U.S. Taxation on Indian Mutual Funds, Provident Funds & More (2019). U.S. Taxes and Indian Investment income is complicated. The Long-Term Capital Gains rules are different, Tax-Free Mutual Funds may not receive reciprocal treatment, and the tax treaty, FATCA treaty, and other regulations just do not make it any easier.
U.S. Taxation of India Income (In General)
A large portion of our client base is from India.
We have represented individuals from India with more than 175 different accounts spread over 20+ institutions, as well multiple different clients who learned only too late that they are the proud owners of multiple PFICs, PPFs, FDs, Demats, etc. — they are out of IRS compliance.
We are Passionate About Offshore Disclosure
We are one of the most qualified IRS offshore voluntary disclosure law firms worldwide when it comes to issues involving India (as well as, Hong Kong, Taiwan, China, Japan, Korea, Singapore, Australia, U.K. and many others).
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.
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) — which is typical for H1-B, and L-1 visa holders who reside in the U.S. full-time.
For a more in-depth summary of the substantial presence test, you can refer to our FAQ page, which includes a post that summarizes 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.
If you meet the Substantial Presence Test, 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.
India Income & U.S. Taxation
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 to your bank account 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).
IRS Reporting Requirements
The default status is that everything has to be reported, and then you work backwards to determine whether some exemptions, exclusions, or limitations may apply.
Here are some typical issues we come across with our clients from India:
Foreign Mutual Funds
Many of our clients invest funds with companies such as Kotak, ICICI, NJ investments, etc. This is a very complex area of U.S. Tax Law.
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).
To understand how Excess Distributions work, you can click here.
PPF (Public Provident Fund)
Even though your Public Provident fund is not being taxed during the growth phase, it will be taxed in the United States on the accrued, but non-distributed income. The IRS does not see it as retirement (EPF may receive better treatment), so therefore, the accrued funds are still taxed and reported.
*Common Misconception: Even though the FATCA treaty excludes the PPF from reporting to the U.S., it does not resolve the issue of the U.S. person having to report. In other words, even if the PPF does not have to report — you still do (FBAR, FATCA, etc.)
If your life insurance policy with Prudential, ICICI, LIC or any other number of different companies, and it has a surrender value, then it must be reported as well. Even if the NAV value is not all together clear.
Even though passive income in India (and many other countries) such interest Income, Dividends, Capital Gains is not always taxable in India, the United States still taxes you on the income.
Fixed Deposits that are accruing interest income but have not yet been distributed will also be taxable in the current year (not all at one time when it matures.)
Issues we deal with Often with Clients from India
These issues are very common, so no, you are not alone.
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 an inheritance (even through the surviving parent is receiving the income from the children 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. Usually, the income will be imputed to you, and then the transfer to your parent is a gift (assignment of income rules are very complicated and frowned upon by the IRS).
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.
This is not conclusive of anything, since many people with ulterior motives also keep money overseas that they never transfer to the U.S. 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 your CPA will at some point send you a questionnaire at some point which will ask you whether you have any foreign accounts or foreign income.
If you intentionally misrepresented the facts to your CPA, and you are audited it can be a problem. This is especially true if your CPA is contacted, as it can lead you down a dark path very quickly if it is determined that the CPA asked you about foreign accounts and you made an intentional or reckless misrepresentation or omission.
What Can You Do If You are Out of Compliance?
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.
Get Into Compliance with Experienced Counsel
Offshore Disclosure is complex. It is a specialty area of tax law, which requires a experience firm that specializes exclusively in IRS Offshore Disclosure.
How do you Vet out Potential Attorneys?
Three words: Credentials, Experience, Education.
What is the Board Certified Tax Law Specialist Credential?
Once an Attorney earns the prestigious Board Certified Tax Law Specialist credential, it proves to the general public that the attorney is dedicated to tax law, and has real tax law practice experience as an Attorney.
Few tax attorneys have passed the tax speciality exam (regarded as one of the most difficult tax exams in the country) — and met the additional education, experience, and recommendation requirements necessary for certification.
Once a person becomes “Board Certified in Tax,” it shows they have met the following requirements:
- Advanced tax education
- Extensive tax law experience
- Attorney & Judge recommendations for certification
In California for example, there are 200,000 active Attorneys, with tens of thousands of Attorneys practicing in some area of tax — and only 350 Tax Attorneys have successfully earned the designation.
Less than 1% of Attorneys nationwide have earned the credential.
Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
IRS Offshore Disclosure is ALL we do.
Our Managing Partner, Sean M. Golding, JD, LLM, EA earned 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.)
Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Beware of Copycat Law Firms
Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.