FATCA – Foreign Account Tax Compliance Act

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is a United States federal law which enforces a requirement for United States citizens living outside of the US to file yearly reports on their non-U.S. financial accounts. It also applies to Foreign Financial Institutions (FFIs) in regards to financial accounts held by U.S. taxpayers and/or foreign entities which U.S. taxpayers hold a significant interest in.

It was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It was created in an effort to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, certain U.S. taxpayers holding financial assets outside of the United States must report those assets to the IRS. FATCA has many key indicia which qualify an individual as reportable (unless “cured”).


The Indicia are:

  • U.S. place of birth
  • Identification of the account holder as a U.S. citizen or resident
  • A current U.S. mailing address (including a P.O. Box, in-care-of & hold mail addresses)
  • A current U.S. telephone number
  • Standing instructions (or standing orders) to pay amounts from a foreign account to an account held within the U.S.
  • A current signatory or authority granted to a person with a U.S. address
  • Others affected by FATCA include
    • any non-U.S. who shares a joint account with a U.S. person, or is authorised as a signatory to the account
    • Any business or non profit organisation that allows a U.S. person to have a signatory on a financial account


Reporting by U.S. taxpayers holding foreign financial assets

It is required that U.S. taxpayers holding foreign financial assets that exceed $50,000 report on certain information about those assets. It must be included with the taxpayers annual return. This became effective from years beginning 18th March 2010.

Failure to do so could result in penalties of $10,000 (and up to $50,000 for failure to do so after continued notice from the IRS).

An additional penalty could be added to a substantial understatement of 40%.


Additional reporting by FFIs

FATCA also requires FFIs to report certain information directly to the IRS  in regards to financial accounts held by U.S. taxpayers, or foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The participating FFI is required to:

  1. Undertake identification and due diligence procedures with respect to its accountholders
  2. Report annually to the IRS on its account holders identified by the indicia
  3. Withhold and pay the IRS 30% of certain payments made from a U.S. source income as well as gross proceeds from the sale of securities that generate U.S. income. These can include:
    • Non-participating FFIs,
    • Individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person
    • Foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.


Fallbacks and other issues

Identity theft – The IRS reports that identity thieves are using fraudulent compliance requests as a “phishing” ruse to obtain sensitive account-holder information. As of April, 2015, more than 150,000 financial institutions throughout the world are storing social security numbers and asset values of U.S. citizens.


FATCA Discrimination – Due to the initial costs and complexity of this legislation, many banks were found to be excluding U.S. persons from holding financial accounts with them. This has not been halted by government authorities. The EU affirmed the practice of closure based on nationality by stating “Banks have the right, under the contractual freedom principle, to decide with whom they want to contract. They can in any event refuse clients for sound commercial reasons”, these closures or refusals have happened despite the fact those countries have signed intergovernmental agreements & promised not to close the accounts of U.S. persons.


Need advice?

Midshore are able to help provide project management, advice, or procedures, for your organisation to successfully implement necessary policies and practices to be able to ensure your FATCA compliance.

Midshore can also provide tailored FATCA awareness training either in-house, at our training facility or as a training video for your business.

Please contact us to discuss your needs.