FATCA
Quick Definition
U.S. law requiring foreign financial institutions to report information about accounts held by American taxpayers to combat offshore tax evasion.
Key Takeaways
- Requires foreign financial institutions to report U.S. account holders to the IRS
- Non-compliant institutions face a 30% withholding tax on U.S.-source payments
- U.S. taxpayers must report foreign financial assets above certain thresholds
- Implemented through intergovernmental agreements with over 100 countries
- Designed to combat offshore tax evasion by U.S. persons
What Is FATCA?
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the HIRE Act, requires foreign financial institutions (FFIs) to identify and report information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. FFIs that fail to comply face a 30% withholding tax on certain U.S.-source payments. FATCA also requires U.S. taxpayers with specified foreign financial assets exceeding certain thresholds to report those assets on Form 8938. The law has been implemented through intergovernmental agreements (IGAs) with over 100 countries, creating a global framework for financial account information exchange.
FATCA Example
- 1A Swiss bank must report account balances and income earned by its American clients to the IRS under FATCA requirements.
- 2A U.S. citizen living abroad with foreign bank accounts totaling more than $200,000 must file Form 8938 with their tax return under FATCA.
Related Terms
KYC (Know Your Customer)
Regulatory requirement for financial institutions to verify the identity and assess the risk profile of their clients before and during business relationships.
Anti-Money Laundering (AML)
Laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income.
Beneficial Owner
The true owner of an asset or account who enjoys the benefits of ownership, even if the legal title is held in another name.
Compliance Officer
A professional responsible for ensuring a financial institution adheres to all applicable laws, regulations, and internal policies.
SEC (Securities and Exchange Commission)
The primary U.S. federal agency responsible for regulating securities markets, protecting investors, and enforcing federal securities laws.
FDIC
Independent federal agency that insures bank deposits up to $250,000 per depositor, per institution, and supervises financial institutions for safety and soundness.
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