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Indian Bank Accounts : Key US Tax Obligations | International Tax Lawyer

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Due to ongoing implementation of FATCA as well as the tax reform in India, more and more Indian Americans and US tax residents of Indian nationality are learning that they are required to disclose to the IRS their Indian bank accounts. Yet, there are still many more US taxpayers left who are either completely unaware of this requirement or they are confused with respect to what is required to be disclosed and how. This essay intends to clarify who is required to report their Indian bank accounts to the IRS and explain the most common US international tax requirements applicable to Indian bank accounts.

Indian Bank Accounts: Who Needs to Report Them to the US Government?

All US tax residents with Indian bank accounts need to disclose them to IRS. Warning: “US tax resident” is not equivalent to the immigration concept of “US Permanent Resident”. The confusion over these two concepts is a frequent cause of US tax noncompliance, because many Indian immigrants who come to the United States on a work visa assume that they are not US tax residents since they do not have the status of a US Permanent Resident. This assumption is completely false.

The definition of US tax residency includes US permanent residents, but it is much broader. In general, this term includes: US citizens, US Permanent Residents, any person who satisfied the Substantial Presence Test and any person who declared himself as a tax resident. There are exceptions to this rule, but you will need to consult with an international tax lawyer before making use of any of these exceptions.

Indian Bank Accounts: Indian Income Must Be Disclosed on US Tax Returns

All US tax residents must comply with the numerous US tax reporting requirements, including the worldwide income reporting requirement. All Indian-source income generated by the Indian bank accounts of US tax residents must be disclosed on their US tax returns.

The worldwide income reporting requirement applies to any kind of income: bank interest income, dividends, capital gains, et cetera. This income should be reported on US tax returns even if it was already disclosed on Indian tax returns or subject to Indian tax withholding. This income should be disclosed in the United States even if it never left India.

Indian Bank Accounts: FBAR

The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (popularly known as “FBAR”) is one of the most important and dangerous reporting requirements that applies to Indian bank accounts. Generally, a US person is required to file FBAR if he has a financial interest in or signatory authority or an authority over foreign bank and financial accounts which, in the aggregate, exceed $10,000 at any point during a calendar year.

FBAR has an extremely severe penalty system, and US taxpayers should strive to do everything in their power to make sure that they comply with this requirement.

Indian Bank Accounts: FATCA Form 8938

US tax residents are also required to disclose their Indian bank accounts on Form 8938. The Foreign Account Tax Compliance Act (“FATCA”) led to the creation of Form 8938; US taxpayers should have filed their first Forms 8938 with their 2011 US tax returns.

Form 8938 requires US tax residents to report all of their Specified Foreign Financial Assets (“SFFA”) as long as the Form’s filing threshold is met. SFFA includes a very diverse set of financial instruments, including foreign bank and financials accounts, bonds, swaps, ownership interest in a foreign business, beneficiary interest in a foreign trust and many other types of financial assets. In other words, with the exception of signatory authority accounts, Form 8938 not only duplicates FBAR, but covers a much broader range of financial instruments that would not be required to be reported on FBAR.

It should be pointed out that, even when FBAR and Form 8938 cover the same assets, both forms must be filed despite the duplication of the disclosure.

While Form 8938 has a much higher filing threshold than FBAR, it may still be easily exceeded, especially by taxpayers who reside in the United States. For example, if a taxpayer resides in the United States and his tax return filing status is “single”, then he would only need to have $50,000 or higher at the end of the year or $75,000 or higher at any point during the year in order to trigger the Form 8938 filing requirement. A lot of US taxpayers with Indian bank accounts easily exceed this threshold, especially if they are helping their parents or buying properties in India.

Finally, it should be remembered that Form 8938 has its own penalty structure for failure to file the form. Furthermore, Form 8938 forms an integral part of a federal tax return; this means that a failure to file the form may extend the IRS Statute of Limitations for an IRS audit indefinitely for the entire return.

Contact Sherayzen Law Office for Professional Help With Reporting of Your Indian Bank Accounts in the United States

In this essay, I just listed the most common US tax reporting requirements that may apply to US owners of Indian bank accounts. There is a plethora of other requirements that may apply to these taxpayers.

