The aim of the Foreign Account Tax Compliance Act (FATCA) is to bring down tax evasion by introducing transparency in the financial activities of U.S. taxpayers and U.S. financial institutions. FATCA makes it mandatory for U.S. individual taxpayers to report information about certain foreign financial accounts and offshore assets if they exceed a certain threshold. They can fill Form 8938 and attach it to their income tax return.
Financial institutions are required to get a Global Intermediary Identification Number (GIIN), register with the IRS, and report certain financial information to the IRS. If a U.S. taxpayer has a substantial ownership interest in a foreign entity or has financial accounts, the taxpayer must report the assets to the IRS.
The U.S. has made agreements with many countries under FATCA. According to the IRS, “If a jurisdiction enters into an Intergovernmental Agreement (IGA) to implement FATCA, the reporting and other compliance burdens on the financial institutions in the jurisdiction may be simplified. Such financial institutions will not be subject to withholding under FATCA.”
Withholding information from the IRS is considered as not reporting, and attracts heavy penalties. U.S. taxpayers living abroad or in possession of financial accounts overseas must ensure that they are compliant with the FATCA rules.