Foreign Bank Accounts Reporting (FBAR) and Interest earned in NRE accounts

Post on: 16 Март, 2015 No Comment

Foreign Bank Accounts Reporting (FBAR) and Interest earned in NRE accounts

I was preparing to file my tax returns for this year and started searching on reporting interest earned in NRE accounts in India. I have NRE savings accounts with ICICI and SBI in India.

Disclaimer: I would like to say this right here that the information here is from my own research, done online and talking to some tax attorneys. This is my own experience and this SHOULD NOT be taken as legal advice.

Reporting Interest Earned in NRE / Foreign Accounts

Back in 2009, I used a CPA to file my taxes for 2008. I told him I have earned interest of Rs.2000/- in my NRE account. He said since I was not a Green Card holder, I don’t have to report that. I took that for granted while filing taxes for the year 2009 and 2010. The interest earned in those NRE accounts is non-taxable in India. So I didn’t even pay taxes on it in India. Plus ICICI or SBI doesn’t send you 1099-INT as the banks in US does for the interest earned. I read if you have NRE account with Citi Bank, they do send 1099-INT.

I got my Green Card just 7 days back and that’s when I started looking how my taxes are affected and should I start reporting my NRE interest starting this year or I should do next year since I received my card in 2012.

I was surprised to find that I should have been reporting the interest earned in NRE account all these years. Even though I was on H1 visa, in eyes of IRS I am a resident and so I must report any interest or income earned in foreign banks as well. So now I knew that I have made a mistake and should be corrected. But that wasn’t it. While searching I also came across something called FBAR, which I never heard of before and that was another mistake I made.

Foreign Bank Accounts Reporting (FBAR)

What is FBAR?

Here is an extract from the IRS FBAR page .

If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

Who Must File FBAR?

United States persons are required to file an FBAR if:

The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Get detailed information here: FBAR

I had more than $10,000 total in NRE accounts at one point in 2008,2009 and 2010. So I should have filed FBAR. So not filing FBAR is my second mistake. There are steep penalties for not reporting Foreign Bank Accounts.

Account holders who do not comply with the FBAR reporting requirements may be subject to civil penalties, criminal penalties, or both.

Check this webinar video from IRS which answers basic questions on FBAR:

Correcting My Two Mistakes

So I need to do two things:

1: Amending my previous years Federal and State Tax returns so as to reflect the interest I earned in my NRE accounts.

2: File FBAR for the previous years.

I must do those two things in such a way that:

I avoid criminal charges / prosecution
Pay the penalties as little as possible.

Avoid Criminal Charges:

For the first one IRS came up with Offshore Voluntary Disclosure 2009 for the first time. They have the similar one for 2011 and now for 2012 as well. Here’s an abstract why should I make a voluntary disclosure:

Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.

Paying penalties: This is something which will depend on the maximum amount of money you had in your account at any particular time. From what I have found the minimum is 12.5% of the maximum amount you had in you account(s)  for the time you missed to file FBAR (provided the maximum was less than $75,000). So say on some random date 12-May-2009, the total of the balances in all your foreign accounts is $50,000. So minimum penalty would be $6250. For balance above $75,000, the penalty is 27.5%. The penalty could be $0(waived) if you had a very compelling reason or you can prove it wasn’t willful and the IRS officer buys your reason. I wouldn’t say if not knowing about the law comes under willful or not.

Now I don’t think I want to deal with this by myself. So I called couple tax attorneys and here’s the responses I have got so far.

From Tax Attorneys:

Important Note I read this somewhere but couldn’t find a link: Always talk to a tax attorney about this instead of a CPA. If you decide not to do anything about your mess and don’t report the accounts and if IRS comes behind you, the CPA can be a witness to bring criminal charges against you. While with tax attorney, you are protected by some attorney-client relationship thing. (I will post the link, if I find a reference.)

Attorney1

According to him this is what he will do:

Amend my federal/state tax returns for the previous years for which I didn’t report my interest in NRE accounts. He said he will try to see if he can adjust in a manner that I don’t owe them anything i.e. no back taxes. Otherwise I will have to pay the taxes plus any interest on that and some nominal penalty.
File Offshore Voluntary Disclosure to avoid any criminal charges. He said since my case is not complicated and the amount that wasn’t disclosed is very nominal, this should get cleared very easily. He doesn’t see any problem with this.
He will file FBAR for all the previous years I missed. Since it was out of ignorance of the law he will try to argue it as a non-willful act and as for $0 penalty. That is the best case. Little better scenario, he said, is asking penalty on my first year violation when I had little over $10K max in my accounts. In worst case I will have to pay 12.5% of the max in my account in the previous years, since my max balance didn’t exceed $75K.

    Fees: He would charge $3K for the entire process mentioned above.

Attorney2

Second attorney said almost the same except she didn’t mention about making $0 back taxes while amending federal taxes and about the second best case i.e. penalty on $15K instead of $50K. She did say she would first contest for $0 penalty on the same basis i.e I was unaware of the law due to it’s confusion with H1 and Green Card holder.

Fees: She said she would charge $400/hr. She can’t say for sure how much time it would take without seeing all my documents(previous tax returns, foreign bank statements, etc.).

Attorney3

He was vague and didn’t tell much about what he would do. He just said he needs to see the documents first. He will work with me and show me what needs to be done for one year. Rest I can do it myself using the first as base. It can take about hour and half to two in the first meeting. I can consult him if I have doubts/ questions again. He charges $400/hr.

Several other Attorneys

I talked to few other attorneys. They weren’t clear and not much information while some misleading. One suggested not to go for OVDI and just file FBARs for the missed years. They all were charging around $400/hr and some $8k to$9k for entire process.

So I know that there’s a situation and I need to get it resolved as soon as possible. I will update this post as I find more information.

Finalized the attorney

Update 02/15/2012 : I decided to go with Attorney1. He was convincing and told me exactly what he will do, how long will it take and what are my chances on lower penalty are. His suggestions matched with my online readings and research. Though his charge seems a bit higher, but unlike others, with him I knew the cost upfront. Plus he was going to do all paperwork for me and I am just suppose to sign and pay any penalties/back taxes.

If anyone of you readers or your friends have gone through this or are in similar situation, I would love to hear about the experience. e.g.