Contact Sherayzen Law Office for professional help with your US tax compliance. We have worked extensively with our Indian clients with respect to reporting of their Indian bank accounts, including offshore voluntary disclosure for late filings.

The stakes in international tax compliance are high, and you need to be able to rely on the knowledge, experience and professionalism of Sherayzen Law Office in order to make sure that you protect yourself from draconian IRS tax penalties. We have successfully helped hundreds of US taxpayers to deal with their US international tax compliance, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Disclosure of Swiss Bank Staff Details to the IRS Blocked by Swiss Court

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On January 3, 2018, a decision of the Swiss Federal Court (the nation’s highest court) dated December 18, 2017, was published, prohibiting automatic disclosure of the Swiss bank staff details to the IRS and the US DOJ. Let’s analyze this decision in more detail.

Disclosure of Swiss Bank Staff Details: History of the Case

The lawsuit decided in 2017 is not the first time that the Swiss Federal Court is placing limits on the IRS ability to obtain information from Switzerland with respect to Swiss citizens. Already in 2016, the Court ruled that a Swiss bank could not disclose to the US authorities the names of financial advisers who helped US taxpayers set up secret Swiss bank accounts (“facilitators”). The reasoning was based on the inadequate level of data protection in the United States which is far below the Swiss Data Protection Act.

It should be emphasized, however, that in the same opinion, the Court also said that the names of facilitators could be disclosed to the US government despite the data protection concerns if the failure to do so would deepen the legal dispute between Switzerland and a the United States and harm the Swiss reputation as a financial center.

The lawsuit with respect to disclosure of Swiss bank staff details was initiated by an unnamed US taxpayer who lived in Switzerland. He filed a lawsuit to prevent the Swiss equivalent of the IRS, the Federal Tax Administration (“FTA”) from disclosing to the US government the name of third parties who were involved or might have been involved with his financial affairs. The lower Swiss court agreed with the taxpayer.

Automatic Disclosure of Swiss Bank Staff Details to the IRS Prohibited

The Swiss Federal Court also partially agreed with the unnamed US taxpayer, stating that FTA could not automatically turn over to the US government the names of Swiss bankers and others who might have helped US tax residents in evading their US tax reporting obligations. The reasoning behind the decision was based on relevance.

Basically, the Court stated that the Swiss bank staff details in this particular case were not necessary to the US government to prove its tax evasion case against the unnamed US account holder. “What is needed . . . is information about the existence and intervention of these third parties, not their identities,” the Court said.

The Court basically stated that administrative assistance requests should not be used for indirect purposes. In other words, the IRS cannot use such requests “in order to obtain information about the identities of alleged accomplices of the taxpayer . . . that could be subject to criminal prosecution if this information is not relevant to elucidate the tax situation of the same taxpayer.”

Obviously, this reasoning does not offer any decisive protection for Swiss bank staff details. It appears that, if the information would have been necessary for the US tax authorities to prove its tax evasion case, the transfer of Swiss Bank Staff details would have been permitted. Additionally, the decision might have come in a bit late as hundreds of documents with the Swiss bankers’ names have already been turned over to the IRS.

Swiss Bank Staff Case Offers No Protection to US Taxpayer’s Data Transfer

Moreover, the Court’s decision offered no hope for blocking the transfer of US taxpayers’ information. While the Court blocked the transfer of the Swiss bank staff details, it still allowed the FTA to provide to the US government the US account holder’s information. This means that the transfer of data concerning US tax residents from Switzerland to the United States will continue unimpeded.

Swiss Bank Staff Case Offers Insight Into IRS’ Next Target in Switzerland

This case also offers a good insight into the current IRS strategy concerning Switzerland. It appears that the IRS is compiling statistics concerning Swiss bank staff who might have helped US taxpayers evade their US tax reporting obligations. Most likely, the focus is on the bankers who provided this help regularly to a large amount of US taxpayers.

Sherayzen Law Office will continue to observe the IRS latest moves in Switzerland.