The Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA)

July 15, 2022
The Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA),
information sharing. More than 100 countries have adopted
enacted as part of the Hiring Incentives to Restore
the CRS, but the United States has not.
Employment Act (HIRE Act, P.L. 111-147), was intended
to increase compliance with U.S. tax law among U.S.
Effectiveness in Inducing Compliance
citizens and residents with financial holdings outside the
The magnitude of individual tax evasion is uncertain, but
United States. FATCA aimed to reduce noncompliance by
recent estimates placed it at around $40 billion a year (see
requiring certain U.S. taxpayers with assets outside the
CRS Report R40623, Tax Havens: International Tax
United States to report those assets to the Internal Revenue
Avoidance and Evasion, by Jane G. Gravelle). When
Service (IRS) and placing requirements on foreign financial
enacted, FATCA was projected by the Joint Committee on
institutions (FFIs).
Taxation to raise $1 billion in revenues per year by 2019,
which is a small share of current estimates of international
Under FATCA, FFIs and certain other entities are required
tax evasion.
to report foreign assets held by U.S. account holders to the
IRS on Form 8966, FATCA Report. FFIs can register
Reporting requirements for FFIs on accounts held by U.S.
directly with the IRS or comply with the FATCA
taxpayers can increase compliance by providing third-party
Intergovernmental Agreement (IGA) for their jurisdiction
reporting and can increase revenue through data to identify
(if applicable). The United States currently has FATCA
noncompliant individuals, imposing a withholding tax, and
IGAs with 113 countries. FFIs that do not comply with
encouraging voluntary compliance. The implementation of
FATCA may face 30% withholding on their U.S.-source
FATCA by the IRS had been delayed, in part, by the need
income.
to set up agreements with other countries, where domestic
law does not permit the sharing of information, to arrange
FATCA disclosures generally require an FFI to obtain
IGAs where FFIs report to their governments, which in turn
consent from its account holder to share the holder’s
report to the IRS. The IRS compliance program has also
financial information. If consent is not granted from the
been delayed by resource constraints and, most recently, the
account holder, FFIs must withhold and remit to the IRS
coronavirus pandemic.
30% of any U.S.-source income generated by these
accounts.
A 2022 report by the Treasury Inspector General for Tax
Administration (TIGTA) also highlighted difficulties with
Under FATCA, certain U.S. taxpayers holding financial
obtaining taxpayer identification numbers (TINs) from
assets offshore greater than certain thresholds must report
FFIs, the failure to institute matching, in part for that
those assets to the IRS on Form 8938, Statement of
reason, and the lack of focus on nonfilers of Form 8938.
Specified Foreign Financial Assets. The specific thresholds
TIGTA reports that the IRS appears to be moving toward
depend on residence and marital status. The threshold for
identifying nonfilers, although it is hindered by the lack of
taxpayers residing in the United States is $100,000 on the
data on TINs. In 2019, according to the TIGTA report, FFIs
last day of the tax year or $150,000 at any time during the
identified 1,286,866 unique individual TINS, while the
tax year for those filing married joint returns and $50,000
number of Form 8938 individual filings was 467,145.
(or $75,000) for all other taxpayers. Taxpayers living
However, this difference may be due to the fact that the
abroad have thresholds of $400,000 (or $600,000) for those
filing threshold is higher for married couples for the Form
filing married joint returns and $200,000 (or $300,000) for
8938 than for the Form 8966.
all other taxpayers. The threshold for certain domestic
entities is $75,000.
The TIGTA report indicates withholding of $536 million in
2018, and $8 million of penalties for underreporting. IRS
Failure to report foreign financial assets on Form 8938 may
stresses that the purpose of FATCA is not withholding or
result in a penalty of $10,000 (and a penalty up to $50,000
penalties but to encourage voluntary compliance. The
for continued failure after IRS notification). Further,
effectiveness of FATCA is difficult to measure. In its
underpayments of tax attributable to nondisclosed foreign
response to TIGTA, the IRS noted the substantial increase
financial assets are subject to an additional substantial
in filings of Foreign Bank and Financial Account (FBAR)
understatement penalty of 40%.
forms that are filed with another agency, the Financial
Crimes Enforcement Network (FinCEN). Form 8938
The Organisation for Economic Co-operation and
reports have increased from 307,004 in 2014 to 467,145 in
Development (OECD) subsequently implemented a
2019. A study by Ahrens and Bothner estimated that
multilateral program similar to FATCA, the Common
FATCA and CRS together reduced evasion by 67%, but did
Reporting Standard (CRS). CRS provides for reciprocal
not determine the separate effects of FATCA. A study of
FATCA by de Simone, Lester, and Markle found that it
