In the last few years, the US Internal Revenue Service (IRS) has been focusing heavily on tracking offshore accounts of its residents and citizens. Today, there are several forms to be filed with the US treasury department declaring one’s offshore account information and compliance is becoming more and more stringent.
Two developments in the last two weeks have again shifted the spotlight on this issue. We take a look at these developments and try and understand the impact on Indian Americans.
1.Indian American gets convicted for tax evasion
Last week, Indian American neurosurgeon Arvind Ahuja was found guilty of failing to tell the US government about foreign bank account and of filing a false 2009 federal tax return. Ahuja, a US citizen, allegedly failed to disclose $8 million in assets held in a bank account in India in 2009.
He was convicted on two counts. First, that he had filed a false 2009 tax return with the IRS where he failed to report the interest income earned on bank deposits at HSBC India. Second, he did not file an FBAR (Foreign Bank and Financial Account Report) for 2009 to report his offshore accounts to the IRS. In addition to civil penalties, the charges also attract criminal consequences. The false return charge attracts sentence of as long as three years imprisonment while the failure to file the FBAR carries a top sentence of 10 years. Ahuja is scheduled to be sentenced on January 18, 2013.
How does this conviction impact Indian Americans? US residents, green card holders and citizens are required to comply with the following:
-Must declare income earned from offshore assets and pay tax on those assets in the US. Interest and dividends from foreign financial assets must be disclosed on Schedule B on the Form 1040. Foreign financial assets must also be declared in Form 8938 along with Form 1040.
-Must file the FBAR if they have a financial interest in, or signature or other authority over, a financial account in a foreign country with assets in excess of $10,000
Failure to comply with these can attract civil as well as criminal penalties. Civil penalties can be as high as 50% of the account balances in addition to penal interest and criminal penalties can extend to up to 10 years imprisonment.
“With the Ahuja conviction, the IRS is sending out a clear message that they will not hesitate to actively pursue criminal penalties if non compliant,” explains Jim Mastracchio, Partner at Washington DC based law firm Baker Hostetler. “So for those who have failed to comply in the past, this is a reminder to come into compliance,” he says.
If you have been a defaulter, inadvertently or otherwise, Mastracchio advices, “The IRS is encouraging people to enter the 2012 Offshore Voluntary Disclosure Program (OVDP). Through the OVDP, the IRS is allowing non compliant taxpayers to come into compliance without the risk of criminal penalties and with a reduced rate of civil penalties. We have seen that if the process is followed correctly, the OVDP can be an effective means to come into compliance.”
It is important to remember that a silent disclosure, that is, filing amended returns for delinquent years and hoping the IRS will not notice is becoming less and less of an option. “The filing of an amended income tax return has heighted audit risk (probably significantly greater than the original filed return). The filing of a delinquent FBAR also has heighted audit risk (probably significantly greater than a timely filed FBAR),” says Parag Patel, a tax attorney at New Jersey based law firm Patel Law Offices. Having said that, Patel adds, “The analysis to enter the 2012 OVDP program versus other alternative options is complex and requires full legal analysis by a competent experienced tax attorney.”
With the new regulation FATCA (Foreign Account Tax Compliance Act) now almost imminent, the IRS is soon going to get more details about foreign financial accounts. Most experts agree that there is going to be little scope to say ‘I am not going to report small accounts.’
2.IRS announces new filing procedure for non-resident US taxpayers
With effect from September 1st 2012, a new IRS procedure went into effect to help ‘low compliance risk’ US citizens and green card holders living abroad to comply with their offshore disclosures. The new procedure is being termed by some as the new ‘EZPass’ or ‘Express OVDP’ for non-resident US taxpayers.
According to the IRS website, this initiative is targeted at ‘taxpayers who have recently become aware of their filing obligations and now seek to come into compliance with the law.’ The IRS clarifies that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution.
Let us take a look at the details of this new procedure:
This procedure is available for non-resident US taxpayers who have resided outside of the US since January 1, 2009 and who have not filed a US tax return during the same period. However, these taxpayers must present a low level of compliance risk (discussed in next point)
-What is low compliance risk
In the absence of any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner. The risk level may rise under several circumstances such as if the return filed under this program is an amended return or it the taxpayer has not declared all of his/her income in his/her country of residence or if the taxpayer is under audit or investigation by the IRS etc.
-Procedure to participate
You must submit complete and accurate delinquent tax returns and mention ‘Streamlined’ at the top of the return to indicate that these returns are being filed under the new initiative. You must also pay all the taxes due along with interest and penalty, if any, for delay. You must also submit a questionnaire as prescribed by the IRS to present your compliance risk profile.
You can find the entire process on the IRS website.
“While this is for extremely low risk taxpayers, this procedure is just another initiative from the IRS that gives US green card holders and citizens a chance to come into compliance. As we approach newer and more stringent laws like FATCA, the opportunities to come into compliance in the future may not be easily available. Hence, we believe that this initiative is indeed a new alternative to OVDP for non-resident US taxpayers. We intend to comprehensively explore this alternative for our clients and expect to aggressively advocate for a very wide new EZPASS or express OVDP lane for entrants,” Patel says.