FATCA India – Unreported Accounts and Income on Taxes & FBAR Filings

Golding & Golding - International Business Tax Lawyers

Golding & Golding – U.S. and International Tax Lawyers

Golding & Golding is an international tax law firm that focuses exclusively in Offshore Disclosure. Our practice is limited to helping individual and business clients get into compliance with:

  • FATCA (Foreign Account Tax Compliance Act)
  • FBAR Reporting (Report of Foreign Bank And Financial Accounts),
  • OVDP (Offshore Voluntary Disclosure Program); and
  • Streamlined Offshore Disclosure Program (aka Streamlined Filing Procedures)

We have worked with numerous clients from India in particular, due to the fact that there is a large percentage of individuals who maintain accounts in India of which those accounts are not being taxed (TDS).

Moreover, India takes FATCA reporting very seriously. India was one of the more recent countries to sign the Model 1 IGA (Intergovernmental Agreement) – in large part due to the fact that India has such a high expat community, coupled with the numerous tax loopholes involved with the India tax system.

India Offshore Disclosure – FAQ

As a result, we have put together a comprehensive Frequently Asked Questions page dedicated exclusively to India and offshore disclosure, as provided below:

Unreported Passive Income (Interest, Dividends, Capital Gains)

Namely, when an individual maintains accounts in India which are NRO/NRE, sells Stocks in India, or earn Interest on Foreign Insurance Policies — these earnings are generally not taxed.

Thus, if a person has equivalent of a few hundred thousand dollars worth of US money in Indian NRE accounts, they could be earning significant interest income, but not paying tax on the earnings.

Moreover, since capital gains are generally tax-free in India as well, an Indian citizen or Legal Permanent Resident of the United States who resides in the United States sells/trades stock investments within India could be earning significant income annually, which they are not paying tax on India – and not reporting to the United States as part of their “worldwide income.”

An “Unintentional” Tax Crime

We represent numerous clients from India, and we can tell you that nine out of 10 times any potential crime committed by failing to report NRE and Capital Gains income on a US tax return is entirely by accident.

Here is the Common Situation: an Indian foreign national relocates to the United States for work. The individual is still a citizen of India but is not considered a nonresident. The individual wants to provide money and resources for his or her family back in India and therefore opens up nonresident accounts in India. The account authorizes the nonresident to deposit money (Non-INR) into the account for the family back in India to access.

The family members back in India are most likely utilizing the interest for themselves.

Interest is Taxable and the Transfer is a “Gift”

Unfortunately, it does not matter who is using the interest income. In the above referenced example, the U.S. Resident is responsible for reporting the interest income on his or her US tax return because they earned the interest. Since it is the relatives of the U.S. Resident who is receiving the interest (unless beneficial ownership may be argued), the interest is still the responsibility of the US resident, and the transfer from the US person to the relatives back in India is considered a “Gift.”

**In other words, merely giving your parents or other relatives money back in India from an account that you own does not mean you are not responsible for US tax on that money


Received a FATCA Letter From an Indian Bank

If you happen to have funds in any of the Indian Banks, it is important to ensure you are in compliance with U.S. and IRS Tax Law.  

Moreover, if you have accounts at either ICICI, Axis, HDFC, State Bank of India or Bank of India, it is important to note that in accordance with FATCA (Foreign Account Tax Compliance Act), these banks are reporting U.S. Taxpayers to the U.S. Government.

Ever since India signed and began enforcing the FATCA Agreement laws, the Banks and Foreign Financial Institutions in India have began actively reporting U.S. Taxpayers – with the initial contact being by either email and/or “FATCA Letter.”

India Banks and FATCA Reporting

We have represented numerous clients with accounts in Indian Banks — with unreported account balances in the millions. Many of our clients first contacted us after receiving a FATCA Letter from either ICICI, Axis, HDFC, State Bank of India or Bank of India.

It is very important that if you received a FATCA Letter from any Indian Bank, you take action before the IRS contacts you first and you lose the right to voluntarily disclosure your foreign account and income information. 

FATCA Letter means serious businessIf you are a U.S. Citizen, Legal Permanent Resident, or Foreign National subject to U.S. Tax and you received a FATCA letter, it is important you act quickly.

There are very strict time requirements in responding to a FATCA letter and the failure to do so can result in fines, penalties and even the forfeiture or downgrading of your foreign account.


What is a FATCA Letter?

