Aadhaar Card & FATCA – Indian Foreign Banks & U.S. Reporting Rules
Aadhaar Card & FATCA – Indian Foreign Banks & U.S. Reporting Rules
We represent numerous clients each year who are originally from India. And, when it comes to India and U.S. Tax/Reporting rules, there are many different fact patterns scenarios for clients from India which results in them being out of tax compliance.
In a typical situation, a client moves here from India and begins working in the US. They may or may not have not transferred any money from India to the United States, or vice versa.
In addition, the individual may have had money amassed already in India from years of working, gifts, investments, etc.
India and U.S. Tax or Reporting
Typically, some the main issues we deal with are the following:
– Unreported interest income from an NRO or NRE Account
– Unreported accrued but non distributed interest income from a PPF or FD
– Unreported dividend income which is otherwise tax-free
– Undisclosed foreign accounts
Aadhaar Card Linking Update
It is important for client from India who may not have already updated their Foreign Financial Institution about their U.S. Residence to take note of the recent change and updates to Aadhaar linking rules.
Aadhaar Card Linking – Resident vs. Non-Resident
The focus of today’s blog posts will be nonresidents of India in which the foreign bank in India still has the individual identified as a resident.
You Never Updated the Foreign Bank
There are many reasons why a person residing in the United States did not update their Indian bank regarding their US status. Often times, the individual is still a citizen of India end either in the United States on a H-1B, L-1 or green card.
As a result, they may still have a residence in India or the information from the accounts are being directed to a parent or other relatives home.
Better Interest Rates of Indian Residents
Another reason for not updating the foreign banks regarding moving to the United States is because of the foreign bank still believes the person is a resident of India, then in many circumstances the interest rate will be better. In a typical situation the same bank may provide a nonresident an account that generates a 3% or 4% interest rate, whereas if the person is considered a resident the interest rate can be as high as 8% or 9%.
Therefore, in a situation where a person may have $500,000 in foreign accounts, that is the difference between a $20,000 and $45,000.
FATCA is the Foreign Account Tax Compliance Act. More than 110 countries (including India) have entered into Intergovernmental Agreements (IGA) with the United States. These IGAs are reciprocal, with India agreeing to report US account holder information to the IRS – and vice versa.
Ordinarily, if someone opened up in Indian account using their Indian name and Indian address, the chances of the bank having any knowledge that the person is now residing in the United States and subject to US tax laws a.k.a. (worldwide taxation) is slim to none…
Aadhaard Card Linking
The Aadhaard Card is a card that is used to identify individuals in India. Is based on a 12 digit number, an individualized for each person. A recent survey showed that more than 99% of individuals who are over the age of 18 are already registered in the system.
And Here is How they Catch You
A recent law in India was enacted in which requires linkage of the Aadaard Card to Indian Bank Accounts. There are limited exceptions, which includes:
- Those who are not citizens of India
- Non-resident Indians as per Income Tax Laws
- Those aged over 80 years at any time during the tax year, and
- The residents of Assam, Meghalaya and Jammu & Kashmir.
Therefore, let’s say you’re a citizen of India but a nonresident of India because you reside in the United States. At some point, the bank contacts you (because they still believe you are an Indian resident, as the Indian address is the only address they have on file).
The bank inquires as to why you haven’t done the proper linkage and you explain (because you hadn’t been aware of this law yet) that you reside in the United States. At that time, the bank then asks you why you never updated the account information to reflect that you reside in the United States.
Depending on the particular bank and their own policies, procedures, rules and regulations there’s a good chance the bank is going to send your information to the IRS.
That is not to scare you: the reality is, the United States and India have entered into an intergovernmental agreement IGA and India has already indicated that it is going to be reporting U.S. Accountholders in accordance with these laws. For a list of Indian foreign financial institutions already reporting or agreeing to report, Click Here.
Thus, it is important to make sure you are in compliance.
Does the IRS have Your Information Already?
It is impossible to know whether the IRS computers has been populated with your information. The reason why it is so important, is because if the IRS already has your information and you have not reported your foreign accounts and/or reported your foreign income properly, you may be penalized and prevented from entering one of the voluntary offshore disclosure programs.
