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FATCA India (Understanding the Basics of IRS Foreign Reporting)

FATCA India (Understanding the Basics of IRS Foreign Reporting)

FATCA and India is a complex area of Tax Law and international Reporting. If you are a U.S. Taxpayer who resides in India, the United States or another country and have assets in India, then you may have a FATCA requirement to report your assets, investments, accounts and income to the IRS (Internal Revenue Service)

U.S. Taxpayers (U.S. Citizen, Legal Permanent Resident, or Foreign National/Visa Holder) may have a FATCA India reporting requirement, if the taxpayer has FATCA Asserts (specified foreign financial assets) located in various Foreign Financial Institutions (FFI) throughout India.

Common questions we receive regarding India:

  • Do I have to report my Foreign Mutual Funds?
  • Are all Indian Mutual Funds treated the same?
  • Is my PPF/EPF Reportable and Taxable?
  • Are Demat accounts reportable?
  • How do I report my Foreign Life Insurance Policy?
  • Do I pay tax on Fixed Deposits?
  • What if TDS payments were refunded?
  • Does the U.S. tax NRO and NRE the same?
  • Does the U.S. Tax my Foreign Rental Income?
  • Do I report India Rental Property to the U.S.?
  • What is FATCA?

FATCA India

FATCA India (Understanding the Basics of IRS Foreign Reporting) - Golding & Golding

FATCA India (Understanding the Basics of IRS Foreign Reporting) – Golding & Golding

We have represented hundreds of clients from India in all aspects of IRS Offshore Voluntary Disclosure, and have written numerous articles on how FATCA, FBAR, OVDP and IRS Offshore Voluntary Disclosure impacts India.

Some of our more popular resources includes:

Sean M. Golding, JD, LL.M., EA – 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 Matters.

Sean represents clients in:

  • OVDP
  • Streamlined Filing Compliance Procedures
  • Streamlined Domestic Offshore Procedures
  • Streamlined Foreign Offshore Procedures
  • FBAR Penalties
  • Form 8938 Penalties (FATCA)
  • Form 3520 Penalties
  • Form 5471 Penalties
  • For 8865 Penalties
  • International Tax Investigations
  • Criminal International Tax Investigations

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 Offshore Voluntary Disclosure.

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.

What If the IRS Finds Me First?

If the IRS finds you first and you are under audit or examination, you are disqualified from entering any of the programs. In addition, the IRS can issue severe fines and penalties against you.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

To avoid the IRS obtaining your information from one of these countries/institutions before you have the chance to disclose, you may want to consider getting into compliance with IRS Offshore/Voluntary Disclosure.

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

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

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

Our Managing Partner, Sean M. Golding, JD, LLM, EA  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, and authorizes him to represent clients nationwide.)

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

*Recent cases we had to fix after taking over from less experienced counsel that flubbed the case can be found by Clicking Here (Case 1) and Clicking Here (Case 2).

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

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.

IRS Penalty List

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

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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

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

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

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

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

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

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.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

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

Contact Us Today; Let us Help You.