No matter which part of the world you are living in, if you are a citizen or a tax resident of the United States (U.S.), the government taxes your international income and requires disclosure of foreign assets. That’s where knowledge of the Foreign Account Tax Compliance Act (FATCA) becomes crucial.
FATCA was introduced to curb tax evasion and increase transparency into the foreign accounts held by U.S. citizens or tax residents. As such, having a clear understanding of FATCA reporting ensures you remain compliant with the latest legal requirements and file your taxes correctly.
In this article, we explain who must comply with FATCA, what needs to be reported, and how individuals and institutions can meet their reporting obligations.
Latest Update on FATCA Reporting
Here are the latest updates on FATCA-related reporting requirements:
Update on the Technical Filing
For reporting years 2026 and beyond, the IRS is decommissioning the legacy FIRE (Filing Information Returns Electronically) system. Both individuals and institutions must transition to the IRIS (Information Returns Intake System) for filing information returns. The filings must now comply with the FATCA XML Schema v2.0.1, which includes updated ISO country codes to prevent technical rejections.
Definition Change of Specified Foreign Financial Assets
Starting in 2026, the definition of "Specified Foreign Financial Assets" has been functionally expanded to align with CRS 2.0. This includes not just traditional crypto but also Central Bank Digital Currencies (CBDCs), Stablecoins, and Specified Electronic Money Products (SEMPs). Reporting now moves beyond simple year-end balances to include "Relevant Crypto-Asset Transactions," such as exchanges between fiat and crypto or transfers to unhosted wallets.
TIN Relief Policy
The IRS issued Notice 24-78, which extends temporary relief for Foreign Financial Institutions (FFIs) through the 2026 and 2027 reporting years. Thus, if you cannot provide a TIN/SSN to your foreign bank, the bank can avoid "non-compliance" penalties by using specific IRS TIN Codes and reporting your date of birth instead. However, this is a temporary bridge; the IRS still expects you to obtain an SSN for full compliance.
Enhanced Automated Audit
Discrepancies between what your foreign bank reports (Form 8966) and what you report (Form 8938) are now checked by automated systems rather than manual audits. This significantly increases the risk of receiving an "Information Reporting Penalty" notice, even for minor errors.
Regional Highlight
On April 1, 2026, India’s Income-tax Act, 2025, officially replaces the 1961 Act. The long-standing Rules 114F, 114G, and 114H are being replaced by Draft Rules 238, 239, and 240. Under the new rules, if a bank finds a discrepancy between your FATCA self-certification and your KYC (Know Your Customer) documents, it is legally required to flag it within 90 days.
What is FATCA Reporting and What Governs It?
FATCA reporting includes the key disclosures about the assets and income of the US citizens and persons.
FATCA is part of the 2010 Hiring Incentives to Restore Employment Act (HIRE Act). It was enacted as Subtitle A (sections 501 through 541) of Title V to boost government revenue and fund temporary hiring incentives.
Though launched as part of the HIRE Act, it was designed to be a permanent Act that operates autonomously. Thus, to give it permanent status, section 501 of the HIRE Act added Chapter 4 to the Internal Revenue Code, making tax reporting mandatory.
Hence, aside from boosting revenue, the Foreign Account Tax Compliance Act also establishes reporting requirements to combat tax evasion. It aims to build transparency by identifying foreign-sourced income and assets of U.S. citizens and tax residents.
Understanding FATCA’s Dual Reporting Framework: Form 8938 vs. Form 8966
FATCA has a dual reporting system that includes both local and foreign reporting. The individuals and specified domestic corporations within the U.S. have to self-report foreign income and assets by filing ‘Form 8938’.
Foreign firms and institutions face more complex FATCA reporting requirements. These depend on the intergovernmental agreement (Model 1 or Model 2) that a country has with the United States.
Model 1 requires firms to share data with their local authorities, which in turn share the data with the Internal Revenue Service (IRS). On the other hand, Model 2 allows the firms to share the data directly with the IRS.
Thus, as per the agreement signed, firms and institutions (banks, investment funds, and so on) in other jurisdictions have to assess their customers to identify U.S.-based clients and report their key details, such as name, tax identification number, etc., either directly to the IRS or their local government via Form 8966.
This dual reporting system allows the IRS to cross-check the data submitted through ‘Form 8938’ and highlight any discrepancies.
Who Needs to Meet FATCA Reporting Requirements?
FATCA filing requirements are multifaceted and cover both U.S. and non U.S. citizens.
While non U.S. citizens can self-declare that they are not a U.S. person for tax purposes by submitting ‘Form W-8BEN’, the actual burden of FATCA compliance falls on U.S. persons.
