India has become one of the latest countries to sign on to the Foreign Account Tax Compliance Act (FATCA) and report data from Indian financial institutions to the IRS. FATCA was passed by the US Congress in 2010. Over one hundred foreign countries have agreed to participate, including former “tax havens” such as Cayman, Liechtenstein and Switzerland. The agreement by so many foreign countries to share information with the IRS represents yet another example of the elimination of foreign bank secrecy.
Under the India-US FATCA agreement, financial institutions in India (which include not only banks, but also brokerages and insurance companies) will report information about US account holders (i.e., Indians with US citizenship or residency) to the Indian government. The Indian government will then provide the information to the IRS. The information transfer will be automatic, i.e., without the need for a treaty request, court order, summons or other formality. Reporting under FATCA will begin on September 30, 2015. However, many of our Indian clients have already received letters from Indian banks, warning them about FATCA and requesting that the clients provide the banks with IRS Forms (e.g., W8-BEN, W9) and waivers which would allow the banks to reveal client identities to the IRS.
FATCA’s broad reach has coincided with the IRS crackdown against foreign banks that facilitate the hiding of assets and income from the IRS. While the majority of IRS enforcement action has been targeted against banks in Switzerland, it should be noted that HSBC India is also under investigation for facilitating US tax fraud. In 2011, the US Department of Justice (DOJ) asked a Federal Court in California to issue a “John Doe Summons” against HSBC India which demands the names of US taxpayers with accounts at HSBC in India.
The “John Doe Summons” is an important, effective weapon for prosecutors to uncover once-“secret” banking information from foreign financial institutions. It was once thought that without actual names of account holders and account numbers, prosecutors could not obtain information from foreign banks. The success of the John Doe summons against Swiss bank UBS proved otherwise. Now, a broad class of account holders, identified only as “Americans with accounts at HSBC”, are vulnerable to discovery and prosecution. HSBC is expected to cooperate with DOJ and IRS in order to settle the tax fraud investigation.
As a result of FATCA and the IRS offensive against foreign banks, including banks in India, American taxpayers with non-compliant foreign accounts, whether in India or elsewhere, should take steps to bring those accounts into tax compliance. U.S. amnesty programs such as the OVDP and the Streamlined Procedures exist. Americans with non-compliant foreign accounts should take heed and consult with a tax lawyer. If the IRS obtains the account information first (for example, as a result of FATCA, John Doe Summons, audit, investigation, whistle blower or otherwise), then a taxpayer’s “voluntary” disclosure will be considered untimely and will be rejected, in which case the full range of penalties will apply, including criminal prosecution.
If you have an account in India or another foreign country and wish to discuss US tax compliance, please contact us for a confidential consultation.