India FATCA Letter – ICICI, Axis, HDFC, State Bank of India, Bank of India & More
- 1 India Banks and FATCA Reporting
- 2 What is FATCA?
- 3 What is a FATCA Letter?
- 4 Who has to Comply with FATCA?
- 5 IRS Voluntary Disclosure of Offshore Accounts
- 6 When Do I Need to Use Voluntary Disclosure?
- 7 Golding & Golding – Offshore Disclosure
- 8 The Devil is in the Details…
- 9 What if You Never Report the Money?
- 10 Getting into Compliance
- 11 1. OVDP
- 12 2. Streamlined Domestic Offshore Disclosure
- 13 3. Streamlined Foreign Offshore Disclosure
- 14 4. Reasonable Cause Statement
India has been actively enforcing the FATCA Agreement it signed with the United States.
If you have Unreported Foreign Accounts in any Indian Bank, then you have become a target for the IRS. If you received a FATCA Letter, the clock is already ticking and it is very important to get into compliance before it is too late!
Whether your money is being held in a Foreign Bank Account (NRO/NRE), Fixed Deposit (FD), Foreign Mutual Fund, Retirement Account, Demat Account, PPF, Life Insurance, Post Office Accounts, etc. — your money may be in jeopardy.
Moreover, if you have accounts at either ICICI, Axis, HDFC, HSBC, 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 actively 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 some clients having unreported account balances in the millions and upwards of 200 FDs in a single disclosure. Whether the money was a gift from your parents or earned income that was taxed before depositing it into account, the IRS does not really care.
The IRS does not make any distinction when it comes to reporting requirements. 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. Thus, 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.
A FATCA Letter means serious business. If 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 FATCA?
FATCA is the Foreign Account Tax Compliance Act, and it is an international tax law with a global impact on U.S. Taxpayers worldwide – no matter where they live. FATCA is being enforced by the IRS, several foreign countries, and tens of thousands of FFIs (Foreign Financial Institutions). The purpose of FATCA is to ensure that US taxpayers comply with all aspects of IRS tax law by reporting their foreign accounts and reporting their foreign interest income and other passive investments, even if the amounts are relatively small, to the IRS.
*If you have a large account (over $50K) but minimal income, it will not reduce the chances of disclosure, since disclosure is typically based on the account balances, not the income.
Over the past years, the IRS has become aware that hundreds of thousands if not millions of U.S. taxpayers maintain foreign accounts overseas that have gone unreported. Many of these US taxpayers have never reported their foreign accounts because for as far back as anyone can remember, it was impossible for the IRS to track foreign accounts. In fact, it was common practice for CPAs or Chartered Accountants abroad to recommend to their clients that they avoid disclosure. After realizing how much money the IRS loses annually in penalties and tax revenue – FATCA was born.
Even before the implementation of FATCA, the IRS has been recovering Billions of dollars of revenue annually through OVDP (Offshore Voluntary Disclosure Program) and other accepted Offshore Disclosure Programs such as the Streamlined Offshore Disclosure Programs.
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.
Who has to Comply with FATCA?
Specifically, US taxpayers are required to comply with FATCA by properly disclosing and reporting their foreign accounts and foreign income in their Tax Return filings and FBAR reporting requirements of foreign and offshore accounts. In order to ensure the taxpayer has complied, the foreign financial institution issues a FATCA Letter, which will usually be accompanied by two forms – a W-9 and a W-8 BEN. Only US taxpayers are required to complete a W-9 and return the completed W-9 form to the foreign financial institution.
Once the US taxpayer returns the W-9 to the foreign financial institution, then the foreign financial institution will identify the individual taxpayer as a US taxpayer. Next, the foreign financial institution will forward the US Taxpayer’s information to the Internal Revenue Service for their records during a FATCA information exchange.
Alternatively, if the individual who maintains the foreign bank account is a foreign person who may be residing in the United States but not actually subject to US tax (tourist or student for example) then they are not required to complete a W-9. Rather, they will complete W-8 BEN which signifies that they are not US taxpayers, and therefore the foreign financial institution will not report that information to the Internal Revenue Service.
Before you try to “fool the IRS”, if you submit a W-8 BEN when you are actually W-9 then that is tax fraud and/or tax evasion and the Internal Revenue Service and Department of Justice have made it known that they will seek full enforcement and criminal prosecution of individuals seeking to avoid penalties and other voluntary disclosure programs by lying about their US tax status.
Is it True Some Foreign Financial Institutions are Reporting “Everybody”
Yes. In order to comply with FATCA, many countries are finding it easier to “over-report” rather than to “under-report.” In other words, if you are a foreign national but either have a US address or other proof on file that you currently or previously resided in the United States, then some of these foreign financial institutions are reporting you as well – and you are now caught in the FATCA Matrix. Why? For many foreign financial institutions, it is simply easier and more cost-effective to jus report everybody than than it to try and sift through each client’s record to determine if they are actually a US Taxpayer or just someone who resides or previously resided in the United States.
Why are foreign Countries Complying with FATCA?
One important thing to keep in mind is that several of the countries and/or foreign financial institutions who have agreed to enter into agreements with the United States are doing so because they want to stay in the good graces of the United States. Moreover, the countries sign a “reciprocity agreement” so that the United States will also exchange information of Foreign Taxpayers who have accounts in the United States. Moreover, implementing FATCA for many of these countries and institutions has been a very costly endeavor; thus, they are doing whatever they can to make their lives easier complying with the Internal Revenue Service and Department of Treasury.
