What Should American Investors Know About FATCA?

Caye International Bank

FATCA RequirementsFor American investors, offshore banking can seem challenging thanks to the Foreign Account Tax Compliance Act, or FATCA. Once you understand FATCA, however, it is clear that the legislation doesn’t have to prohibit you from banking or investing around the world.

Learn a little more about FATCA so that you will feel confident establishing accounts overseas.

What is FATCA?

First, it is important to define FATCA. This Act was established by the United States government in 2010. The purpose of FATCA is to increase tax compliance by American citizens, residents, or anyone else responsible for paying taxes within the United States.

Under FATCA, foreign financial institutions and certain other non-financial entities are required to report back to the Internal Revenue Service (IRS) about the accounts and assets of U.S. citizens banking overseas. This is far more of a burden on banks than on individuals, although individuals will have to provide more information to overseas banks as a result.

FATCA was established to reduce tax evasion and ensure U.S. citizens paid the appropriate taxes to the IRS on foreign-held assets. Offshore banking can and does reduce the burden of taxation for many account holders. However, these individuals still must comply with any tax laws within their country of residence.

Through FATCA, the IRS has an easier time tracking the financial transactions of Americans, allowing them to better determine what taxes are owed to the United States government at the state and federal levels.

What Information is Supplied to the IRS Through FATCA?

Because of FATCA, foreign financial institutions, known as FFIs, are required to report to the IRS information about financial accounts held by U.S. citizens. All U.S taxpayers should recognize that when they provide information to a foreign bank, some of that information must be reported back to the IRS.

Information reported to the IRS includes:

  • Name
  • Address
  • U.S. Tax Identification Number (TIN)
  • Annual aggregate account balance
  • Gross amount of interest paid on a deposit account

Some American investors are frustrated by how involved the IRS is with international banking. However, there are certainly valid reasons for the IRS, and the U.S. government, to enforce tax compliance for American citizens.

What Does FATCA Mean for International Banks?

This piece of legislation mainly impacts foreign financial institutions. Each offshore bank has to comply with FATCA, and it can be an expensive and challenging process.

In fact, some international banks have opted not to offer services to Americans as a result of FATCA. Since the costs of compliance can be so high, and gathering the relevant data time consuming, many banks have limited services to investors coming from countries other than the United States.

Banks, mutual funds, and other investment entities that do work with U.S. citizens and residents need to comply with all FATCA regulations. To start, financial institutions have to determine whether account holders are U.S. citizens, or if they are subject to taxation laws in America. Then, banks contact their American account holders and ask them to submit a W-9 form, which provides information about tax identification numbers. Financial institutions may also have to go to extreme lengths to confirm that anyone opening an account can have their identity and address verified.

Of course, financial institutions also have to regularly report to the IRS about the transactions, withdrawals, and balances of American-held accounts. This adds a lot of administrative work, and it can mean that banks need to levy additional fees to account holders. While these fees are typically minimal, they reflect the additional hoops that offshore banks have to jump through in order to meet FATCA regulations.

What Does FATCA Mean for American Investors?

If you’re a U.S. taxpayer with foreign assets, what does FATCA actually mean for you? First, it’s important to know that you, as well as the FFI, have IRS reporting responsibilities. There are reporting thresholds for those who file U.S tax returns as:

  • Single
  • Married, but filing separately
  • Married, filing jointly

These thresholds also vary according to whether you are a taxpayer living abroad or a taxpayer living in the United States. Some of the IRS forms that are required in addition to the 1040 form include:

  • FinCen Form 114, also referred to as FBAR – filed electronically and separately from your 1040 form
  • Form 8938 – must be attached to your 1040 tax filing

Failure to file the appropriate forms with the IRS can result in stiff penalties and even criminal charges. You can find more details, including a summary of FATCA reporting, on the IRS website here.

Establishing an offshore bank account is relatively easy, but you will be required to submit more information than you do when opening a domestic bank account in the United States. If you’re planning to establish a bank account in a destination like Belize, be prepared to submit a bit more information. The additional information required is to simply confirm that you are who you say you are, making it easier for your financial institution to maintain compliance with FATCA and other international banking laws.

There’s no denying that FATCA makes international investing and banking a little trickier for U.S. citizens. However, there are far more benefits to offshore banking and investing that offset the additional legwork required by FATCA.

Belize is a country that is fully compliant with FATCA. Find out more about legally banking in Belize while being FATCA-compliant from the knowledgeable banking staff at Caye International Bank headquartered on Ambergis Caye island in Belize.

Contact Caye today to get answers to your questions about international banking.

This article is copyright © 2018 

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About this author:

Luigi Wewege

Luigi Wewege is the Senior Vice President of Caye International Bank, published author of The Digital Banking Revolution, has co-authored economic research which was presented before the U.S. Congress and currently serves as an Instructor at the FinTech School as well as a Speaker at the Silicon Valley Innovation Centre. He holds an Italian MBA with a major in International Business, as well as a BSBA with a triple major in Finance, International Business, and Management - cum laude from the University of Missouri-St. Louis.

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