement on matters involving individual compliance with FATCA. In previous years, the IRS did not aggressively pursue taxpayer compliance with FATCA, beyond issuing a soft letter. More recently though, the IRS has been issuing CP15 Notices for penalties involving noncompliance with FATCA. Taxpayers who receive a CP15 notice should be cognizant of the timing requirements for submitting a reply.

FATCA Compliance for Missed Prior Year Reporting

Once a taxpayer misses the reporting requirements for prior years, they will want to be careful before submitting their current year’s international reporting forms. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely FBARs, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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