FATCA is an acronym for the Foreign Account Tax Compliance Act, a law passed by Congress in 2010 to help crack down on tax evasion involving people keeping money offshore. The law came into effect on July 1st, 2014.
FATCA has two aspects. It requires individuals with assets abroad worth over a certain value to report them when they file their federal tax return, and it also requires foreign financial institutions to report their US account holders.
While this creates a little extra paperwork for expats when filing, it's definitely worth doing, as the penalty for failure to report foreign financial assets on Form 8938 is $10,000, or up to $50,000 for continued failure after IRS notification.
So far straightforward at least.
It's the second aspect of FATCA that has caused the controversy and widespread stress though.
Every month the IRS publishes a list of the financial institutions that are signed up and complying with FATCA by reporting their US account holder details to the IRS. As of June 2016, the total number of institutions complying is over 197,000 worldwide. These include any and every type of financial institution, including banks, funds, and investment and pension firms.
However, an unintended consequence of this has been that many foreign banks, faced with the extra reporting burden that FATCA has placed on them, have made the decision that it's not worth their while reporting US account holders, causing them to close American expats' bank accounts, or not allow Americans to open new ones or apply for loans or mortgages. For thousands of Americans living abroad across the world, this has resulted in them being unable to buy a house, or their business going bust without access to banking or credit facilities. It has in turn been one of the major reasons why so many Americans have resorted to renouncing their US citizenship.
Then there is the question of unwarranted intrusion on a global scale. The vast majority of the estimated seven to nine million Americans living abroad are ordinary people rather than tax dodgers, and they don't appreciate their bank and other financial details including bank balances) being handed over to the IRS.
“The latest [list of FATCA-compliant institutions] has grown from 193,450 financial institutions at the start of May to 197,736 at the start of June (2016).” - iexpats.com
All Americans are required to file a federal return if they earn over $10,000 (or just $400 or self-employment income), wherever in the world they live, and regardless of whether they owe any tax to the IRS or are paying tax in another country. Up until now, many Americans living abroad have assumed that they can remain safely beyond the IRS' reach though. Because of FATCA, this is no longer the case.
With clients in over 150 countries, Bright!Tax is a leading US expat tax services provider for the 9 million Americans living abroad. If you have any questions regarding your tax situation, don't hesitate to get in touch for some advice.