The Foreign Account Tax Compliance Act (FATCA) is a United States federal law that requires United States persons, including individuals who live outside the United States, to report their financial accounts held outside of the United States, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their U.S. clients. Congress enacted FATCA to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts and shell corporations, and thus to recoup federal tax revenues. The FATCA is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act.
The rules of the Report of foreign bank and financial accounts (FBAR) were established to provide investigators with leads and information required to track down and prosecute criminal activity, tax evasion, money laundering, and international terrorist activities. A United States person must file an FBAR report if that person has financial interest in, signature authority, or other authority over any financial account (s) in a foreign country and the aggregate value of these account(s) exceeds $10,000 at any time during the calendar year.
FATCA is designed to increase compliance by U.S. taxpayers rather than to enforce collection from foreigners. FATCA requires foreign financial institutions to report information related to the ownership by U.S. persons of assets held overseas. Under U.S. tax law, U.S. persons are generally required to report and pay taxes on income from all sources.Taxpayer identification numbers and source withholding are used to enforce foreign tax compliance. For example, mandatory withholding is often required when a U.S. payor cannot confirm the U.S. status of a foreign payee. The United States levies income taxes on its citizens, regardless of residency, and therefore requires U.S. citizens living abroad to pay U.S. taxes on foreign income (minus credit for foreign tax paid). For this reason, the increased reporting requirements of FATCA have had extensive implications for U.S. citizens living abroad.
The IRS previously instituted a Qualified Intermediary (QI) program under Internal Revenue Code § 1441, which required participating foreign financial institutions to maintain records of the U.S. or foreign status of their account holders and to report income and withhold taxes. One report found that participation in the QI program was too low to have a substantive impact as an enforcement measure and was prone to abuse. An illustration of the weakness in the QI program was that UBS, a Swiss bank, had registered as a QI with the IRS in 2001 and was later forced to settle with the U.S. Government for $780 million in 2009 over claims that it fraudulently concealed information on its U.S. account holders. Self-reporting of foreign financial assets was also found to be relatively ineffective.
It has been estimated that the U.S. Treasury loses as much as $100 billion annually to offshore tax non-compliance. Therefore, supplementing the reporting regimes already in place was deemed to be an effective means of increasing compliance and raising government revenue. After committee deliberation, Sen. Max Baucus and Rep. Charles Rangel introduced the Foreign Account Tax Compliance Act of 2009 to Congress on October 27, 2009. It was later added to an appropriations bill as an amendment, sponsored by Sen. Harry Reid, which also renamed the bill the HIRE Act. The bill was signed into law on March 18, 2010.
FATCA has three main provisions:
These reporting requirements are in addition to the requirement for reporting of foreign financial accounts to the U.S. Treasury; this most notably includes Form TD F 90-22.1 "Report of Foreign Bank and Financial Accounts" (FBAR) for foreign financial accounts exceeding US$10,000 required under Bank Secrecy Act regulations issued by the Financial Crimes Enforcement Network (FinCEN).