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About the Foreign Account Tax Compliance Act

What is FATCA?
Chris Jackson/Getty Images

You may have heard about FATCA and its potential effects on American investors and the economy as a whole. But what is FATCA, what is its purpose, and what may be its effects? Go through the slideshow and read below to have these questions answered.

What are the penalties of not complying with FATCA?

If foreign financial institutions don’t comply, the IRS will impose a 30% withholding tax on all transactions concerning U.S. securities. In other words, foreign financial institutions and Americans holding accounts overseas will lose access to 30% of their holdings.

How much will FATCA cost?

FATCA might cost billions of dollars to set up, while the IRS will only collect an estimated $792 million in tax revenues from it. The foreign financial institutions will need to set up entire new departments in order to handle the additional work required to comply with the law.

Is anyone fighting FATCA?

According to Think Progress, “The most recent GOP budget cut IRS funding for tax enforcement, and the Republican National Committee is calling for a full repeal of FATCA.” Additionally, Switzerland’s Credit Suisse, the UK’s Barclays, and Canada’s TD Bank have spent millions of dollars lobbying to change the law.

When will FATCA take into effect?

July 1, 2014 is when foreign financial institutions registered under FATCA are required to withhold 30% of U.S. financial assets if holders fail to meet the new reporting requirements.

What could be the effects of FATCA?

Foreign financial institutions are already talking about diversifying out of all U.S. securities to avoid paying billions of dollars to comply with the act. 77,000 banks and financial institutions have registered themselves under it so far. $27 trillion of the European financial industry is invested in U.S. securities. If this $27 trillion is suddenly pulled out of the market, there may be a crash. European banks are already contacting U.S. citizens urging them to close out their accounts. China is looking to create banking relationships with Germany, England, Hong Kong, etc. and start using the Yuan (their country’s currency) for trade. The act could quickly hurt the value of the U.S. dollar.

What is FATCA?
What is FATCA? Chris Jackson/Getty Images

What is FATCA?

FATCA stands for Foreign Account Tax Compliance Act. It is a federal law signed by President Obama in 2010 and is contained within the Hiring Incentives to Restore Employment (HIRE) Act.

What is the purpose of FATCA?
What is the purpose of FATCA? Sean Gallup/Getty Images

What is the purpose of FATCA?

FATCA is designed to bring forward people who have foreign financial accounts. It requires individuals to report their foreign bank accounts, hedge funds, real estate, life insurance, etc. to the IRS. The IRS feels there are many Americans living here or abroad who are not reporting such information and avoiding paying taxes, so they want foreign financial institutions to begin divulging that information.

Who will FATCA affect?
Who will FATCA affect? Chip Somodevilla/Getty Images

Who will FATCA affect?

FATCA directly affects Americans living here or abroad who have financial accounts or investments overseas, and the foreign financial institutions where they are holding those accounts. It will also affect U.S. businesses operating in global markets, as well as U.S. financial markets and institutions. FATCA applies regardless of whether or not the investments are legitimate (meaning it applies to legal as well as illegal financial activity).