If you have a foreign bank account in India and would otherwise be required to link your Aadhaard card to your bank account, you may want to consider your options to avoid any unnecessary fines and penalties under US tax law ( for not reporting of foreign accounts and income)
**If the IRS already your information and audits you, you lose the right to enter one of these offshore disclosure programs ( because you are no longer considered “ voluntary”)
For more information on the interplay of US tax and India, please see below:
India Income & U.S. Taxation
When it comes to India specifically, there are many similar facts, circumstances, fears and concerns common amongst many of different clients.
Therefore, we would like to do our best to educate you on some of the basics that you should be aware when it comes to India income and accounts in US tax and offshore reporting laws.
Offshore Tax Compliance is complex. Moreover, Indian Tax Law is different than US tax law and usually the U.S. treats India income as “presently taxable.” That is true, even if it is in a Foreign Mutual Fund which is distributed and immediately re-invested, a PPF which has not reached maturity, or a Fixed Deposit accruing (but not distributing) income.
Unfortunately, oftentimes it does not become apparent to individuals from India that they must report foreign accounts and pay tax on foreign income until they have been living in the United States for many years and filings returns incorrectly (aka failing to file in accordance with the IRS’ significant international tax and reporting requirements).
U.S Person Status
The term U.S. person is often confused with term U.S. Citizen. While U.S. citizen is a very specific identity/definition, a US person is much more broad and encompassing.
You do not have to be a US citizen to qualify as a US person. Moreover, you did not even have to be a Legal Permanent Resident/Green-Card Holder either. Rather, all you have to do is meet the IRS Substantial Presence Test (SPT).
For a more in-depth summary of the substantial presence test, you can refer to our prior blog page analyzing the SPT requirements. In a nutshell, if you are in the United States for at least 30 days in the current year and for an average of 121 days in each of the last three years, chances are you will have to file taxes and report properly on an FBAR, etc.
In other words, if you meet the reporting requirement then you are required to file tax returns and report all of your foreign income just as you were US citizen born in the United States.
IRS Reporting Requirements
The default status is that everything has to be reported, and then you work backwards to determine whether some exemptions/exclusions may apply.
Here are some typical issues we come across:
PPF (Public Provident Fund)
Even though your Public Provident fund is not being taxed during the 15 years of growth, it will be taxed in the United States on the accrued, but non-distributed income.
Foreign Mutual Funds
Many of our clients invest funds with companies such as Kotak, ICICI, NJ investments, etc. Under U.S. Tax Law, the foreign mutual fund may have to be reported and taxed in the present year, depending on whether you receive distributions and whether the distributions are excess distribution. Simply because the money was reinvested does not mean it is not presently taxable (this is distinct from the money never being distributed, as opposed to distributed and immediately reinvested).
If your life insurance policy with Prudential, ICICI, LIC or any other number of different companies, and it has a surrender value, then it must be reported as well. Even if the NAV value is not all together clear.
Even though passive income in India (and many other countries) such interest Income, Dividends, Capital Gains is not always taxable in India, the United States still taxes you on the income.
Fixed Deposits that are accruing interest income but have not yet been distributed will also be taxable in the current year (not all at one time when it matures.)
My Parent Controls the Account
This is a very common scenario. You may have some investment accounts back in India that either you opened yourself (before you came to the U.S. or after you started making more money) or your parents opened them on your behalf. Your parents are controlling the account, making the investments, and transferring the money to different fixed deposits to get you the best rate — and then immediately reinvesting it to avoid tax liability under India Tax Law.
Moreover, your parents may be filing tax returns on your behalf or it is TDS (Tax Deducted at Source), but because the amount of income you personally generated is below the threshold value, it is refunded to you — and your parents keep the money as payment for acting as your “financial planner” (Read: you are not alone with this scenario)
The IRS does not care. While it may impact willfulness versus non-willfulness, and reasonable cause versus “non” reasonable cause — you still have to report the income in the United States.
**With respect to tax rules in India, oftentimes money is split between children following and inheritance to avoid other tax related issues. The end-game is that the income generated is being redirected to a parent, but it is under the child’s name.
If you are the child and you are a US person and owner of a foreign account (even if the income is being transferred to your parent), it is important to speak with the US offshore tax attorney to understand the tax ramifications.
I Didn’t Know I was on the Account?
While this is not specific to India, it is very common with our clients from India. Typically, the parents who are non-US citizens and still residing in India begin to move “pre-inheritance” to the children. If the child is a US person, then there are significant tax issues to contend with.
