FATCA was signed into law in March 2010 with the objective of combating international income tax reporting non-compliance by US citizens and U.S. taxpaying residents (US Taxpayers). It requires Foreign Financial Institutions (FFIs) to annually report the reportable balances and income in the accounts held by their US customers to the IRS. It requires US Taxpayers to report reportable foreign financial assets and income to the IRS on an annual basis.
FATCA imposes penalties on FFIs and US Taxpayers that do not comply with its disclosure requirements. It imposes an automatic 30% withholding tax on U.S.-source payments such as interest and dividends. It imposes a $10,000 penalty on US Taxpayers who fail to report their reportable Foreign Financial Assets.
The FATCA disclosure of information by FFIs to the US Government (IRS) has generated revenue to help offset the US Tax Gap resulting from offshore tax non-compliance.
FATCA will not go away because:
- The US government would have to raise taxes its US taxpayers from other “sources” if it did not obtain the revenue that FATCA generates.
- Implementation is in place and most FFIs have already invested in satisfying the complexity of the requirements.
- There is a global initiative towards transparency in financial reporting, including the OECD’s Common Reporting Standard whereby over 100 jurisdictions are now participating.
FATCA has become a source of data analytics to the IRS
IRS Continues to Cross-Reference Foreign Financial Accounts and Assets. It electronically matches (cross-checks) information that is sourced from FATCA reports submitted by Foreign Financial Institutions (FFI) (on Form 8966 – FATCA Report) and by Individual US Taxpayers that have reporting obligations via Form 8938 (Statement of Specified Foreign Financial Assets) to identify US Taxpayers that are not making required disclosures to IRS through not filing or underreporting as well as FFIs that are not reporting their reportable US account holders.
Through its cross-check process, IRS may identify:
- US Taxpayers that are non-compliant because they have been reported to the IRS by the FFIs via a FORM 8966 report while the Taxpayer has not submitted FORM 8938 or filed an inaccurate Form 8938.
- FFIs that are non-compliant because a US account holder has reported its reportable foreign accounts through FORM 8938 and an FFI has not submitted FORM 8966 regarding that US account holder.
And then came the FATCA Filling Accuracy Campaign!
Launched in October 2018, the campaign is directed at US Persons that fail to file FBARS and Form 8938 and reporting non-compliant FFIs that may lose their status as compliant institutions through losing their Global Intermediary Identification Number (GIIN), be subjected to 30% withholding on US source income and lose their US correspondent accounts.
Participation in FATCA is not an option, it is here to stay, as part of a global “transparency” initiative
IRS Criminal Investigations reported in its December 2019 Annual Report that it is using information sourced from FATCA data analytics to open and refer criminal investigations. In addition, the IRS Advisory Council issued Public Reports in November 2019 and November 2020 addressing the need to assist FFIs with their FATCA and QI portals.
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