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What is FATCA? Here is what you need to know

June 13, 2014

Calendar, July 1stWith FATCA going into effect in just a few weeks, on July 1, 2014, the controversy surrounding this important federal law continues to mount. However, many Americans are still unfamiliar with the Foreign Account Tax Compliance Act and how it could affect their financial situation. To help you better understand FATCA and what it will mean for many Americans (not just those who have overseas bank accounts), we’ve put together this quick, straightforward overview.

FATCA OVERVIEW

  • What is FATCA?
    FATCA is the Foreign Account Tax Compliance Act, a federal law signed by President Obama in 2010 that goes into effect in July 2014. Under the law, American citizens and permanent residents will be required to report all their foreign bank accounts and other financial assets overseas to the IRS. Likewise, foreign financial institutions will be required to report on their American clients and comply with IRS tax reporting requirements. The basic intention of the law was to help reduce the number of Americans who are avoiding paying taxes on their hidden offshore bank accounts.

  • Who is subject to FATCA?
    FATCA directly affects Americans who have bank accounts in other nations, as well as the financial institutions that hold those accounts. This includes both Americans living in the U.S. and abroad, as well as American businesses that have accounts overseas. U.S. taxpayers who are found to have concealed or understated income held in a foreign financial account will be subject to tax penalties up to 40%. Similarly, financial institutions that do not comply with the new regulations will be subject to withholding taxes of up to 30%.

  • When does FATCA go into effect?
    FATCA will be effective July 1, 2014, as part of Title V of H.R. 2847, a bill known as HIRE (Hiring Incentives to Restore Employment). However, the IRS has extended the compliance deadline for some financial institutions to January 1, 2016, as banks scramble to get their systems ready for the complex reporting requirements.

  • What the IRS considers a foreign bank account
    Most forms of financial accounts held by institutions outside the United States are subject to FATCA regulations. That includes standard bank accounts, investment accounts, hedge funds, trusts, life insurance policies and real estate. Financial assets that are not held in a custodial account, such as physical stock and bond certificates, must also be reported.

  • Reporting requirements
    Financial institutions must identify the names, addresses, taxpayer identification numbers and account transactions in any account owned by a U.S. person. The individuals owning those accounts must also report the assets on IRS tax form 8938 when filing their annual taxes.

For more on the basics of the new law, in plain English, here’s our episode of the Miller Report on FATCA.

FATCA CONTROVERSY

Although lawmakers tout that FATCA will generate more U.S. tax revenue and uncover cheats, opponents argue the law will result in several unintended and potentially disastrous consequences. Here are some of the primary reasons why FATCA is so controversial:

  • Cost of compliance
    FATCA is estimated to be costly for virtually everyone: not just the individuals and banks who are directly affected by the law, but also for the IRS (and thus all U.S. taxpayers who help foot the bill).

    Experts estimate that foreign financial institutions will end up spending as much as $7,000 for each of its U.S. account holders to comply – with totals in the billions of dollars. Americans living overseas, who already must pay taxes on income they earn abroad, may incur an average of $4,000 in expenses to comply with FATCA.

    Administrating the complex new regulations and handling the millions of new filings will also be costly for the Internal Revenue Service. There is increasing doubt that the IRS is prepared for it.

  • Impact on banks and citizens
    Many fear the astronomical costs of compliance will make banks reluctant to comply at all, and thus refrain from doing business with Americans – a scenario that would have far-ranging effects on the American economy. The high costs for expatriates could also entice more Americans to renounce their U.S. citizenship, even as the rate of those renouncing is already at a record high.

    In an interview with Birch Gold Group, Paul-Martin Foss from the Carl Menger Center for the Study of Money and Banking said, “[FATCA] will devastate innocent Americans both at home and abroad … Real criminals will continue to find ways around these new regulations. Law-abiding citizens will be forced to suffer yet again and to spend billions more dollars complying with draconian regulations, all because we have a government that is unable to discipline itself and rein in its out-of-control spending.”

  • Potential impact on the U.S. dollar and economy
    As the U.S. government demands overseas banks to suddenly eat billions of dollars in losses (to generate far less than those amounts in new tax revenue), critics argue FATCA will deteriorate foreign relations even further. Russia is one of several key nations that have not yet signed up to comply with the new regulations.

    Some European banks have already shut their doors to Americans, and many believe more are to come, ultimately making it harder for Americans to live, work or do business outside of the U.S.

  • Formation of online communities
    The angst created by FATCA has inspired many citizens – living both within and outside the United States – to form online communities to voice their displeasure.Some notable websites devoted to this cause are:

    Many have also gone to social media to voice their concerns. Notable accounts on Twitter that report the latest on FATCA include: @FedupUSExpat, @SwissTechie, @FATCA_Fallout, @USCitizenAbroad, @FATCAed, @NOFATCA_TW, @nobledreamer16, @STOP_FATCA and @USExpatCanada.

     

All of this could also have severe consequences for the already fragile U.S. dollar. Opponents argue FATCA will be the tipping point that finally causes international banks to cut the cord with the dollar. Even if a complete collapse is not imminent on July 1, as some have suggested, a continued slow and painful death of the dollar will create serious financial difficulties in the U.S. felt by every American.

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