FATCA stands for Foreign Account Tax Compliance Act. The legislation was passed into law in 2010 as part of the unrelated jobs legislation known as the HIRE law (Hiring Incentives to Restore Employment Act)
FATCA is a broad, complex set of rules designed to increase tax compliance by Americans with financial assets held outside the United States. The legislation was drawn up primarily as a response to the 2009 UBS off-shore banking scandal which revealed that many Americans were maintaining large financial holdings in secret Swiss bank accounts without reporting or paying U.S. taxes due on those assets.
The legislation creates new self-reporting requirements and increases penalties for failure to comply fully with complex reporting rules. Most importantly, the legislation imposes on all foreign financial institutions a vast new legal mandate to determine who among their clients are “U.S. Persons” and report directly to the IRS information on those clients’ accounts. This mandate is backed up by draconian enforcement mechanisms that ensure that virtually all non-U.S. financial institutions will comply. The legislation also ratchets up penalties imposed where tax payers fail to fully comply with all the special rules that pertain specifically to non-U.S. financial assets.
For Americans abroad attention will have to be paid to new self-reporting requirements on foreign financial assets. Equally important, however, is that new attention will have to be paid to many long standing reporting and filing rules that have been widely and safely ignored until now. Failure to comply with these rules has very rarely been an issue because they were virtually unenforceable. With FATCA’s new reporting mandate on foreign financial institution, that is all about to change.