Asset Protection – FATCA Requirements

The Foreign Account Tax Compliance Act, or FATCA, will require all foreign financial institutions or FFI’s to enter into information disclosure agreements with the IRS.

A FFI is any non-U.S. entity that accepts monetary deposits, holds financial assets for the accounts of others, or participates in the business of investing or trading securities, commodities, partnerships, real estate, or any real value interests with these accounts. It appears at this point that FATCA will be far-reaching and try to include rather than exclude firms, however, there is an exception for accounts held by an individuals if the combined value of all deposits does not exceed $50,000.

The Act also defines a FFI by stating that it is any such “entity that is a ‘substantial’ portion of its business, holds financial assets for the account of others” whilst providing the Treasury the power to modify the definition of a “financial account” in the future.

FATCA, which was passed as part of the HIRE act, financially compels through the use of withholding taxes that foreign financial intermediaries identify and report specified U.S. account holders to the U.S. Treasury. The Act requires a 30% withholding on any accounts that do not comply with reporting requirements.

Why is there a need for FATCA?

It is estimated that the United States Treasury loses over $350 billion per year due to concealed and undeclared accounts. Although it would be impossible to determine the exact total amount of US wealth held overseas, it is clear that the US government, particularly the IRS, knows the amount is significant. So significant that new legislature such as FATCA is created in an attempt to seek, identify and hold accountable institutions that conduct business practices with U.S. taxpayers in jurisdictions outside immediate U.S. control.

According to the IRS, U.S. persons have an obligation to report to the United States Treasury their worldwide income earned in both foreign and domestic accounts. The IRS spends a tremendous amount of money on auditing U.S. citizens accounts that they believe are not paying the full amount due in taxes. In fact $8.2 billion in tax enforcement will be spent in 2011. This includes audits on the estimated 6 million U.S. citizens living abroad, who do not pay US taxes because they mistakenly believe that they only have to pay taxes where they reside. However, according to the official IRS website “If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”

Additionally, FATCA seeks to fill potential gaps in current U.S. withholding and reporting rules by U.S. owned foreign entities as well as account for the lack of Form 1099 reporting by FFI’s. The IRS believes that U.S. Citizens (as well as green card holders who are also included) are escaping tax on worldwide income by having unreported accounts and seek remedy by way of FATCA that builds on existing rules and reporting requirements.


A potentially troublesome facet of FATCA is the potential for international firms to simply deny US customers opportunities for investment due to the highly complicated, thorough, and invasive reporting requirements. The IRS will now need to know the names and information of directors and shareholders of firms with US owners, customers, or clients. The privacy implications of FATCA are dramatic.

This new law assumes that FFI’s and other institutions affected by the legislation will devote resources for execution of the reporting requirements. If they fail to do so, it is at their potential liability.

A withholding financier under the new law will be personally liable to the government for a 30-percent withholding tax on any “withholdable payments” made to FFI’s if the information disclosure and other requirements as required by FATCA are not satisfied together with interest on the unsatisfied tax payment.

Additionally, a withholding agent may also be liable for a 100% penalty for the amount of tax evaded (or not collected, reported incorrectly, not accounted for properly, etc.)

Penalties for noncompliance

The US federal Government to may require an offending institution that is caught evading taxes to:

1. Purge any profits from said evasion as a non deductible penalty for the year in which the illegal activity was incurred, pay withholding taxes, interest and tax penalties
2. Pay restitution for any unpaid taxes and interest
3. Exit profitable businesses or activities from which the tax evasion stemmed from
4. Present detailed client and account holder information to the government
5. Provide as part of the settlement a public disclosure of the institution’s blameworthiness of misconduct — at risk to the firm’s brand and reputation
6. Have any licenses, approvals or authorizations suspended or terminated
7. Enter into a delayed prosecution arrangement requiring resources for compliance
8. Face possible charges and convictions for conspiring to the defraud the United States

Further Research

U.S. Treasury Code Sections 1471 through 1474–Part_I–072810.pdf$FILE/FATCA_2010_English.pdf,,id=97324,00.html

by: Ed Lowell

3 thoughts on “Asset Protection – FATCA Requirements”

  1. Did I read this correctly? That the IRS can force a foreign bank to disclose private company information?
    How is this possible? The U.S. doesn’t rule the world, so how can it makes demands of, threaten and then prosecute a foreign entity?
    I’m stumped..

    1. Unfortunately since the US retains the reserve currency status, they can still dictate USD transactions globally. All USD transactions must clear through a US registered bank. So if a foreign bank refuses to provide info, the US Treasury can block their access to the SWIFT banking system and thus USD transactions. No bank in the world can afford this.

  2. Pingback: Asset Protection » Asset Protection – The Foreign Account Tax Compliance Act

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