FATCA, the Foreign Account Tax Compliance Act, is the collection of regulations and laws that went into effect in January, 2013 as part of the Hiring Incentives and Restore Employment Act, which signed into law several years prior in 2010. The rules as set forth int his Act an entirely new chapter to the U.S. tax code, targeting abuses of the system by taxpayers in the United States with undisclosed foreign bank accounts. The new regulations require foreign financial institutions, including banks and holding companies, to disclose the names and balances of their U.S. account holders to the IRS where these balances exceed certain dollar amounts. The rules also require non-U.S. entities, including businesses, to give the IRS information about their U.S. owners.
How FATCA Affects Foreign Account Holders
FATCA affects foreign financial institutions in two ways. First, institutions must report the details of all accounts held by U.S. persons to the Internal Revenue Service. Second, U.S. entities, both financial and non-financial, that make payments of most types of U.S. source income to non-U.S. persons will also be impacted as they may now be required to withhold a 30% tax on that income paid to a non-U.S. person under FATCA. This will require the U.S. entities to maintain documentation on those non-U.S. persons and also track how those persons are classified under FATCA.
How does FATCA impact U.S. citizens and residents? If you hold accounts with foreign financial institutions that require annual disclosure, or if you have foreign income that has not been reported to the Internal Revenue Service, you might be subject to criminal prosecution. Criminal liability can be avoided if you enter a special amnesty program, called the Offshore Voluntary Disclosure Program. If you do not disclose your foreign accounts and income before your accounts are reported to the Internal Revenue Service by any foreign financial institution, you will not be eligible for the Offshore Voluntary Disclosure Program and will not be able to avoid criminal liability .