The Foreign Account Tax Compliance Act, also known as FATCA, is a federal law in the US that demands all American citizens report to the IRS details of any financial accounts if they have any accounts outside the US. Besides, FATCA demands foreign financial institutions to report details about American clients' accounts to the IRS. It was created to prevent American citizens from avoiding federal taxes by hiding their funds in offshore accounts.
FATCA was designed to enhance American citizens' compliance to make it easier for them than forcing their foreign counterparts to collect taxes.
One of the primary reasons FATCA was crucial is that Americans living abroad have to pay US income tax. Despite income generated in a foreign country and has no direct connection with the US, income tax must be paid to the US's government. Unlikely in other countries, the US is the only developed nation that demands this.
Parts Of Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act contains three main parts. The first part demands foreign institutions to agree with the IRS. This agreement consists of the foreign institution providing the IRS with information about American clients and their transactions. The second component of FATCA requires American citizens who own foreign accounts to report their assets on tax form 8938. If a US citizen got caught understating their income, %40 of their wages could be fined. The third component of FATCA closes a loophole that many Americans overseas had avoided their US tax liability by using swap-contracts to convert their US dividends to equivalents. After FATCA, it became far prom possible.
Similar to tax legislation, FATCA has faced severe criticism. Although concrete statistics are not available yet, many speculations based on the cost of implementing the Act are way more than the additional revenue it will bring in. It is inconvenient for other countries, and also it can be diversified.
FATCA For Financial Institutions
Financial institutions have to comply with FATCA rules. FATCA imposes various penalties and sanctions on financial institutions that do not comply with regulations. FATCA compliance requires time and cost for companies. Some financial institutions have announced that they have spent millions of dollars to ensure FATCA compliance.
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