Understanding the Basics of India FATCA Compliance Rules (2018)

Understanding the Basics of India FATCA Compliance Rules (2018)

Understanding the Basics of India FATCA Compliance Rules (2018) (Golding & Golding)

Understanding the Basics of India FATCA Compliance Rules (2018) (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:

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.

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, including:

IRS Offshore Penalty List

A Penalty for failing to file FBARs

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

FATCA Form 8938

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

A Penalty for failing to file Form 3520

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

A Penalty for failing to file Form 3520-A

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

A Penalty for failing to file Form 5471

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

A Penalty for failing to file Form 5472

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

A Penalty for failing to file Form 926

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

A Penalty for failing to file Form 8865

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

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

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

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

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

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

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

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

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

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

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

A person convicted of tax evasion 

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

IRS Voluntary Disclosure of Offshore Accounts

Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.

When Do I Need to Use Voluntary Disclosure?

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

Common Un-filed IRS International Tax Forms

Common un-filed international tax forms, include:

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

Golding & Golding – Offshore Disclosure

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

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

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

The Devil is in the Details…

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

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

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

What if You Never Report the Money?

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

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

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

Getting into Compliance

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

5 IRS Methods for Offshore Compliance

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

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

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

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

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

1. OVDP 

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

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

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

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

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

What is Included in the Full OVDP Submission?

The full OVDP application includes:

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

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

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

OVDP Penalties

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

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

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

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


2. Streamlined Domestic Offshore Disclosure

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

What am I supposed to Report?

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

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

Reporting Specified Foreign Assets – FATCA Form 8938

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

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

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

Other Forms – Foreign Business

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

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

Reporting Foreign Income

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

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

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


3. Streamlined Foreign Offshore Disclosure

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

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

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

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


4. Reasonable Cause

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

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International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC