FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”, is one of the most important requirements that Indian Americans face as part of their US tax compliance concerning their Indian Financial Accounts. This articles provides an overview of the Indian American’s FBAR compliance requirements with the particular focus on the FinCEN Form 114 Indian Financial Accounts obligations.
FinCEN Form 114 Indian Financial Accounts: FBAR Background Information
FinCEN Form 114 is a critical requirement for any US person with financial accounts outside the United States. US citizens, residents, and even certain non-residents who have a financial interest or signature authority over foreign financial accounts must file an FBAR if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.
FBAR was introduced in the early 1970s as part of the Bank Secrecy Act. Its original purpose was to combat money laundering, tax evasion, and other illicit activities involving undisclosed foreign financial assets. After the 9/11 terrorist attacks, however, Congress turned over the FBAR enforcement to the IRS, effectively turning FBAR into a tax form and one of the most formidable enforcement tools in the IRS arsenal.
What makes FinCEN Form 114 such a great US international tax enforcement weapon is the combination its broad scope of compliance, its low reporting threshold and, most importantly, its draconian noncompliance penalties. FBAR penalties range from criminal penalties (i.e. a person can actually go to jail for FBAR noncompliance in certain limited circumstances) to horrendous civil willful penalties (imposed on a per account per year basis) to even non-willful penalties.
While the Supreme court limited in 2023 the non-willful penalties to $10,000 (as adjusted for inflation) per form, FBAR has a statute of limitations of six years. This means that a non-willfulness penalty assessed after January 25, 2024 (until sometime at the end of the January of 2025) can still total $96,702 (inflation is accounted for in this number through the end of 2024).
FinCEN Form 114 Indian Financial Accounts: FBAR’s Broad Definition of “Account”
I mentioned above that the broad scope of FBAR compliance is one of the form’s characteristics that makes it so dangerous. The foundation for the far reach of the form stems from the FBAR’s broad definition of what constitutes a reportable “account” “Account” can be applied a huge variety of financial arrangements including but not limited to:
- Bank accounts (such as savings and checking accounts)
- Fixed-deposit accounts (each one individually is a separate account)
- Mutual funds
- Pension accounts (including the Indian PPF accounts)
- Insurance policies with a cash-surrender value
- Precious metal accounts
- Retirement accounts
Basically, any type of a arrangement that involves a fiduciary relationship with a financial institution (which is itself a term of art with a broad definition) with respect to your assets immediately raises a possibility of additional FinCEN Form 114 compliance.
It is crucial to note that the FBAR filing requirement applies not only to accounts where a US person is the sole owner but also to accounts where they have joint ownership or signature authority. Even accounts where a person only has signing authority, such as an employer’s account, are subject to the FinCEN Form 114 reporting requirement if the $10,000 threshold is met.
FinCEN Form 114 Indian Financial Accounts: Special Challenges in the Context of India
In the specific context of Indian Financial Accounts, such a broad definition of accounts for FinCEN Form 114 purposes leads to unique compliance challenges. Let’s discuss the three most common challenges. First of all, Indian FBAR filers tend to have a very large number of fixed-deposit and Indian mutual fund accounts as long-term savings financial vehicles. Many Indians think that they only have to report only main checking and savings bank accounts. This is an important error. FBAR filers need to disclose each fixed-deposit and mutual fund account individually.
Second, Indian FinCEN Form 114 filers generally do not think of life insurance policies as something that they need to disclose. Yet, the FBAR requires the disclosure of each life insurance policy individually.
Third, FBAR filers must disclose Public Provident Fund (“PPF”) accounts on their FBARs. Many Indian Americans completely forget about these accounts.
I should also mention one more important point about these unique challenges – income tax compliance concerning all of these accounts that many Indian FBAR filers tend to overlook. India has a very different system of taxation from the United States and, usually, a failure to disclose accounts properly on FBAR is also a good indicator of potential US income tax noncompliance.
FinCEN Form 114 Indian Financial Accounts: Offshore Voluntary Disclosure
Now that we have identified the problem, let’s discuss how to best deal with FinCEN Form 114 noncompliance. First of all, this is an issue that you should discuss with an international tax attorney who can advise on the best course of action based on the specific facts of your case.
One of the common advices that you will receive from your international tax attorney is to engage in an Offshore Voluntary Disclosure option. Offshore Voluntary Disclosure is a reflection of the fact that the IRS cannot possibly audit every single US income tax return. Hence, the IRS offers various offshore voluntary disclosure programs that allow noncompliant US taxpayers to come forward and report their unreported foreign financial accounts and other foreign assets in exchange for a more lenient treatment.
An offshore voluntary disclosure can be a highly-beneficial solution for prior noncompliance. At the same time, it is a highly-complex process that requires extensive knowledge of US tax laws.
Moreover, in the context of FinCEN Form 114 Indian Financial Accounts noncompliance, there are specific challenges that arise from the income tax treatment concerning Indian fixed-deposit accounts as well as Indian mutual fund investments (something that I alluded to above).
In these situations, working with an experienced international tax attorney who understands the intricacies of US tax reporting of Indian financial accounts is crucial. An attorney can help you navigate the voluntary disclosure process and minimize your exposure to penalties.
Contact Sherayzen Law Office for Professional Help with Your FinCEN Form 114 Indian Financial Accounts Compliance
Sherayzen Law Office is a premier US international tax law firm that specializes in FBAR compliance and offshore voluntary disclosures. We have an extensive experience with US tax reporting concerning Indian bank and financial accounts, including in the context of various offshore voluntary disclosure options such as Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures, Reasonable Cause disclosures, et cetera. By working with Sherayzen Law Office, you ensure that your compliance with US tax laws is handled thoroughly and professionally with the goal of protecting you from potential penalties.
Contact Sherayzen Law Office today to schedule your confidential consultation!