With that said, there are potential methods for avoiding tax liability on the money if (even though it is under the child’s name) it does not belong to the child — and/or the child has not collected any of the income.
What if I Close the Accounts?
Simply closing the accounts will not achieve the intended purpose of avoiding reporting. In fact, oftentimes it achieves the opposite effect. That is because by closing the account after receiving a FATCA Letter, or otherwise being made aware of the reporting requirement, it means you have are acting willful. is your
If the IRS believes you are willful, you could be subject to excessive fines and penalties (Read: do not close the account after receiving knowledge of the reporting requirement solely to avoid reporting)
Joint Account But the Money is Not Mine?
If the money is in a joint account, for example between a U.S. child and a foreign parent, it still needs to be reported at least on an FBAR. The distinction between the FBAR and FATCA form 8938 lies in the distinction between having ownership, joint ownership, or signatures authority (FBAR) versus having no interest in the money (even if the child’s name is on the account), and therefore may be able to avoid reporting under FATCA Form 8938.
With the FBAR, there is a much broader reporting requirement.
I Never Transferred the Money to the U.S.
So what? The IRS does not care whether the money went back and forth between India and the United States. All the IRS cares about is whether meet the threshold requirement for having to file the specific form (8938, FBAR, 8621, etc.)
If you meet the threshold requirement, you file the form. Nowhere in the form does it ask whether you transferred the money back-and-forth. Trust us, we’ve seen enough cases wherein the facts you believe would be benign (never transferred the money from India to the United States) could objectively be seen as flagrant by the IRS (you knowingly kept the money separate in India even though it was earning interest income that should’ve been reported).
The IRS does not know your background, or why you did not report. The IRS will often come to its own conclusions-resulting in you and the IRS having wildly divergently analyses regarding the same set of facts.
The IRS Doesn’t Care About Me, I’m Not a Big- Fish
The reality is, not everybody gets caught – but the IRS does not have a throwback rule like most fisherman do; they are happy to catch a minnow and treat it like a whale. These days CPAs and tax professionals in general are doing much more to cover themselves. Therefore, chances are they will send you a questionnaire at some point which will ask you whether you have any foreign accounts or foreign income.
In years past, tax professionals did not take such care in protecting themselves. In fact, the FBAR has been around since the 1970s and was only recently enforced as a result of the introduction of FATCA (developed in 2010, with enforcement beginning in 2014).
Therefore, if you are audited and your CPA is contacted (usually they will be the IRS believes foreign money is involved) it can lead you down a dark path very quickly if it is determined that the CPA asked you about foreign accounts and you acted Willful, performed a willful omission, or acted with Reckless Disregard.
Compliance is Scary
It shouldn’t be. The problem is there are a bunch of inexperienced attorneys trying to posture online that they have experience in offshore disclosure when they really do not.
They often have less than 10 years of attorney experience, no advanced degrees (LL.M. or Master’s of Tax) no additional certifications (CPA or EA) and no litigation experience (Read: working as an examiner or auditor for the IRS is not the same as litigating tax cases as an attorney).
What to Look for in an Offshore Disclosure Attorney
**Tax Law is a specialized area of law, and Offshore Disclosure is especially complex. Your OVDP or Streamlined Attorney should have:
- At least 15 years of experience as a practicing lawyer
- An advanced Master’s of Tax Law Degree (LL.M.); and
- Either a CPA or Enrolled Agent (EA) license.
While a sole Attorney practitioner may offer a reduced rate, if they are not handling the tax preparation as well as the legal portion of the representation (including signing their own name) to the Tax Return and Legal Submission, then you have to wonder who is going to be handling that portion of the submission. Will you even get the chance to interview the CPA beforehand and work with them during the process?
Likewise, if the firm advertises or markets themselves as a Tax Resolution Firm that also handles OVDP or Offshore Voluntary Disclosure, you have to question how much experience they really have in OVDP, Streamlined, FATCA and FBAR compliance.
If you find the right attorney, you’ll be fine. At Golding & Golding, our entire law practice is dedicated to offshore voluntary disclosure. We take representation seriously and when you believe you are ready to get into compliance, feel free to contact our firm to schedule a reduced fee initial consultation will go through your case in detail with you.
Want to Learn More about Offshore Voluntary Disclosure?
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.