US Citizens & Green Card Holders in India - Don't wait for the IRS to get you
US tax laws are based on residency as well as citizenship. That is, the US taxes both its residents and citizens on their global income irrespective of where they live. A “US person” includes the following:
• US citizen
• Green Card holder
• Person meeting Substantial Presence Test (physical presence in US)
This provision has caught out a lot of our Indian clients with a mad scramble to manage the damage done. In this post, we highlight the requirements for US persons and damage control if you haven't been filing US tax returns.
If you are a US Citizen/ Green Card Holder, you have to pay tax in the US. There is no getting around this, even if you are residing in India for the rest of your life. As long as you are a US Citizen/ Green Card Holder, you have to pay US taxes and complete necessary compliances.
Here's what you need to know:
Below are the slab rates for 2020.
Note: If only one of the spouses is a US Citizen/ Green Card Holder, you must file under Married Filing Separately.
Due Dates for Filing US Tax Returns
Note: These are general due dates. For Calendar Year 2019, due dates have been extended due to Covid-19.
Key Reporting Requirements
Certain Exceptions from Reporting:
US person who has reported specified foreign financial assets on other forms, need not report the same on Form 8938.
• trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust);
• foreign corporations reported on Form 5471;
• passive foreign investment companies reported on Form 8621;
• foreign partnerships reported on Form 8865;
• registered Canadian retirement savings plans reported on Form 8891.
FBAR and FATCA
These are the 2 things that catch most people out. See reporting thresholds above.
A lot of US Citizens/ Green Card Holders residing in India have significant assets in India. These become reportable on your FBAR and Form 8938 (FATCA form). As the IRS tightens the screws, people need to start reporting their foreign holdings (Indian holdings) in their US tax returns.
What if I messed up and didn't do some/ all of the above compliances?
Gone are the days when you could hope that the IRS wouldn't find out. With tax treaties, information sharing agreements and financial institutions reporting your assets to the IRS, you can no longer assume that the IRS won't catch you.
The IRS has allowed 2 programmes for voluntary disclosure of overseas assets in cases of good faith misunderstanding of the requirements of the law.
Note: The erstwhile OVDP program has now ended. Only the above 2 programs are now available.
You can enter these programs and pay any taxes due without any penalties. Remember - If the IRS does decide to crack down on overseas assets (and it is) the penalties may be substantial.
If you're confused about what your responsibilities are as a US person, feel free to contact us and we'll be happy to help out.