Common India Account and Asset Reporting Mistakes in the U.S.

7 Common India Account and Asset Reporting Mistakes in the U.S.

It is very common for U.S. taxpayers who are originally from India and residing in the United States either on a work, transfer, or travel visa (L-1, H-1B, B2) or as a Lawful Permanent Resident or U.S. citizen to still maintain assets in India. Oftentimes, once taxpayers reside in the United States for a significant amount of time they no longer actively manage or oversee their foreign assets. Sometimes it is because they have moved the assets into the United States, but other times it is because the assets are dormant or possibly a parent or other relative is managing the asset for them.  Many different types of foreign financial accounts and assets located in India are both reportable and taxable in the United States. While there is a tax treaty between India and the United States it does not negate the fact that the reporting and tax is required and that the US tax treatment of some of these foreign assets are different than they are in India. Let’s look at seven (7) common Indian account and asset reporting mistakes.

PPF Income

With a PPF (Public Provident Fund), an investment will grow for a stated time — usually 15 years — before the income is distributed or accessible to the taxpayer. During those 15 years, the individual was not paying taxes in India on the growth. In the United States, the US government does not recognize the PPF as ax deferred so the accumulated income within the fund is still taxable in the United States even though it has not been distributed.

FD (Taxes During Growth)

Fixed Deposits are very common in India and similar to a CD in the United States. With fixed deposits, they may mature at different times, and therefore a taxpayer may have multiple FDs that stagger in time when it comes to maturity. It is important to note, that even if The FD has not paid out the interest yet, the accumulated interest within the fixed deposit is still taxable as it accumulates.

Demat (Dormant Account is Reportable)

A Demat (Dematerialized Account) is also very common and is used to make and manage investments in India. For some taxpayers, once they come to the United States, they no longer actively manage their demat account. Nevertheless, even dormant demat accounts are reportable in the United States.

Demat (Pooled Fund vs Other Investments)

Depending on what type of assets are in the demat will impact what is necessary for reporting. In general, a Demat account is reported on both the FBAR and Form 8938. But, if there are mutual funds or other types of pooled funds such as ETFs in the Demat, then the pooled funds may require additional more complicated reporting as a PFIC on Form 8621.

NRO/NRE Still Taxable in the U.S.

Two common types of accounts for taxpayers in India our savings accounts called NRO and NRE. With the NRO account, taxes are withheld in India, so taxpayers in the United States who are reporting the income from their NRO account will have foreign tax credits to apply (unless it is below the TDS threshold). Conversely, NRE accounts in India do not have any taxes withheld at source. Nevertheless, from a U.S. tax perspective, it is important to note the NRE income is still taxable in the United States even if it was not taxable in India — with the only difference being that there will be no foreign tax credits from that specific account to apply on Form 1116.

Foreign Mutual Funds

As referenced above, mutual funds and other pooled funds such as ETFs can be very complicated when it comes to tax and reporting. Even growth funds that may not be distributing any income are still reportable on a U.S. tax return. Noting, that if these funds have been redeemed or there are certain types of distributions or excess distributions, it may result in significant tax and reporting headaches for the taxpayer.

Foreign Insurance

Finally, many taxpayers who are originally from India or have lived in India may have insurance policies. These are investment-type insurance policies at companies such as Prudential/ICICI and/or LIC. These types of insurance funds may become very complicated when it comes to the taxing reporting depending on what type of assets are in the fund, whether premiums are being paid annually (or a one-time or 5-time premium), who is making the premium payments, and whether the investment policy has significantly increased over time.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.