FATCA is the Foreign Account Tax Compliance Act, and it was passed as part of the HIRE Act. It requires foreign financial institutions and other non-financial foreign entities to report foreign assets that are held by U.S. account holders. This act was passed primarily to prevent tax evasion by U.S. citizens who hold assets offshore.
U.S. citizens who hold financial assets outside of the United States are required to report them to the IRS, and there are serious penalties for failure to do so. This requirement extends beyond banks to include investment entities, brokers, and certain insurance companies. In addition, certain non-financial foreign entities will report on certain U.S. owners.
U.S. citizens who live abroad must file a form 8938 to report foreign investments if they are single and have more than $200,000 of the specified foreign financial assets at the end of the year or had more than $300,000 at any time during the year. U.S. citizens who are single and live in the United States must report if the assets are greater than $50,000 at the end of the year or more than $75,000 at any point during the year.
U.S. citizens who file as married couples must file the 8938 form if their assets totaled more than $600,000 at any time during the year or $400,000 at the end of the year. For those living in the United States who are married, they need to file if the value of the assets was over $150,000 at any time during the year or $100,000 on the last day of the year.
If a U.S. citizen is required to file the form 8938 and fails to do so, there are penalties. They could face a $10,000 failure to file penalty, an additional penalty of up to $50,000 for failure to file after IRS notification, and a 40% penalty on an understatement of tax attributable to non-disclosed assets.
These foreign financial and non-financial institutions are required to report to the U.S. Treasury, so the IRS will have a record.