A FATCA Letter is a warning. The letter will come from a foreign financial institution such as a bank, brokerage, or investment house when it is unsure of the intended recipient of the letter is a U.S. Taxpayer. In other words, the FFI will evaluate its client base to determine which portion of the clients are either US taxpayers, live in the United States, or maintain a foreign address in the United States. For these unlucky taxpayers, the foreign financial institution will send out a FATCA letter.

The main purpose of the letter is to investigate the customer in order to ascertain whether the bank client has complied with IRS FATCA laws. Namely, has the taxpayer filed the necessary paperwork with both the Internal Revenue Service and Department of Treasury sufficient to show full compliance with FATCA, including FBAR (Report of Foreign Bank and Financial Accounts, 8938 (Statement of Specified Foreign Financial Assets), Schedule B (Interest and Ordinary Dividends) and more.


Fixed Deposits or Term Deposits

An FD or TD (Term Deposit) is an investment in which money earns a “guaranteed range” interest rate which will not change much (if at all) for the term of the investment (equivalent to a U.S. “CD”).

More often than not, the bank or foreign financial institution will offer various rates based on the length of deposit (just as in the United States a CD would generally offer better interest rates the longer you keep the money in the bank.)

During the period in which the money is invested in the fixed deposit, it cannot be accessed by the customer. One of the main benefits of the fixed deposit is that it is earning interest tax-free (usually as long as the tax received is below a certain amount each year). This is also where the customer gets into a problem with US tax law.

Fixed Deposits or Term Deposits – Taxable in the U.S.

While the fixed deposit is not taxable in India, the same rules do not apply to the United States. In other words, the United States does not recognize a fixed deposit as a tax-free instrument. Thus, if you are receiving annual earnings from a foreign financial institution as a result of investing in a Fixed Deposit, and you have to pay US tax on the earnings – even if the interest is being re-deposited, reinvested, or transferred into a new fixed deposit account (it is very common for a person to have one “customer number” and numerous fixed deposit accounts per customer number)

If you have not paid US tax on your fixed deposit earnings, or reported the accounts on an FBAR (Report of Foreign Bank and Financial Accounts) and the IRS or US government gets wind of this (by way of FATCA Reporting “Foreign Account Tax Compliance Act” in which India is active) and you could be subjected to very high Texas fines and penalties.


India NRO Accounts

The NRO account is a “Non-Resident Ordinary Rupee Account.” This is the preferred account for individuals who do not reside in India (even if they are still Indian citizens). The main purpose for an Indian citizen/nonresident of India for opening an NRO account is that a person can use the account to manage income earned in India such as passive income or rental income. Therefore, the Non-Resident Indian can operate their NRO from outside of India (including depositing non-INR currency into the account) and provide access to the money to relatives and family in India.

Moreover, with most Indian Financial Institutions, foreign currency can be deposited into the NRO account, which will be converted into Indian Rupees, as per the prevailing foreign exchange rate.

The main features of an NRO Account are as follows:

  • Nearly anyone (resident or nonresident) can open the account;
  • It can be held jointly between an Indian resident and nonresident;
  • It can be a savings account, current account, recurring account or fixed deposit account; and
  • A certain amount of the money ($1,000,000 USD) is “Repatriable” (Can be transferred out-of-India and into a different country)


India NRE Accounts

The NRE account is popular for the simple reason that the account is usually not TDS (Not Tax Deducted at Source). In other words, while an NRO account has taxes withheld, there is no tax on the earnings generated in the NRE account (unless the individual requests the account to be TDS).

Like the NRO (at most Banks), foreign currency can be deposited into the NRE and then exchange and to rupees and/or exchange back into foreign currency at the time of repatriation. Deposits into an NRE must be done through Foreign Exchange Remittances and since the countess held in rupees it is subject to significant fluctuation risks.

The main features of an NRO Account are as follows:

  • The Interest earned is not taxed;
  • The Account Currency is held in Rupees;
  • A resident individual can be appointed to serve as Power of Attorney (no Joint Account Holders with Indian Residents); and
  • Generally, the money in the NRE is fully repatriable in foreign currency


What is a DEMAT Account?

Demat accounts are very popular in India. Demat is short for “Dematerialization” and it is the process of transitioning physical share certificates into electronic securities, with the value being credited to the owner’s “Demat” account.

There are many benefits to Dematerialization, including:

  • Reduced Risk of Fraud
  • Reduced Risk of “Losing” the Shares
  • Increased Ease of the Transaction Process
  • Reduced Cost (no “Stamp Duty”)
  • Lack of “Risk” of having Paper Shares.

