What is FATCA Reporting?
The Foreign Account Tax Compliance Act (FATCA) is a federal law that requires U.S. citizens to disclose foreign account holdings annually to curb tax evasion via offshore accounts and assets. Passed as part of the HIRE Act in 2010, FATCA requires U.S. persons, foreign financial institutions (FFIs), and other non-financial foreign entities (NFFEs) to provide the United States Department of the Treasury reporting on foreign assets or be subjected to serious penalties.
FATCA’s Objective: Preventing Tax Evasion
The goal of the Foreign Account Tax Compliance Act is to stop American individuals and companies from evading taxes when they invest, conduct business, and generate taxable income overseas. Maintaining an offshore account is not against the law; however, failure to disclose the account to the Internal Revenue Service (IRS) is illegal. It’s because the United States taxes all of its residents’ income and assets globally.
FATCA Exemption Codes
If your entity is exempt from FATCA reporting, use one of the following FATCA exemption codes:
| Code | Entity Type |
|---|---|
| A | U.S. government entity |
| B | International organization |
| C | Foreign government entity |
| D | Exempt retirement plan |
| E | Entity wholly owned by an exempt entity |
| F | 501(c) tax-exempt organization |
| G | Certain financial institutions (e.g., U.S. regulated banks) |
| H | Publicly traded corporation |
| I | Subsidiary of a publicly traded corporation |
| J | Certain trust accounts (such as escrow accounts) |
| K | Certain tax-exempt organizations under section 501(a) |
Most individuals do not need to fill out this section unless they represent an entity that qualifies for an exemption.
How does FATCA affect Form W-9?
Form W-9 is used by U.S. persons to certify their tax status and provide taxpayer identification numbers (TINs). Some entities may need to include a Foreign Account Tax Compliance Act exemption code if they qualify for an exemption from Foreign Account Tax Compliance Act reporting.
How does FATCA impact businesses and financial institutions?
Businesses and financial institutions must verify whether vendors, partners, or payees are subject to FATCA filing requirements. If required, they must check the FATCA box on Form 1099 and report relevant payments to the IRS.
What happens if FATCA reporting requirements are ignored?
Failure to comply with FATCA filing requirements can result in penalties, withholding taxes on certain payments, and potential restrictions on conducting international financial transactions.
How does FATCA impact foreign entities receiving U.S. payments?
Foreign entities receiving U.S.-source payments must certify their Foreign Account Tax Compliance Act status using Form W-8BEN-E (for businesses) or Form W-8BEN (for individuals). If they fail to comply, U.S. payers may be required to withhold 30% of certain payments.