The Foreign Account Tax Compliance Act (FATCA) is a United States federal law that was passed by Congress in 2010. The goal of the FATCA is to limit tax evasion by requiring (1) U.S. citizens to report any financial accounts held outside the U.S. and (2) foreign financial institutions to report their U.S. clients to the Internal Revenue Service (IRS). Originally implemented to ensure that said tax evaders couldn’t get away by hiding their assets in foreign bank accounts, the FATCA, which took effect on July 1, 2014, has been the subject of great controversy.
Reducing Offshore Tax Evasion
The U.S economy has seen better days. With ever-rising debt levels and an increasing number of citizens storing their money abroad to avoid taxation, things have been heading downhill for those living in the U.S. FATCA is simply a federal effort to put an end to offshore tax evasion and make sure that the federal government receives its dues in a timely and fair manner. According to the FATCA, non-compliant account holders are subject to a 40% penalty on underreported income in an undisclosed foreign financial asset. Meanwhile, foreign banks that refuse to cooperate also face the threat of closure or monetary penalty by the U.S. government within its borders.
Troubling Offshore Citizens and Foreign Banks
However, while the Act focuses on U.S citizens, it includes citizens who are employed or living abroad. This fact has prompted a great outcry of indignation, especially among U.S. citizens who are living or working abroad and who may be paying taxes to the country in which they are employed. Although getting taxed on work conducted outside U.S borders may not concern those who are working offshore on a short-term basis, those who are in a long-term contract feel that the Act has put an enormous strain on their lives. As a result, many U.S. citizens living abroad have decided to relinquish their citizenship altogether.
In fact, the FATCA has made American citizens even less appealing in the eyes of foreign banks. Unless foreign financial institutions register with the IRS and agree to release the financial data of their U.S clients, the Act will impose a 30% withholding tax on certain payments made to these foreign financial institutions from the U.S. Consequently, many U.S. citizens residing overseas are reporting banking lock-out because many foreign financial institutions have chosen to eliminate their U.S. citizens and U.S. person client basis in order to minimize exposure to FATCA reporting requirements, withholding fees, and potential penalties.
Myth vs. Truth About the FATCA
In response to the public outcry over the FATCA, the U.S. Department of the Treasury has released various statements to clarify the purpose and design of the FATCA. According to an article from the U.S. Treasury, the FACTA is about the Treasury’s effort to combat offshore tax evasion. In the article, Robert Stack, the Deputy Assistant Secretary for International Tax Affairs at the U.S. Department of the Treasury, clarified that the FACTA is not overly costly or burdensome, but rather a means for the U.S. government to collect the debts owed it. The claim that U.S. citizens living overseas will become outcasts in the international financial world is also dismissed as a myth. The reality, according to Stack, is that as time proceeds, many nations will also require financial institutions to identify and report on all non-resident account holders.
The Outlook of FATCA
How the FATCA will develop in the coming years, and what its true impact will be, is uncertain. Until more can be known about the results, those with foreign investments or accounts should consult their accountants and learn more about the FATCA through the IRS to avoid unnecessary penalization.