FATCA
FATCA (Foreign Account Tax Compliance Act) is a US federal law enacted in 2010 that requires foreign financial institutions to identify and report information on financial accounts held by US persons to the IRS, and requires US taxpayers to disclose specified foreign financial assets on Form 8938.
FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act and became effective in stages beginning in 2014. Its primary purpose is to detect and deter offshore tax evasion by US citizens and residents who hold assets in foreign accounts that were historically invisible to the IRS.
The law operates on two tracks. On the institutional track, foreign financial institutions (FFIs) — banks, brokerages, insurance companies, and investment funds outside the United States — must enter into agreements with the IRS or comply with intergovernmental agreements (IGAs) between their home country and the US government. Compliant FFIs identify US account holders and report their account balances, income, and gross proceeds annually. FFIs that refuse to comply are subject to a 30 percent withholding tax on certain US-source payments.
On the individual track, US taxpayers who hold specified foreign financial assets exceeding certain thresholds must file Form 8938 with their income tax return. Thresholds vary by filing status and whether the taxpayer lives in the US or abroad, ranging from $50,000 to $600,000 in aggregate value. FATCA reporting overlaps with but is separate from FBAR (FinCEN 114) reporting; many taxpayers with foreign accounts must file both.
Non-compliance carries severe penalties. Failure to file Form 8938 incurs a $10,000 penalty per year, which can rise to $50,000 if the IRS issues a notice and the taxpayer still does not file. Criminal penalties for willful evasion can reach five years in prison. The IRS offshore voluntary disclosure programs have allowed many non-compliant taxpayers to come into compliance with reduced penalties.