As a result, even if you are just a Foreign National who resides in the U.S., if you have a U.S. address, chances are the FFI will send you a FATCA Letter and report you to the IRS.
What are the Procedures to Comply with FATCA?
There are many facets to FATCA, depending on whether you are an individual taxpayer, foreign institution, withholding agent, various other designations. Boiled down to its barest, in order for most individuals in order to stay in compliance with general IRS Tax Reporting Requirements as well as FATCA ,they must make sure that they properly reported the foreign and offshore accounts.
Depending on how much money you have and what types of assets you have overseas will determine what is required in terms of achieving FATCA compliance. For the most part, if your overseas accounts are limited to bank/investment accounts, and you do not have any interest in a foreign business or foreign trust then there are three (3) main forms you have to file:
– Schedule B – Even if you do not earn any interest or dividends, section 7 of the form requires you to identify if you have any interest in any overseas account despite whether you earned any income from the accounts.
– 8938 – This form is filed by individuals who have $50,000 in aggregate total in the overseas accounts for any given year on the last day of the year or more than $75,000 and any foreign account at any point during the year. If the person is married, then those numbers are doubled. The numbers are higher for those who are required to file the 8938 but reside overseas.
– FBAR/FinCEN114 – These forms are used to report foreign accounts, but unlike the 8938 an individual is required to complete this form if at the end of the year the individual has an annual aggregate total of all their foreign accounts exceed $10,000. This form is not filed with your tax return but rather filed electronically directly with the Department of Treasury. In addition, unlike the US tax return, you have until June 30th of any given year to electronically file this form. (Updated Procedures for Tax Year 2015 – filed in 2016)
What Happens if I am Not in Compliance with FATCA?
Luckily, you are not alone. If you are one of the hundreds of thousands – if not millions – of individuals have failed to comply with these laws and earned overseas income (even if it is minimal foreign interest income in a country that does not even tax passive income) then there are two different IRS programs you can enter to try to get compliant – the Offshore Voluntary Disclosure Program (OVDP) and the IRS Modified Streamlined Program (Domestic and Foreign – based on where the applicant(s) reside).
Each program has separate requirements and you should speak with an experienced international tax attorney before entering into either program, since if you enter one of these programs and it is the wrong program you cannot enter the other program. Thereafter, once you can prove compliance with FACTA your foreign bank and foreign financial institutions will generally leave you alone.
What will the Foreign Banks and FFIs do if I do not comply?
If you do not comply, your Foreign Bank and/or Foreign Financial Institution may freeze or even forfeit your account. FATCA has a very strong hold over hundreds of foreign institutions and many of them would do whatever they have to do to prove to the US they are complying with FATCA.
Conversely, if one of these Foreign Financial Institutions report you to the IRS, you may have a serious issue at hand, including additional taxes penalties, interest, and worse – if the IRS believed you acted criminally and/or if you are applying for naturalization and/or seeking to renew of your green card.
If you are under IRS examination for any reason before applying for admission into one of these programs, you are disqualified from entering. As difficult as it is for individuals to come to grips with the fact that compliance with FATCA will usually require a person to enter one of the offshore disclosure programs and pay a penalty, it is also important to be aware that there are legitimate purposes behind FATCA.
Moreover, if a person is caught (IRS Investigation or IRS Audit) before they had the opportunity to enter one of the offshore disclosure programs, the penalties and sanctions will be much worse.
If you are out-of-compliance, one of the most effective methods for getting into compliance is the IRS Offshore Voluntary Disclosure Program.
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 if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
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 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.
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. Unlikes 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.
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 (reduced by any outstanding mortgage) 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).
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 Statement
When a Person, Estate, or Business is out-of-tax compliance for failing to report Foreign Income and/or Foreign Assets, the applicant has relatively few options for timely and safely getting into tax and foreign reporting compliance — before fines and penalties are issued.
While the most common options include the Offshore Voluntary Disclosure Program or the Streamlined Offshore Disclosure Program, there is another alternative. It is called making a Reasonable Cause submission.
Reasonable Cause Process
An individual should never attempt offshore disclosure without the assistance of a qualified attorney. With that said, it is even more important to ensure that if you are even considering a reasonable cause submission, that you do so only with the help of an attorney. That is because only with an attorney do you receive the benefit of the attorney-client privilege.
Unlike the Streamlined Program or OVDP where there are strict procedures to be followed, a reasonable cause submission is different. It should be noted that a person can submit a reasonable cause application for any number of different reasons; it is not limited only to offshore money and reporting foreign accounts. It should also be noted that there are potentially high risks and penalties associated with this Reasonable Cause process, so you have carefully weigh your options.
With a reasonable cause submission, the attorney will carefully evaluate and analyze the facts and circumstances of your case in detail. He or she should sit down with you either in person or via teleconference if you are non-local and assess the pros and cons of the potential submission in order to determine what the benefits and detriments may be to a reasonable cause disclosure. Thereafter the attorney will amend the returns, prepare the necessary forms, and draft a persuasive Reasonable Cause Letter.
At Golding & Golding, we are Tax Attorneys (with Masters of Tax Law) and Enrolled Agents credentialed by the IRS (Highest Credential awarded by the IRS), so we can handle your entire submission (Taxes, Legal, and Audit Defense) in-house, for a flat-fee.
Reasonable Cause Examples
If you were completely non-willful in your failure to disclosure and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd and you may consider Reasonable Cause as an alternative option.
Reasonable Cause is determined on a Case by Case basis in accordance with your specific facts and circumstances.
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