Foreign Account Tax Compliance Act (FATCA)

What is FATCA?

The FATCA full form is the Foreign Account Tax Compliance Act. It was a law made to prevent the tax evasion done by US taxpayers who hold their financial assets in foreign accounts. Under FATCA, the foreign financial institutions need to report the account information of US taxpayers to the US Internal Revenue Service (IRS).

This law was enacted in 2010, and it was a part of the HIRE Act. Some of these foreign financial institutions can be:

• Investment Funds
• Banks
• Insurance Companies
• Brokerage Firms

Important Clauses of FATCA

Some of the principal clauses that come under FATCA are:

• It prevents US citizens from using foreign financial institutions to evade taxes and encourages tax compliance.
• Non-financial foreign entities should disclose the substantial US owners or certify them.
• It requires the FFIs to disclose the information to the IRS about the US account holders.
• If the account holders and non-compliant FFIs fail to give the required information, then withhold their part of the payments.
• The US taxpayers who have foreign financial assets above the specific limit should report these assets on the Form 8938.

How Does FATCA Work?

To facilitate compliance with the Foreign Account Tax Compliance Act (FATCA), the US has signed agreements with many countries. The following are the ways in which FATCA works:

• The foreign financial institutions have to register with the IRS, and they need to agree to report the information about the US account holders.
• Then these FFIs need to identify the US foreign accounts and then report their information to the IRS or the local tax authority.
• Then the IRS compares this information provided by the FFIs with the ITRs of those US taxpayers to find the potential tax evasions and discrepancies.