FATCA is the short name for new anti-avoidance disclosure rules under the Foreign Account Tax Compliance Act.
Working out if someone needs to make a FATCA disclosure involves working through a checklist of rules and regulations.
The key factor is whether the person has residence and taxpayer status in the USA.
If they do, then if they have foreign investments generating income or sell foreign assets that result in a capital gain, they are liable to declare this to the IRS on their annual tax returns.
The far-reaching legislation makes the same demands of offshore corporations or entities owned or controlled by someone with US status, even if they share a joint account with someone who does not have US status.
Next, not all financial holdings and transactions are reportable to the IRS under FACTA.
The aim is to capture tax on transactions going through foreign financial institutions (FFI) that would be taxable if they had taken place in the US.
The US Treasury and IRS are still issuing guidance and updates to effective FATCA dates, so a FATCA adviser needs to make sure they are in the notification loop.
Making the wrong decision could see a client making unnecessary financial disclosures or facing fines that start at $10,000 for failing to comply with the rules.
Any FATCA solution has to consider the customer’s tax status, the nature of the transaction and whether the transaction generates income or profits in the USA.