Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA) is a United States federal law enacted in 2010 designed to crack down on tax evasion by U.S. taxpayers holding assets in offshore accounts. Think of it as the U.S. government's way of extending its tax-collecting vision across the globe. The law's core principle is transparency. It compels foreign financial institutions (FFIs)—like banks, brokerages, and investment funds outside the U.S.—to report information about accounts held by their American clients directly to the Internal Revenue Service (IRS). Institutions that refuse to play ball face a hefty penalty: a 30% withholding tax on certain payments they receive from the U.S. This powerful incentive has effectively turned foreign banks into deputies for the IRS, creating a global information-sharing network. For the individual investor, FATCA introduces new layers of paperwork and due diligence, fundamentally changing the landscape for Americans investing abroad.

FATCA operates on a two-pronged approach, targeting both the financial institutions that hold the money and the individuals who own it. This dual reporting system creates a powerful cross-verification mechanism for the IRS.

The primary engine of FATCA is the mandatory reporting by FFIs. To avoid the punitive 30% withholding tax, these institutions must enter into an agreement with the IRS.

• Identifying U.S. Accounts: Banks and brokerages must actively sift through their client lists to identify “U.S. Persons.” This includes U.S. citizens (even those living abroad), green card holders, and others who meet a “substantial presence” test. When you open an account, they'll likely ask you to fill out a form like a W-9 (for U.S. persons) or a W-8BEN (for non-U.S. persons) to certify your tax status.
• Reporting Information: Once a U.S. account is identified, the FFI must report key details to the IRS or their home country's tax authority. This includes the account holder's name, address, Taxpayer Identification Number (TIN), account number, and the year-end account balance.
• Intergovernmental Agreements (IGAs): To overcome foreign privacy laws, the U.S. has signed Intergovernmental Agreements (IGAs) with over 100 countries. Under these agreements, FFIs report the required information to their own government's tax agency, which then automatically exchanges it with the IRS.

FATCA also places a direct reporting obligation on U.S. taxpayers themselves. If you are a U.S. person and the total value of your specified foreign financial assets exceeds certain thresholds (which vary depending on your filing status and whether you live in the U.S. or abroad), you must file Form 8938, Statement of Specified Foreign Financial Assets, along with your annual tax return. This is separate from and in addition to any other foreign account reporting you might need to do.

While FATCA's target is the tax evader, its reach impacts any U.S. person with financial ties outside the country. For the value investor seeking global opportunities, understanding FATCA is crucial.

Simply put, investing overseas as an American is more complicated than it used to be. Opening a simple bank or brokerage account abroad now involves more forms and questions about your U.S. status. Some foreign banks, daunted by the cost and complexity of FATCA compliance, have decided it's easier to just refuse service to American clients altogether. This can shrink the pool of investment options and banking relationships available to U.S. expatriates.

One of the most fascinating and frustrating side effects of FATCA is its impact on “Accidental Americans.” These are individuals who are U.S. citizens—often by virtue of being born in the U.S. to foreign parents—but have spent their entire lives elsewhere with no other connection to the country. Many are unaware of their U.S. citizenship or their obligation to file U.S. taxes. FATCA has brought this issue to a head, as their local banks suddenly flag them as U.S. persons, thrusting them into the complex and often expensive world of U.S. tax compliance.

Investors often confuse FATCA's Form 8938 with another foreign reporting requirement, the FBAR (Report of Foreign Bank and Financial Accounts). While they seem similar, they are distinct obligations with different rules, purposes, and administering agencies.

• FATCA (Form 8938):
  1. Purpose: To combat tax evasion.
  2. Filed With: The IRS, attached to your annual tax return.
  3. Reporting Threshold: Higher and more complex, starting at $50,000 for individuals living in the U.S. but varying based on filing status and residency.
• FBAR (FinCEN Form 114):
  1. Purpose: An older rule designed to combat money laundering and other financial crimes.
  2. Filed With: The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, filed online and separately from your tax return.
  3. Reporting Threshold: Lower and simpler. Required if the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the year.

It's entirely possible that you may need to file one, the other, both, or neither. The key takeaway is that compliance with one does not excuse you from the other. Given the severe penalties for non-compliance, when in doubt, it is always wise to consult a qualified tax professional.