India and U.S. Sharing Banking Information – New Agreement Signed

India’s banks and financial institutions will start sharing banking information with the U.S. tax authorities. On July 9th, 2015, India signed an inter-governmental agreement with the U.S. Pursuant to this agreement, India will require its financial institutions to reveal information about U.S. taxpayers (which includes citizens, resident aliens, companies and certain non-resident aliens) to India’s Revenue Service who will then pass the information along to the U.S. tax authorities. Reciprocally, the U.S. will provide India with information regarding India’s tax payers with “foreign financial assets” here in the U.S.

Under the U.S. tax system (Title 26) and Bank Secrecy Act (Title 31), in addition to reporting and paying income tax on interest from foreign owned financial accounts, taxpayers are also required to report foreign financial accounts on a FinCEN 114 form when the aggregate value of all “foreign financial accounts” is $10,000 or more. This is an on-line filing. This reporting applies to account owners and anyone who has signature rights over a “foreign financial account.”

A “foreign financial account” is broadly defined, and includes bank accounts, mutual funds, pension accounts, certificates of deposit, securities derivatives, or “other financial instruments” and “securities.” Other financial accounts generally encompass any accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund. A mutual fund account is an example of such an account.

There can be severe penalties for failure to report “foreign financial accounts”. Failure to timely file can result in a penalty equal to 50% of the unreported account’s highest balance for each year. The IRS can charge this for each year the account is unreported. The statute of limitations for this purpose is also extended from 3 years to 6 years, so the penalty for not reporting foreign financial accounts can be as much as 3 times the balance. Additionally, in some cases, “foreign financial accounts” also require a Form 8938 to be filed in addition to the FinCEN 114. Failure to file the 8938 when required under the rules can result in additional significant penalties as well, and also extends the statute of limitations from 3 years to 6 years.

These laws were instituted under the Bank Secrecy Act to stop money laundering, but due to the extreme penalty regime, they have become Treasury’s largest success story and are getting a lot of resources as a result. Many people finding themselves in trouble with these rules are innocent taxpayers who failed to clearly understand the reporting requirements and the types of accounts that must be reported. Fortunately, the IRS recognized this and now allows for a voluntary disclosure of these unreported accounts, with reduced and, in some cases, no penalties. Taking swift action is critical to this process. To reduce the penalty potential, the taxpayer must voluntarily disclose these unreported accounts to the IRS before the IRS contacts them. If the IRS catches a taxpayer with unreported “foreign financial accounts” before they voluntarily disclose this information, then that particular taxpayer is not able to participate in the voluntary disclosure and the reduced penalty programs. Additionally, if all the taxable income was reported by the taxpayer in prior years, it is possible to bring prior years up-to-date without any penalties at all.

Now that India is requiring its financial institutions to report accounts held by U.S. tax payers to the Revenue Service, and the Revenue Service is proving this information to the U.S. tax authorities, the risk that U.S. tax authorities will discover these accounts and impose penalties has increased sharply. Again, if the IRS discovers these accounts and contacts the tax payer, then the penalty regime is much stiffer and the options available are severely limited. Therefore, if you have financial accounts in India, now is a good time to make sure those accounts have been properly reported.

BILTgroup is a boutique law firm that focuses on issues of international law and tax. If you need help determining whether your account has been properly reported or if you have unreported bank accounts outside of the U.S. we can help you determine how best to move forward. Please contact us if you have any questions or concerns at +1.919.615.3767 or by email at gbryant@biltgroup.net.