Are DEMAT accounts Reportable?

Yes. The reason why, is that a dematerialized account is an “Account.” In other words, when a person has a foreign account, the account has to be reported on an annual FBAR statement (Report of Foreign Bank and Financial Accounts) and/or 8938 (Statement of Specific Foreign Assets).

When a person holds share certificates (the “actual” certificates, which are not held in an account) thee generally do not need to be reported on an FBAR, but they do have to be reported on the 8938 – if the threshold requirement is met).

  • FBAR – Share Certificates Not Held in an Account are NOT reported
  • 8938 – Share Certificates Not Held in an Account ARE reported.

Is my DEMAT a PFIC (Passive Foreign Investment Company)?

This is a very complicated analysis, which will have to be determined on a case-by-case basis. Generally, PFICs are highly frowned upon by the US, and the IRS will seize any opportunity it can to reclassify a foreign account as a PFIC — since it is a chance for the IRS to levy very high taxes and penalties against the individual.

In fact, the IRS gone so far as to state that basically any foreign mutual fund will be considered a PFIC.

As to whether a Demat account is a PFIC will usually be determined by using “look-through rules” to determine what the specific investments are that are being held by the account.

Public Provident Funds (PPF)

One of the more complex issues we deal with involving our international clients, is what about overseas tax exempt income. For example, in India there is a very popular tax savings plan called a Public Provident Fund (PPF). With this particular type of account a person in India will invest a lump sum of money into the fund.

Then, the money will grow tax exempt for usually a period of 15 years. After 15 years has expired, that money has earned significant interest, and the account holder can withdraw the money. Further, the interest rate on these accounts usually approaches 10%, and they are intertwined with the government, so while not insured — they are very safe.

Why is this important to you? Because, if you did not report this account on your US tax returns and are considering offshore disclosure, then the mere fact that the account is tax-exempt in India does not mean it obtains tax-exempt status in the United States. Further, the mere fact that you could not “withdraw” the money is also not dispositive of U.S. tax disclosure requirements.Thus, the account would be subject to both income tax and the offshore disclosure penalty.

Still, this should not be a reason to avoid offshore disclosure. With the new modified streamlined program in place and depending on where applicant resides — he or she may qualify for a reduced 5% penalty, or have the entire penalty waived. Otherwise, they may have the option to submit a “Reasonable Cause Letter” to avoid the penalty – but this comes with risks.


Black Market Currency Issues

As many international tax professionals are aware, the value of the Rupee has dropped considerably in the past few years. For Example, in 2014 It would take someone 63.2 Rupees in order to purchase one US dollar. Looking back just a few years, in 2010 it would only require 45.7 Rupees to purchase one US dollar. As a result, if somebody was living in India and had $1 million and rupees that they wanted to exchange for US dollars, they would see a roughly 20% drop in value of their money.

As a result, this is led to an increase in the black market of currency exchange within India.

FATCA and Currency Exchange

Overall, people will fetch more money on the black market for currency exchange as opposed to taking more legal means for currency exchange. This can pose a very complex issue for individuals who are overseas as shown in the following example:

India Black Market Exchange Example: David is an Indian born foreign national who resides in the United States. David received a lucrative contract to work in software engineering overseas. He went to India back in 2008 and has remained in India ever since. David travels back to the U.S. around 45 days each year, so he does not qualify for the 330 day rule under the streamlined form program and does not consider himself a bona fide resident of India. Fast-forward to 2015 and David is looking to get compliant with IRS tax law.

  • David decides that he does not like the current exchange rate and therefore takes his 10 million Rupees and exchanges them on the black market. Now, when the money was in the bank account in rupees it was worth around $150,000. When it comes to the penalty (David qualified for the streamlined domestic offshore program) – David will be paying 5% or $7500 since that bank account shows $10 million rupees as the highest year-end balance.
  • In actuality, David uses his connections to exchange the money at a much more lucrative currency exchange rate on the black market and actually receives back $225,000 for his exchange.
  • Thereafter, David opens up a new bank account in US dollars and holds the money there, of which she properly reports to the IRS in the year he open the account and moving forward.
  • As a result, David should be paying $11,250 in penalties since that’s the amount of money he had. In other words, David cannot benefit from illegal activity “black-market currency exchange” and then go ahead and both cheap the Indian government and the US government by only reporting the pre-currency exchange amounts of money.
  • Instead, David only pays the $7,500 penalty based on the Department of Treasury year-end currency exchange rates.


