Aadhaar Card & FATCA Rules for Disclosing Indian Bank Accounts (Golding & Golding, Certified Tax Specialist)

Aadhaar Card & FATCA Rules for Disclosing Indian Bank Accounts (Golding & Golding, Certified Tax Specialist)

Aadhaar Card & FATCA Rules for Disclosing Indian Bank Accounts

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.

Aadhaar Card & FATCA

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

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…

…until now

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).

Life Insurance

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.

Interest Income

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

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).

*If you are considering preparing your own certification form for the streamlined program, please read the following case study based on a true story.

We Specialize in IRS Voluntary Disclosure

We have successfully handled a diverse range of IRS Voluntary Disclosure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to IRS Voluntary Disclosure.

No Case is Too Big; No Case is Too Small.

We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.

We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):

Who Decides to Enter IRS Voluntary Disclosure

All different types of people submit to IRS Voluntary Disclosure. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

…We even represent IRS Staff with getting into compliance.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.

In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.) 

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.

IRS Offshore Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

A Penalty for failing to file FBARs

United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

FATCA Form 8938

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion 

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Summary of IRS Offshore Voluntary Disclosure

IRS Voluntary Disclosure of Foreign or Offshore Accounts is a legal method for getting into IRS Tax and Reporting compliance before the IRS finds you first.  At Golding & Golding, we limit our entire tax law practice to IRS Offshore Voluntary Disclosure. 

Why IRS Voluntary Disclosure?

With the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act) and FATCA penalties, coupled by the renewed interest in the IRS issuing FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) penalties — which are both very steep – it is typically a better strategy to be proactive and get into compliance, than to play “defense.”

FBAR penalties alone can reach ~$12,500 per account, per year (adjusted inflation from $10,000). While this is the maximum penalty, the “recommended penalty” is still $12,500 per year (usually 3-6 years). 

4 Types of IRS Offshore Voluntary Disclosure Programs

There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:

  • Offshore Voluntary Disclosure Program (OVDP)
  • Streamlined Domestic Offshore Procedures (SDOP)
  • Streamlined Foreign Offshore Procedures (SFOP)
  • Reasonable Cause (RC)

IRS Voluntary Disclosure of Offshore Accounts

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.

When Do I Need to Use Voluntary Disclosure?

Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.

Common Un-filed IRS International Tax Forms

Common un-filed international tax forms, include:

If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to IRS Offshore Voluntary Disclosure.

Golding & Golding – Offshore Disclosure

At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.

In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”

It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.

The Devil is in the Details…

If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.

It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.

Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.

What if You Never Report the Money?

If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported —  then you are in a bit of a predicament, which you will need to resolve before it is too late.

As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.

Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).

Getting into Compliance

There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.

5 IRS Methods for Offshore Compliance

  • OVDP
  • Streamlined Domestic Offshore Procedures
  • Streamlined Foreign Offshore Procedures
  • Reasonable Cause
  • Quiet Disclosure (Illegal)

We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.

After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.

If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.

Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.

1. OVDP (Ends on 9.28.18);  Preclearance (Ends on 8.24.18)

OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.

The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.

The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.

Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.

An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.

What is Included in the Full OVDP Submission?

The full OVDP application includes:

  • Eight (8) years of Amended Tax Return filings;
  • Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
  • Penalty Computation Worksheet; and
  • Various OVDP specific documents in support of the application.

Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.

Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).

OVDP Penalties

The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.

Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank) on the highest year’s “annual aggregate total of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).

For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.

Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!

                         

2. Streamlined Domestic Offshore Disclosure

The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.

What am I supposed to Report?

There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.

In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.

Reporting Specified Foreign Assets – FATCA Form 8938

Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.

The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.

The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.

Other Forms – Foreign Business

While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:

  • If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
  • If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
  • If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
  • And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.

Reporting Foreign Income

If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.

It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.

In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.

                           

3. Streamlined Foreign Offshore Disclosure

What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?

If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.

Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)

*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.

                      

4. Reasonable Cause

Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.

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