The following are considered U.S. persons and must meet FATCA filing requirements diligently:
- People with U.S. citizenship, even if they have lived abroad their entire life
- Possess a green card
- Tax residents, i.e., anyone who has lived long enough in the state to trigger residency
- Anyone meeting the substantial presence test
- Any foreign corporation or partnership in which you hold a Substantial Ownership Interest (more than 10% by vote or value)
- Corporations or partnerships that are incorporated locally
- Any foreign trust where a U.S. person is either a settlor or a beneficiary
Note: A substantial presence test is a formula that considers your physical presence in the U.S. over a three-year period. It counts 100 percent of days in the current year, 1/3 of last year’s days, and 1/6 of the days in the year before. If that total hits 183 days, you are a U.S. person for tax purposes and need to fulfill FATCA requirements.
What Should You Include in FATCA Reporting?
For FATCA compliance, you must declare your assets and income transparently. Your FATCA declaration form must include details of the following assets, along with income derived from them:
- Financial accounts held at foreign financial institutions
- Foreign mutual funds, hedge funds, and equity investments
- Assets held by a trust in which the settlor is a U.S. citizen
- Interest in partnerships and corporations incorporated abroad
- Information about deposits and custodial accounts
- Digital assets such as cryptocurrency
- Specified foreign financial assets, such as retirement and pension accounts
However, you do not have to report the following assets:
- Foreign real estate held in your name
- Physical gold or currency
- Foreign government-mandated social insurance
FATCA Reporting Requirements for Individuals: Domiciled vs. Non-domiciled
If you are an individual living either in the U.S. or abroad, you must file the FATCA declaration Form 8938 and disclose your foreign assets that reach a certain value. The eligibility requirements for FATCA reporting include the following:
Filing Status | Domiciled in the U.S. | Non-Domiciled in the U.S. |
Single or married but filing separately | Either individual asset value equals $50,000 on the last day of the year or reaches $75,000 at any time during the year. | Either individual asset value equals $200,000 on the last day of the year or reaches $300,000 at any time during the year. |
Married and filing jointly | The sum of the asset value equals $100,000 on the last day of the year or reaches $150,000 at any time during the year. | The sum of the asset value equals $400,000 on the last day of the year or reaches $600,000 at any time during the year. |
FATCA Reporting Requirements: FFI vs. NFFE
For FATCA compliance, institutions are broadly classified into two categories: Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE).
The following are considered FFIs for FATCA compliance:
- Depository institutions such as banks
- Custodial institutions such as mutual funds, cryptocurrency
- Investment entities such as hedge funds or private equity funds
- Certain types of insurance companies that have cash value products or annuities
On the other hand, the NFFEs are further divided into two categories:
- NFFEs with Active Income: Their passive income from dividends or interests must be less than 50%. Additionally, less than 50% of the assets must produce this income.
- NFFEs with Passive Income: Entities with only passive income must disclose the details of the U.S. citizens who hold more than 10% stake.
The FATCA filing requirements for institutions are as follows:
Feature | FFI (Banks/Funds) | NFFE (Active Business) | NFFE (Passive Holding) |
IRS Registration | Required (Get a Global Intermediary Identification Number) | Not Required | Not Required |
Primary Form | Form 8966 | W-8BEN-E | W-8BEN-E |
Who they report to | Local Government or IRS | Submit the form to the bank or institution that holds their account. | Submit the form to the bank or institution that holds their account. |
Who is Exempted from FATCA Reporting?
Not all U.S. entities have to meet the FATCA compliance obligations. The following entities are exempted from FATCA filing requirements:
- Governmental entities
- Non-profit organizations
- Small, local financial institutions
- Retirement entities
What are the Penalties for Non-Compliance?
IRS levies hefty penalties to counter non-compliance. You can trigger FATCA penalties if you don’t file the relevant forms or miss out on crucial details. Aside from this, you can also trigger FATCA penalties if you have underreported the value of assets, ignored IRS notifications, and failed to report income from foreign assets on your tax return.
The penalties for the above range between $10,000 to $50,000, with criminal prosecution also possible. The following penalties you may need to incur:
- $10,000 for non-filing of Form 8938
- $50,000 for ignoring the IRS notification on misinformation
- 40 percent additional tax on the tax amount you already owe if you underreport your income
- Criminal prosecution if you hid foreign assets or income to avoid paying taxes
- 30 percent withholding tax on the revenue from U.S. citizens' investment or assets
How Can Business Setup Worldwide (BSW) Help?
With a multi-faceted reporting regime and numerous guidelines to adhere to, following the rules of FATCA compliance can be tedious and confusing. On top of that, compliance does not end with FATCA-related returns. You may also have to file other individual tax returns and meet Financial Crimes Enforcement Network (FINCEN) requirements. In situations such as this, seeking the advice of tax consultants from BSW can be helpful. Contact us to avail our tax compliance services now!
