The Foreign Account Tax Compliance Act, better known as FATCA, was created in 2010. It is a piece of legislation that impacts how American citizens are taxed, and it applies regardless of where you live or where you keep your assets.
If you have an overseas bank account, then you need to get familiar with FATCA and its requirements.
What is FATCA?
FATCA is a somewhat contentious law that is designed to increase financial reporting among American citizens and permanent residents.
Its goal is to increase the taxes brought in by Americans who are living, working, investing and banking in foreign destinations. Individuals have to submit specific information to the IRS in the United States, and that information may be the basis for taxation.
Individuals have to report their holdings and account balances to the IRS regardless of where they live or where their assets are held. So, if your account in Belize is set aside for retirement, or you’re amassing wealth from your career in Germany, you’re still expected to comply with FATCA annually.
Why FATCA can be a Burden for Individuals and Banks?
Complying with FATCA can be burdensome for both individuals and financial corporations. In fact, many international financial entities no longer accept American account holders because of the additional work and expense of compliance.
International banks with American account holders are under greater levels of scrutiny, and there is a lot more administrative and compliance work that has to be done. By some estimates, this is costing banks hundreds of billions of dollars on a global scale.
Banks who don’t comply with FATCA can suffer from significant penalties. Any financial institution that doesn’t comply with FATCA and submits the relevant documents may be subject to a 30 percent withholding penalty on any current or future U.S. Dollar transactions.
Clearly, those penalties are steep. That means that many banks have to handle the extra expenses of FATCA compliance or simply choose not to deal with American account holders as a way to cut costs.
Who Needs to Comply With FATCA?
Banks, and all other financial institutions, are the ones that have to worry most about complying with FATCA. However, they comply by requesting information from their account holders.
You, as an individual, will need to supply your financial institution with the relevant details they need for compliance. Individuals with foreign holdings can also opt to report directly to the IRS through an offshore voluntary disclosure program.
Banks can and do get penalized if they don’t comply with FATCA.
But what you might not know is that individuals can also be financially penalized.
If you are an American citizen or permanent resident who isn’t providing the necessary information to the IRS through FATCA, you could be penalized in a serious way.
Penalties can be as high as 50 percent of your total overseas bank account balance.
FATCA is set up so that compliance is a necessity. While it may be inconvenient for you and your bank, the penalties are steep enough that compliance is crucial.
FBAR v. FATCA
If you’re not new to the world of international banking, then you might realize that FATCA has a precursor. However, FATCA is very different from FBAR, or the Foreign Bank Account Report.
Through FBAR, any American citizen or permanent resident has to report a bank balance of international holdings if it surpasses $10,000 USD at any point in time. It was designed to uncover American tax evaders who have been using international bank accounts to hide income from the IRS.
Under FBAR, compliance is largely an individual task. Once a year, individual account holders have to electronically submit FinCEN 114 by June 30th and give the U.S. Government necessary details about the totals of foreign holdings.
FATCA is far more comprehensive, and it requires far more information from banks as well as individuals. However, FBAR is still in effect, and individuals may still need to comply with the annual electronic submission.
How You Can Comply With FATCA
The reporting threshold for FATCA compliance is $50,000 USD. If you have foreign assets with a total value of more than that, then you’ll need to comply with the new laws by reporting your specific assets on IRS Form 8938.
The threshold for reporting and compliance might be higher for specific individuals, such as married couples who file their taxes together annually or U.S. taxpayers who officially reside outside of the United States permanently.
If you do need to comply with FATCA, you can expect to submit specific information to your financial institution. Expect to provide key pieces of information like your name, address and U.S. Tax Identification Number.
Typically, your bank will already hold this information and submit it to the IRS as necessary. You may also be asked to provide supporting documents like a passport or a utility bill highlighting your permanent residence outside of the United States.
It is important to supply the information that banks request because they are doing their best to comply with FATCA. The easier you make it for financial institutions, the more likely they are to continue offering services to Americans.
Compliance with FATCA is a necessity, but it does make foreign investment and international banking trickier.
Fortunately, Caye International Bank continues to work with American account holders and follow the IRS regulations as stipulated by FATCA.