Foreign Account Tax Compliance Act will result in heightened tax scrutiny of NRIsForeign Account Tax Compliance Act will result in heightened tax scrutiny of NRIs

In recent years, the US Congress and the US Department of Treasury have come to believe that many US taxpayers (including US citizens and green card holders in India) have not been complying with the tax law that requires reporting of worldwide income, including income held in non-US financial institutions. In an effort to fight this perceived non-compliance, President Obama and the US Congress enacted the Foreign Account Tax Compliance Act (FATCA) in 2010.

FATCA will become effective this year and will have a significant impact on NRIs’ tax compliance. FATCA requires all foreign financial institutions (FFIs) to enter into an agreement with the US government and disclose foreign account information of US accountholders. This includes all banks and financial institutions in India. In order to effectively force FFIs into compliance, institutions who fail to supply this information to the US government will be subject to a punitive 30% withholding tax on all payments cleared through the United States banking system (most FFIs clear payments through the US banking system).

While FATCA has generated consternation abroad, nearly 30 countries have already entered into information sharing agreements with the US government including Canada, Singapore and many European nations. India has been in discussions to enter into an intergovernmental agreement with the US, where it is expected that Indian financial institutions will be required to disclose account information of US accountholders (including US NRIs’ NRO, NRE and NRI accounts). The US Department of Treasury indicates that India has reached an intergovernmental agreement with the US in substance beginning from April 11, 2014. As a result, it is anticipated that a USA-India FATCA agreement will be signed soon.

Some Indian banks have reportedly started to request US accountholders to submit their US tax identification information and sign declarations that their accounts complied with US tax laws.

FFIs will provide the US Department of Treasury with identifying information on all US accountholders, including the name, address, tax identification number, account number and the account balance. Last year, the US government launched an online registration program for FFIs around the world to facilitate information disclosure under FATCA. This information will used by the US government to investigate any US taxpayers who have not previously disclosed their offshore accounts.

  In addition to income disclosure, the US Financial Crimes Enforcement Network (FinCEN) requires US persons (including US citizens and green card holders in India) to annually report their foreign financial accounts. US persons must file Form 114 (also known as Report of Foreign Bank and Financial Accounts (FBAR)), which reports all foreign financial accounts to numerous agencies within the US government. The failure to file Form 114 could lead to severe civil penalties and criminal prosecution.

It is anticipated through FATCA implementation that FFIs’ information reporting on US account holders to the US government may be “matched” to FBAR reporting to identify those who fail to report or underreport foreign assets and/or income. FATCA is expected to lead to the discovery of tens of thousands of US persons with foreign accounts. As a result of this heightened scrutiny, US NRIs’ should carefully review their US tax compliance history.

Unfortunately, the US government’s interest in US accountholders with Indian accounts is not unprecedented. Over the past five years, nearly a dozen Indian-Americans have been successfully prosecuted in the US criminal courts for failure to report Indian accounts and income (for example, Ashvin Desai of California, Josephine Bhasin of New York, Sanjay Sethi of New Jersey).