This past July, the U.S. Federal Government’s new Foreign Account Tax Compliance Act, or “FATCA,” was enacted. The new act was passed back in 2010 as part of the Hiring Incentives to Restore Employment, or “HIRE,” Act. The purpose of FATCA is to prevent tax evasion through the use of foreign bank accounts by requiring foreign financial institutions, or FFIs, that handle accounts for U.S. citizens to provide certain information (names, account numbers, transactions, etc) to the IRS on accounts of $50,000 dollars or more. The accounts can then be taxed in accordance to the IRS’ new form 8938. This new IRS form needs to be completed and filed with the already established FBARS (Report of Foreign Bank and Financial Accounts) as well. According to Forbes’ Robert W. Wood, the IRS expects the Act to bring in an additional $800 million dollars per year, and the IRS is predicting to see about $8.7 billion in revenue within the next 10 years. That’s a fairly large chunk of change!
Many critics of FATCA, however, foresee significant problems. For example, the cost to implement. Critics like Robert W. Wood and websites such as American Citizens Abroad are predicting FATCA will actually cost more to enforce and uphold than the U.S. is to gain in revenue. Another concern is the extraterritorial nature of the Act. While at least 80 nations have signed up to comply, the U.S. made doing so a requirement by levying a hefty 30% tax withholding on all U.S.-related transactions if an FFI fails to comply with required FATCA reporting. To critics of FATCA it appears that the U.S. is bullying FFIs into compliance. Some fear this “bullying” could have some major consequences on U.S. relationships with foreign countries. Others think that U.S. citizens themselves may react badly, expatriating in larger numbers in coming years.
It has only been two months since FATCA’s enactment, so time will tell whether or not this new tax compliance act will do more good than harm. When tax filing begins next year there will hopefully be light shed on the ramifications of this bold new tax law.