With a July 1st implementation date looming large on the horizon, countries around the world are scrambling to reach agreements with the United States on FATCA, the Foreign Account Tax Compliance Act. India becomes one of the newest nations to agree to its terms.
FATCA was passed by Congress as a legislative response to tax evasion using offshore accounts. The IRS believes that many people move money outside the United States to avoid paying taxes. Owning a foreign account is legal but since the early 1970’s, those accounts must be disclosed annually.
U.S. taxpayers with an aggregate of $10,000 or more in foreign accounts must annually file a Report of Foreign Bank and Financial Accounts – FBAR for short. These accounts must also be disclosed on Schedule B of one’s income tax return. Failure to file an FBAR carries huge civil penalties and in certain cases, can be a felony.
Tens of thousands of Indians work, reside or hold US green cards. Even if a taxpayer is an Indian or foreign citizen, FBARs are still required if there is a corresponding U.S. tax reporting obligation.
Beginning July 1st, foreign banks will be required to review their accounts and identify those with ties to the United States. Accounts that are owned by U.S. taxpayers, have a U.S. signatory or even have a United States address must be reported to the IRS.
Although the IRS cannot regulate foreign banks and financial institutions, it can levy a hefty 30% withholding tax on payments coming from the United States. Uncle Sam can make it expensive and difficult for banks that refuse to comply.
Rather than allow financial institutions to deal directly with the IRS, most countries are entering into “intergovernmental agreements” with the U.S. Banks like having these agreements in place to insure they don’t otherwise violate conflicting privacy laws and to insure uniformity. In many instances, foreign governments are asking for reciprocal arrangements so that they can learn of accounts inside the United States owned by their citizens.
India is adopting an agreement that allows Indian banks and financial institutions to report to Indian authorities that will then turn over the information to the IRS. Now that the framework of an information sharing agreement has been worked out, the Reserve Bank of India (India’s central bank) and the Securities and Exchange Board are expected to quickly issue guidelines for Indian banks.
What does this mean for taxpayers with accounts in India? Plenty.
First, FATCA applies to many types of financial accounts and not just banks. Brokerage accounts, annuities, precious metals accounts and even some life insurance policies are affected. Ditto for certain retirement accounts. We have spoken to many Indians who hold the mistaken belief that only Indian accounts held in US dollars must be reported. Not so!
If you are a U.S. taxpayer and your accounts are already reported, expect little change. Your Indian bank may ask for you to confirm that you are in compliance, but that is about all.
If you are not in compliance, however, don’t sit back and wait to get contacted by the IRS. The IRS says that once a bank discloses your name pursuant to FATCA, all bets are off and you are no longer eligible for the IRS’ amnesty program.
The penalties for willful failure to file an FBAR are up to the greater of $100,000 or 50% of the highest historical account balance. The IRS can look back 8 years, too. There is an amnesty program called the Offshore Voluntary Disclosure Program (OVDP in IRS jargon) that offers lower penalties to most taxpayers.
The IRS’ amnesty may not be the best deal in town but amnesty is lost once a bank makes a FATCA disclosure. An experienced IRS tax lawyer can help you decide your best course of action.
Several Indian banks have already begun sharing information in advance of FATCA. The remaining banks will begin reviewing accounts on July 1st but that information wont be turned over until next year.
As always, some people try to game the system. The IRS warns that those who simply repatriate their funds in advance of FATCA will be caught. Under the new guidelines, banks must perform a retroactive look back of accounts. Moving your account ahead of July 1st will just raise alarms with the IRS.
The same can be said for so-called quiet disclosures in which a taxpayer simply files a current FBAR and hopes the IRS wont ask questions about prior years. According to the IRS’ foreign reporting FAQ’s, the IRS intends on seeking out and penalizing these quiet disclosures.
If you have an unreported foreign account in India, let an experienced FBAR lawyer from Mahany & Ertl help you. Our initial consultations are free and confidential. Services are provided worldwide too. Have problems with English? We have a Hindi speaking attorney available.