Foreign Account Tax Compliance Act is a piece of legislation that mandates citizens of the United States, whether they are residing in the United States or elsewhere in the world, to file yearly reports on foreign account holdings, they may have. The prevention of tax evasion is the primary objective of FATCA.
FATCA was enacted in 2010 as a component of HIRE Act, which was enacted to encourage greater levels of openness within the international financial services industry. If you have any foreign account assets, you must disclose them using Form 8938, and failing to do so might result in severe fines.
Understanding FATCA
As a part of the HIRE Act passed in 2010, President Barack Obama signed to officially make FATCA a law. The HIRE program was primarily developed to provide financial incentives to firms that took on formerly jobless employees. During the global financial crisis of 2008, unemployment rates reached all-time highs.
One of the incentives made available to businesses due to the HIRE Act was an increase in the business tax credit awarded to the employer for each new employee employed and kept on for at least 52 weeks. A payroll tax vacation and an increase in the expenditure deduction limit for new equipment acquired in 2010 were two more forms of encouragement.
The Goal of FATCA
FATCA aims to eradicate tax evasion committed by American people and corporations that invest in, do business in, or generate taxable income outside of the United States. It is not against the law to have an account in a foreign country; nevertheless, failing to reveal such an account to the Internal Revenue Service (IRS) is criminal. The United States government taxes its residents on their worldwide income and assets.
The FATCA was designed to help pay for the expenses of the corporate incentives made available via HIRE. The rules of FATCA compel taxpayers in the United States to declare yearly any financial assets kept outside the nation and pay any taxes that are owed on such assets. The HIRE Act's employment incentives are funded, in part, by the income stream provided by FATCA. This helps to make the law more financially sustainable. In any given year, residents of the United States are subject to penalties if they fail to register holdings in overseas accounts and financial assets that have a combined worth of more than $50,000.
Who Is Required to Comply with FATCA Requirements?
Form 8938 must be submitted by every taxpayer in the United States with financial holdings that add up to more than $50,000. These assets could be held in a bank account or invested in stocks, bonds, or any other kind of financial instrument. There are a few notable exceptions to this rule. An important exception is provided for assets held in a foreign branch of a United States institution or in a branch of a foreign institution located in the United States.
Institutions from Other Countries
By obeying this legislation, foreign financial institutions and non-financial foreign enterprises will be obliged to report the names and account balances of U.S. individuals who maintain bank accounts with them to the IRS or the FATCA Intergovernmental Agreement.
FFIs that do not comply with the IRS regulations will be barred from the U.S. market and have a tax penalty of thirty percent of any payment subject to withholding deducted from any payment they receive. Payments that are subject to withholding may include interest, dividends, and periodic profits, as well as other forms of income that are derived from the financial assets of the United States that these institutions hold.
Penalties for Non-Compliance
The penalties for not filing Form 8938 include monetary fines and other repercussions. If the responsible party continues to ignore the IRS's notices, the IRS may impose a penalty of up to $50,000 in addition to the initial $10,000 for each year of noncompliance. The sum of these fines may be added together.
For unreported income of more than $5,000 that is traceable to a particular foreign financial asset and occurs more than six years after a business files its return, the statute of limitations is extended to include the additional six years. Additionally, the statute of limits for the tax year is extended to three years after the party submits the relevant information if the party fails to file or correctly report an asset on Form 8938. This is done to account for the fact that the statute of limits is prolonged.