What is an FBAR?

An FBAR is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online directly with the Department of Treasury when a person, trust or business owner has more than an annual aggregate amount of $10,000 in foreign and overseas accounts.

When do I File an FBAR?

If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act).

What Accounts are Reported on an FBAR?

Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:

  • Foreign Bank Accounts
  • Foreign Savings Accounts
  • Foreign Investment Accounts
  • Foreign Securities Accounts
  • Foreign Mutual Funds
  • Foreign Trusts
  • Foreign Retirement Plans
  • Foreign Business and/or Corporate Accounts
  • Insurance Policies (including some Life Insurance)
  • Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
  • Foreign Accounts held in a PFIC (Passive Foreign Investment Company)


What is the Streamlined Program?

If you have unreported foreign accounts that have an “annual aggregate total” that exceeds $10,000 you may consider entering into the IRS Streamlined Offshore Disclosure Program in order to get compliant and avoid even bigger headaches – and penalties – in the future.

If you are a US taxpayer and you have undisclosed foreign bank accounts and/or unreported foreign income, then under FATCA (Foreign Account Tax Compliance Act) and IRS general tax law, you may be subject to extremely high penalties according to the Reporting of Foreign Bank and Financial Account Rules. If your actions were non-willful, you may qualify for the Streamlined Filing Compliance Procedures.

If a person was willful, which generally means they intended on defrauding the United States by evading tax, then they have to enter the traditional OVDP (Offshore Voluntary Disclosure Program) and pay a penalty of either 27.5% or 50% on the maximum value of highest year’s annal aggregate total balance going back 8 years.

On the other hand, if the person’s failure to report foreign assets, accounts, and income was due to negligence or non-willfulness (without any intent to defraud the IRS or evade) they can generally opt for one of the streamline programs and have the amount the penalty they owe significantly reduce if not eliminated.


What is OVDP?

Offshore Disclosure is the process of coming forward and disclosing overseas assets and foreign income to the IRS in exchange for a waiver of prosecution by the Internal Revenue Service. Whether a Taxpayer is Willful orNon-Willful will determine which OVDP offshore disclosure program the taxpayer should enter — and what their penalty will be.

Whether or not you will have to pay an OVDP penalty (and if so, how much you will have to pay) will depend on a few different factors – with the most important factor being whether you acted willful or not willful.

Were You Willful?

If you knew you were supposed to report and disclose your foreign income and assets but chose not to, chances are your actions were willful under OVDP. In other words, if you knew you had a duty to report, but intentionally did not report your accounts, then you acted “willfully.”

While there is no strict definition of the word willful, it generally boils down to knowledge of the requirement to disclose. Alternatively, if you did not know that you were required to report you foreign accounts, then you could not have “willfully” failed to report the accounts because you did not know about the requirement to do so.

  • If you were willful then you should be careful not to enter the IRS Streamlined Program because if you are “caught” there can be very stiff penalties. Rather, you should enter the Offshore Voluntary Disclosure Program because you were willful and require IRS Tax protection from criminal prosecution.
  • While the penalty is higher, would you rather admit willfulness, pay 27.5% of the penalty for one year and go on with your life or risk being audited, pay upwards of $1 million in penalties and do 5 to 20 years in federal prison? When compared to the latter option, 27.5% for one year is not such a big deal.

About Golding & Golding, A Professional Law Corporation

Golding & Golding provides Foreign Account Reporting (FBAR) strategies for clients around the globe in order to report Foreign Bank Accounts and become FBAR compliant. We also defense clients who are under FBAR Audit by the IRS and DOT.

We a re experienced U.S. and International FBAR Lawyers who represent clients worldwide with FBAR (Report of Foreign Bank and Financial Account) reporting compliance before the IRS (Internal Revenue Service), DOT (Department of Treasury), and DOJ (Department of Justice)

As Tax Lawyers and Enrolled Agents (Highest Credential awarded by the IRS), we are able to both analyze your tax situation as well as provide you, your officers and your business sound legal advice.

Our clients are located throughout California, as well as nationwide and around the world. We have represented clients with unreported accounts and assets exceeding $30,000,000 and with accounts and assets in nearly 40 countries.

The United States takes FBAR reporting and compliance very seriously, and if not handled carefully a person may find themselves, their trust, or their business subject to significant taxes, fines, penalties, interest and possible criminal investigation.