FATCA (Foreign Account Tax Compliance Act), requires all foreign financial institutions (FFIs) to enter into an agreement with the US government and disclose foreign account information of US citizens and green card holders liable to worldwide income taxation. The move is to ensure greater tax compliance via the exchange of information. FATCA will have a significant impact on US taxpayer compliance.
FFIs who fail to supply this information to the US government will be subject to a punitive withholding tax on all payments cleared through the United States banking system (most FFIs do). Indian financial institutions, like in other countries, will be required to disclose account information of US account holders (including NRI NRO, NRE and NRI accounts).
FFIs will provide the US Department of Treasury with identifying information on all US account holders. This information can be used by the US government to investigate US taxpayers who have not previously disclosed their offshore accounts. Because of FATCA, and additional compliance requirements, many mutual funds restrict investments by NRI and PIO from the USA.
FBAR (Report of Foreign Bank and Financial Accounts): In addition to income disclosure, the US Financial Crimes Enforcement Network (FinCEN) requires US persons (including US citizens and green card holders in India) to annually report their foreign financial accounts when the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported. US persons must file Form 114 (also known as FBAR, which reports all foreign financial accounts, above the threshold amount, to the US government. This filing into the BSA E-Filing System is separate from the filing of the Income Tax return. The failure to file Form 114 could lead to financial penalties as well and criminal prosecution based on the type and amount of non disclosure.
FFIs’ information reporting on US account holders to the US government via FATCA may be “matched” to FBAR reporting to identify those who fail to report or under report foreign assets and/or income.
Note that there is a Form 8938 Statement of Specified Foreign Financial Assets which is where a tax payer would report certain foreign financial assets. The threshold for reporting details will vary if the tax payer is resident in USA or abroad.
In Summary, FATCA is reporting done by the foreign Financial Institutions about bank accounts etc., FBAR is reporting by tax payer into the BSA E Filing System, and Form 8938 reporting is by the tax payer when filing Income Tax returns. See more details at www.IRS.org