Money out of the country should not be out of the taxman’s sight. Laws like the Report of Foreign Bank and Financial Accounts (FBAR) and the Foreign Account Tax Compliance Act (FATCA) ensure that.
FATCA, which took effect in July 2014, and FBAR, which is a few decades older but has tightened since the 2008 financial crisis, want U.S. residents to report their assets abroad to the Internal Revenue Service (IRS).
Many Indian newspapers wrote about the impact these laws would have on NRIs, as the laws impact all U.S. residents including permanent residents / green card holders, naturalized U.S. citizens, Persons of Indian Origin (PIOs), NRIs, and even those in the U.S. via L-1/L-2, B-1/B-2, E-2, or H1-B visas.
FBAR or FATCA
Before getting into the specifics, let’s first understand what the U.S. Congress has engineered to ensure the taxman gets his due.
The two laws at their core focus on foreign investments. The volume of your foreign accounts defines whether you are subject to FACTA or FBAR. For FBAR, you report using FinCEN 114, and for FACTA, you should file IRS Form 8938.
Report of Foreign Bank and Financial Accounts (FBAR)
FBAR, as the name suggests, is a report. The report should have the details of your cumulative foreign accounts if they have more than $10,000. A willful failure to file FBAR can bring civil penalties of up to either $124,588 or 50% of the amount in the account at the time of the violation, whichever is greater. You could also face a criminal penalty of up to $250,000, 5 years in prison, or both. Use the BSA E-Filing System website to file the FBAR.
When to Report FBAR
The report should be filled and submitted online by April 15, the yearly tax deadline in the U.S. The IRS also provides an automatic extension till October 15 in case of failure to file by April. The IRS would seek an explanation for any further delay.
Filers should file as complete of a report as possible by the automatic extension date of October 15. You should file the additional details or amendments as and when available. The BSA Electronic Filing Requirements Attachment B – Error Correction Instructions is an excellent source of information on modifications and error corrections.
Exemptions from FBAR
You don’t have to file an individual FBAR if your consolidated FBAR reports all your financial accounts abroad.
You do not have to file if you gave consent on FinCEN Form 114a for your spouse to file on your behalf, and your spouse filed the FBAR on time.
Even children must file FBAR. If the children are unable to do so due to their age or any other reason, the child’s parent(s) or guardian must file on their behalf.
It is legally mandatory to keep your FBAR filing records for the previous five years. The papers should capture the following information:
- Name on the account
- Account number
- Name and address of the foreign bank
- Type of account
- The maximum value during the year
There is no specification on the kind of document required. It can be bank statements or copies of filed FBARs.
Foreign Account Tax Compliance Act (FATCA)
Things are a bit more complicated regarding FATCA.
As a U.S. resident, you must report if your total financial assets exceed $50,000 on the final day of the tax year or if they exceeded $75,000 at any time during the tax year. Suppose you are married; the reporting threshold numbers double. The threshold becomes $100,000 on the last day of the tax year and $150,000 at any time during the tax year.
Meanwhile, Americans living outside the U.S. need to report only if their financial assets exceed $200,000 in their country of residence.
The reporting must be done on Form 8938 and attached to your tax returns. The law mandates that the filers must file the reports themselves.
The periodic account statements are your best allies to know the value of your financial assets. For assets not held in financial accounts, you can depend on a reasonable year-end valuation of the assets. However, there are special rules to report the maximum value of interest in a foreign estate, a foreign retirement plan, or a foreign trust.
Failure to file Form 8938 would attract a penalty of $10,000. A continued failure to file after IRS notification can lead to an additional penalty of up to $50,000. There’s also a 40% penalty on understated tax returns on non-disclosed assets.
Information sharing among countries
What further distinguishes FATCA from FBAR is its ability to get information from foreign countries. As of April 2018, more than a hundred countries have signed agreements to hand over information to U.S. authorities. The list of countries includes India as well.
The following are some of the FATCA indicators that trigger information sharing by the countries:
- Accountholder was born in the U.S.
- The account has U.S. contact information.
- Bankers are instructed to transfer funds to a U.S. account.
- A U.S. resident has the signature authority or power of attorney.
Impact on NRIs
India is among the countries that have signed FATCA agreements. The FATCA agreement with India mandates all banks and mutual fund firms in India to report any potential American taxpayer accounts to the U.S. The U.S. tax system monitors U.S. residents’ investments in India.
And that is not all. All U.S. assets of Indian residents are also impacted due to reverse information sharing by U.S. authorities.
FATCA covers all your Indian bank accounts, including NRE, NRO, and FCNR. The U.S. taxpayer should note the assets, even if they were purchased before becoming a U.S. resident. You must report even those assets which were purchased with money earned from and in India.
Should I Report My Indian Home?
Your Indian home and any income derived from it are excluded from FATCA’s purview. However, the Indian house and income thereof do fall under Indian tax rules.
Beyond FATCA Purview
Assets outside the FATCA radar include personal real estate, jewelry, cars, art pieces, antiques, and other collectibles. Your safety deposit boxes are also excluded. FATCA excludes your investments in foreign currency outside financial institutions.
U.S. Legislative Proposals Impacting FATCA
Representative Carolyn Maloney had introduced the Overseas Americans Financial Access Act in the 113th Congress in September 2019. Among many things concerning the Americans abroad, the bill looks at FATCA tracking of accounts used to pay bills and save for the future. It is still under discussion.
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