FATCA (FATCA)

FATCA is the Foreign Account Tax Compliance Act, passed in 2010 as part of the HIRE Act to curb the use of foreign accounts to hide income from the Internal Revenue Service. It works on two fronts at once. On one side, it requires foreign financial institutions, meaning banks, brokerages, and similar firms outside the United States, to identify accounts held by US persons and report them to the IRS, on pain of a 30 percent withholding tax on certain US-source payments to institutions that refuse. On the other side, it requires US taxpayers themselves to report their larger foreign financial assets to the IRS each year on Form 8938, filed with the tax return.

The two sides are meant to cross-check each other: the government learns about an account both from the taxpayer and from the institution, so an unreported account is harder to keep quiet. For an individual, "FATCA compliance" usually means the Form 8938 obligation, which is the part a taxpayer actually controls.

The Form 8938 thresholds are fixed regulatory amounts and they depend on two things: filing status and where you live. They are not indexed for inflation. For a taxpayer living in the United States, Form 8938 is required if specified foreign financial assets exceed $50,000 on the last day of the year or $75,000 at any time during the year for a single filer, and $100,000 year-end or $150,000 at any time for a married couple filing jointly. For a taxpayer whose tax home is abroad, the thresholds quadruple: $200,000 year-end or $300,000 at any time single, and $400,000 year-end or $600,000 at any time for a joint return. Crossing the threshold triggers the report; it does not by itself create any tax.

What Form 8938 covers is broader than a bank account. Specified foreign financial assets include foreign bank and brokerage accounts, but also foreign stock or securities not held in an account, interests in foreign entities, and certain foreign financial instruments and contracts. This is wider than the FBAR's account-based scope, which is one of the reasons the two reports do not substitute for each other. Failing to file Form 8938 when required carries its own penalties, beginning with a substantial flat penalty and rising if the failure continues after the IRS gives notice, and the statute of limitations on the whole return can stay open where the form is missing.

The institutional side reshaped banking for Americans abroad. To avoid the 30 percent withholding, most of the world's financial institutions agreed to report US account holders, either directly or through intergovernmental agreements their home countries signed with the United States. That machinery is effective at surfacing accounts, but it also made US customers expensive to serve, and some foreign banks responded by declining to open or maintain accounts for US citizens rather than take on the reporting burden. An "accidental American" who has never lived in the United States can find a local bank asking for a US taxpayer identification number because of this rule.

FATCA is why the "hidden offshore account" is largely a thing of the past for ordinary savers. The combination of taxpayer reporting and institutional reporting means the government generally learns about a foreign account through at least one channel. Holding money abroad remains perfectly legal; the change FATCA made is that not reporting it is much harder to get away with.

For an individual the process is: total up specified foreign financial assets, compare against the Form 8938 threshold that matches your filing status and whether you live abroad, and if you are over it, file Form 8938 with your tax return. The institutional side runs in parallel and requires nothing of the taxpayer, the foreign bank reports on its own.

A hypothetical example. Daniel is single and lives in the United States. He holds a foreign brokerage account that peaked at $80,000 during the year and ended the year at $60,000. Because his specified foreign financial assets exceeded either $50,000 at year-end or $75,000 at any time, he is over the single US-resident threshold and must file Form 8938 with his return. The form reports the account, but it produces no tax by itself. Separately, because the same account exceeded $10,000, he must also file an FBAR, a different report to a different agency. He files both, reporting the one account on each, which is the normal outcome when both obligations apply.

FATCA is a compliance regime rather than a choice, so the honest framing is what it accomplishes and what it costs the people caught by it.

What it accomplishes

• It makes offshore accounts visible to the government from two directions, which is a genuine deterrent to hiding income abroad.
• For an honest taxpayer, Form 8938 is a disclosure that produces no tax; it simply reports what is already owned.

What it costs

• It imposes a filing obligation on ordinary savers abroad whose only "offshore" holdings are the local accounts they live on.
• Its penalties for a missed Form 8938 are steep and can keep the return's statute of limitations open.
• It is separate from the FBAR, so many people must file two overlapping reports on the same accounts to two different parts of the Treasury.
• The institutional reporting burden led some foreign banks to refuse US customers, which can leave an American abroad struggling to open an account.