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The Foreign Account Tax Compliance Act (FATCA)
reduced investment into the United States from tax havens
FATCA compliance issues become better understood and
during 2012-2015 by 21%.
the adoption of CRS becomes more widespread.
Reciprocity, Joining the CRS
H.R. 5799 (Maloney) would exempt FFIs from reporting
Unlike CRS, FATCA does not have full reciprocity in
requirements under FATCA for U.S. citizens who are
information sharing. The IRS receives more information on
residents in the FFI’s country. Residents, as defined in the
U.S. owners of foreign accounts than other countries
bill, are U.S. citizens residing in an FFI’s country at least
receive on foreign owners of U.S. accounts. Legislation
330 full days during the prior 12 consecutive months.
would be required to authorize the collection of the data
needed for full reciprocity, including account balances and
A second FATCA concern of Americans living abroad is
beneficial owners. (Legislation has already been adopted to
compliance costs. These costs include the time spent
disclose beneficial owners of certain entities, including
collecting, organizing, and filing IRS forms and any costs
corporations and limited liability companies: the Corporate
paid for professional assistance. In various annual reports to
Transparency Act, P.L. 116-283, although it has not been
Congress, the National Taxpayer Advocate has offered
fully implemented.) The failure of the United States to
recommendations to reduce FATCA compliance costs by
reciprocate under FATCA has been criticized by the
(1) harmonizing requirements with FBAR, and (2)
European Union. In some views, the failure of the United
exempting from FATCA accounts held in the country in
States to share information under FATCA makes it one of
which a U.S. citizen is a bona fide resident.
the major secrecy jurisdictions in the world.
A further concern related to FATCA is that it may impact
The Administration’s FY2023 budget includes a proposal to
individuals who are U.S. citizens as a result of being born
provide full reciprocity. If reciprocity is not adopted, other
in the United States or by having a parent who is a U.S.
countries have the option of imposing withholding taxes on
citizen, but have otherwise little to no tie to the United
payments to U.S. financial institutions.
States. These individuals may not even be aware of their
U.S. citizenship unless notified by an FFI of their need to
Another option is for the United States to join the CRS,
comply with FATCA or if denied entry to the United States
which would replace FATCA. Such a change would
with a non-U.S. passport. As a result, these individuals are
eliminate requirements for multiple reporting under the two
sometimes referred to as accidental dual citizens.
systems for banks, but certain issues, such as reporting for
Accidental dual citizens are subject to the same FATCA
U.S. citizens abroad, would need to be clarified, since the
requirements as other U.S. citizens. Due to their tenuous
U.S. tax applies to all citizens regardless of residence.
ties to the United States, accidental dual citizens may be
more likely to renounce their U.S. citizenship than other
FATCA and Americans Living Abroad
groupings of U.S. citizens living abroad, though costs
The U.S. tax system is largely based on citizenship—where
associated with renouncing U.S. citizenship may be
U.S. citizens are taxed on their worldwide income
considered prohibitive. The European Union Parliament has
regardless of where they reside. According to the U.S.
stated its position that being subject to FATCA is not
Department of State, nearly 9 million U.S. citizens lived
justified for these individuals.
abroad in 2020. Although FATCA did not change the
underlying tax rules for Americans living abroad, it did
The President’s FY2016 budget would have removed
increase awareness of those obligations and added reporting
accidental dual citizens from taxation as U.S. citizens if
requirements for FFIs that they may utilize.
they met certain requirements. The current FY2023 budget
proposes a narrow exemption from certain exit taxes for
One concern related to FATCA is its effect on access to
lower-income dual citizens. Another option to address this
financial services for U.S. citizens living abroad. In a 2019
concern would be to allow a path for accidental dual
report, the Government Accountability Office (GAO) found
citizens to renounce their U.S. citizenship though a
evidence that U.S. citizens living abroad faced reduced
streamlined process.
access to financial services as FFIs revaluated the risks and
benefits of having U.S. citizens as clients. In response to
Jane G. Gravelle, Senior Specialist in Economic Policy
these concerns, Treasury allowed certain low-risk FFIs to
Donald J. Marples, Specialist in Public Finance
be deemed FATCA compliant if they did not restrict access
to financial services for U.S. citizens. Although anecdotal
IF12166
evidence persists that reduced access to financial services
remains a concern, FFIs’ concerns should be mitigated as

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The Foreign Account Tax Compliance Act (FATCA)

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