The Foreign Account Tax Compliance Act (FATCA) is a US law enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Its purpose is to combat tax evasion by US citizens and residents who hold financial assets overseas. The need for this legislation arose following the 2008 Global Financial Crisis, which exposed widespread use of offshore accounts to hide wealth and avoid US taxes.
The core mechanism of FATCA is a dual reporting requirement. First, US taxpayers must annually report their foreign financial assets on Form 8938 to the Internal Revenue Service (IRS) if the value exceeds a specified threshold. Second, it compels Foreign Financial Institutions (FFIs), such as banks and investment firms, to identify accounts held by US persons and report their details to the IRS. FFIs that fail to comply with this mandate face a severe penalty: a 30% withholding tax on certain US source payments. This obligation is primarily governed by Chapter 4 of the Internal Revenue Code, specifically Section 1471.
To facilitate this global reporting, the US has entered into Intergovernmental Agreements (IGAs) with over 113 jurisdictions, including India, which allows for the reciprocal exchange of information. FATCA is closely connected to the Common Reporting Standard (CRS), a similar global tax transparency initiative developed by the Organisation for Economic Co-operation and Development (OECD). A significant change occurred in 2014, when FATCA's scope was expanded to include entities like corporations and trusts, and it introduced the requirement for FFIs to obtain a Global Intermediary Identification Number (GIIN). US taxpayers also have a separate, long-standing obligation to report foreign bank accounts on FinCEN Form 114, known as the FBAR.