What is FATCA? Foreign Account Tax Compliance Act explained

FATCA (Foreign Account Tax Compliance Act), enacted in 2010 as part of the HIRE Act, requires non-US financial institutions to identify their US-person account holders and report account information to the US Internal Revenue Service. India signed an Inter-Governmental Agreement (IGA) with the US in 2015 under which Indian financial institutions (banks, mutual funds, insurance companies, NBFCs) collect FATCA self-certifications and report US-person accounts to the Indian tax authority, which forwards the data to the IRS.

Two reporting streams. First: Foreign Financial Institutions (FFIs) globally - including Indian banks and mutual funds - must identify accounts held by US persons (citizens, green card holders, US-resident foreigners, and certain US entities) and report account balances, interest, dividends, capital gains and certain other income to the IRS via their local tax authority. Second: US persons themselves report specified foreign financial assets on Form 8938 attached to their US income tax return, when thresholds are crossed. The two reporting streams are independent - both apply.

US person includes: US citizens (including dual citizens of India and the US), green card holders (lawful permanent residents), individuals meeting the substantial presence test (183 days weighted over current and prior two years), and US-organized entities (corporations, partnerships, trusts). Accidental Americans - children of US-citizen parents born abroad - are US persons even if they have never lived in the US. NRIs with US citizenship or green cards trigger FATCA reporting on their Indian bank accounts, mutual funds, NPS, EPF, demat accounts and insurance policies.

Form 8938 is filed with the US income tax return when total specified foreign financial assets exceed: USD 50,000 on the last day of the year or USD 75,000 at any time during the year, for unmarried US-resident filers; USD 100,000/USD 150,000 for married joint US-resident filers. Thresholds are higher for US-citizen/resident filers living abroad: USD 200,000/USD 300,000 unmarried, USD 400,000/USD 600,000 married joint. Foreign accounts include bank accounts, mutual fund holdings, foreign stock/securities not held in a US account, foreign pension interests above certain triggers.

Non-filing of Form 8938: USD 10,000 per failure, plus an additional USD 10,000 per 30-day continuation up to USD 50,000. Underpayment of tax attributable to undisclosed assets: 40% accuracy penalty. Criminal penalties possible for willful violations. FATCA's Form 8938 has overlapping but distinct triggers with FBAR (FinCEN 114) - many US persons file both. Use the IRS Streamlined Filing Compliance Procedures to clean up past non-filings without criminal exposure if violations were non-willful. The IRS regularly receives FFI data from Indian institutions; non-disclosure is increasingly detected.

Does FATCA apply to NRIs?
Only to NRIs who are also US persons (US citizens, green card holders, or substantial-presence-test residents). An NRI with only Indian citizenship and no US tax-person status does not have personal FATCA obligations. The Indian bank still reports per the IGA, but no US 8938 follows.

Why does my Indian bank ask for FATCA declaration?
Under the India-US IGA, Indian banks are FFIs required to identify US-person account holders. The bank's self-certification form asks for US person status, US tax ID and other details. Indian non-US-persons answer 'No' to the US-person questions and the form completes.

Is FATCA the same as FBAR?
No. FATCA's Form 8938 is filed with the income tax return; FBAR (FinCEN 114) is filed separately with FinCEN. Thresholds, deadlines and information required differ. Many US persons must file both. Some assets reportable on FBAR are not on 8938 and vice versa.

What if I have not filed Form 8938 in past years?
Use the IRS Streamlined Filing Compliance Procedures (Streamlined Foreign Offshore for non-US residents, Streamlined Domestic Offshore for US residents). Requires three years of amended returns, six years of FBAR, and non-willful certification, with reduced penalties.

Are Indian mutual funds reportable on Form 8938?
Yes. Indian mutual funds held in a foreign brokerage or directly are foreign financial assets and report on Form 8938 if thresholds are met. They are typically Passive Foreign Investment Companies (PFICs) for US tax purposes, triggering punitive PFIC tax under Form 8621.

Does FATCA apply to corporations?
Yes. US-organized corporations and partnerships (including Delaware C-Corps owned by US persons) file Form 8938 if they meet the entity-level filing thresholds. Foreign corporations with US-person ownership trigger separate filings (Form 5471, 8865, 8858) regardless of FATCA.