MT: Tax Liability on Interest Income in Foreign Account

[SubtleFriend]

This is for a GC holder who is subject to US taxes on worldwide income. Is there an exemption amount for interest from foreign bank accounts, if the amount was deposited prior to coming to the US in the first place. Schedule B has an exemption of $10000 for reporting the account itself, but does that mean exemption from taxes on the interest from the account as well? Thanks.

[Desi]

No exemption. you are required to report all interest for taxes.

NRE Account (Non Resident External Rupee)

[SubtleFriend]

Thanks. If one had made an error in the past by not including the foreign interest income (typically < $500 per year), how does one rectify this? The total account is < $10K.

[dink]

What about interest earned in NRO accounts?
I believe these are already taxed by Indian govt (tax deduction at source).

Should a GC holder report the interest to US? If so, how to avoid double taxation?

thanks
dink

[Desi]

If you have uncovered the error, you can amend return - file 1040X. In grand scheme of things, this is mice nuts, so not necessarily a big deal or an intent to evade taxes, but you make your own call.

NRO account interest is also required to be reported. Any foreign tax paid for this can be take either as a deduction or a foreign tax credit. It makes sense to take that as a credit.

[Sid]

What happens if you don't report this interest income, in bank accounts in India, to IRS and R2I in 3-4 years?

Will IRS know about this magically and will come after you? Will it have an impact on any Indian taxes once you R2I ?

[Bobus]

If IRS wants to go after interest income from India banks of US residents or USC resident anywhere, there are many ways it can do so. No miracle or magic needed.

That said, every tax enforcement agency has a limited budget/resources, and has to make a judicious use of such resources to max tax revenue. One can never rule out a cranky drive that goes after peanuts just to serve as a lesson. If I were IRS Commissioner, I would go after a few (thus conserving resources) such people, selected randomly, and send an unambiguous message to all that there is a positive probability that they could be in the selected sample. But then am not working for the IRS.

[nand]

I am in a bit of a dilemma myself, on whether to file an amended return to report about 3-400 bucks or so of MF dividend that I missed in the previous return, which would have resulted in about 100 bucks or so of additional tax. The dilemma being - is it worth the effort to amend? What is the downside here? Am I looking at a huge fine or even jail time for fraud?

Here is what I found out:

1. Statute of limitations for auditing returns is 3 years. Which means righ now IRS can only dig as far back as 2003. Any chota mota golmaal before that should be out of bounds if this is true. Disclaimer: Since I dont have legal or tax expertise, I cannot say I am sure I beleive this guy here:(www.wwwebtax.com)

"The statute of limitations limits the time during which an action can be brought by the IRS for an audit and the time for IRS tax collection activities. Generally, there is a 3-year statute of limitations for the IRS auditing a tax return and a 10-year statute of limitations for the IRS collecting tax.
Under section 6501(a) of the Internal Revenue Code (Tax Code) and section 301.6501(a)-1(a) of the Income Tax Regulations (Tax Regulations), the IRS is required to assess tax within 3 years after the tax return was filed with the IRS. Similarly, under 301.6501(a)-1(b) of the Tax Regulations no proceeding in court by the IRS without assessment for the collection of any tax can begin after the expiration of 3 years. "

2. Refer this link for a summary of IRS penalties: http://www.wwwebtax.com/payments/penalties_and_interest.htm

Disclaimer: I have no idea of the authenticity of this information. However, it seems that if your tax liability does not greater than 10% of what was reported or 5000, you do not have a penalty, but nevertheless tax and interest is due. Of course, I am not sure what constitutues fraud here.

As for me - I am considering filing an amended return, disposed the MF's this year and will deal with the PFIC headache next year. After spending hours on the calculations it will turn out I owe 90 bucks more or so of tax:emangry: .

Nevertheless, it does seem that if the amount is small, they can only go by the rules and you stand a small chance of a 6-800 dollars of penalties on a 500$ underreporting. Is this a risk you can live with or not?

[Desi]

Nand,

'Jail time" is with criminal and not civil tax issues. An "intentional" tax fraud, wilful tax evasion would fall under criminal. There may be monetary thresholds involved and collection efforts too before prosecution.

I was hoping you would read in between the lines of my earlier post.

http://taxprof.typepad.com/taxprof_blog/2006/11/snipes_settles_.html

Yes, the statute of limitations is 3 years, but if an intentional fraud is discovered within last 3 years, I believe they can go back and dig and still apply penalty and interest.

So 3 years is as far back as you should go if you file amended return. The process of filing 1040X is fairly simple ( I have done these) but the interest computation may be cumbersome. Sometimes ignorance works in your favor although it is not an excuse, IRS agents are trained and can discern where there is intentional fraud and deceit and they have to prove it.

I have found IRS fairly easy to work with, although time consuming. I had two fairly recent situations, in one case, there was an NRA account on which taxes had been witheld ($9000 plus) but it took about a year to recover them and worked with IRA TaxPayer advocate office assigned to me in this case. I had POA to discuss this on behalf of a relative of mine and the check was mailed from Chennai office in India to the NRA.

In another case, IRS misapplied about 30K of my taxes to a different year and bumped up my refund on a 1040X of that year with only explanation that I had credit on my account. I could not figure out what it was, but hey if IRS tells me they owe me money, then I thought fine :D . I had paid taxes that year in six figures, so the credit made sense:emwink: . 15 months down the road they send me a big bill and over 10K in penalty and interest.

I called and asked and they explained that they had not received my tax payment (for a different tax year). I had a photocopy of my check and they finally tracked the misapplication, but still charged my $10K. It took about 3 letters and explanations that it was their error and they paid me back the penalty, interest, and interest on all this.

In another two instances, IRS waived genuine penalty owed to IRS on explanation that the situation was not under taxpayer control and the taxpayer past record of tax payments - with some pleading in both cases, the penalty was waived (I do not remember if the interest was charged).

The above are just some examples where I have found US tax authorities easy to work with, but hey everyone makes their own decision.

I am not going to spend hours to correct something in which I have to $10 bucks in taxes that I genuinely missed. On the other hand I have filed amended taxes when I missed paying $50 to a $100 approximately more in taxes because of a property tax refund that was taken as a deduction.

[Desi]

What happens if you don't report this interest income, in bank accounts in India, to IRS and R2I in 3-4 years?

Will IRS know about this magically and will come after you? Will it have an impact on any Indian taxes once you R2I ?[/quote]


If you did not know, made an error that is different from wilful evasion.
Error is not fraud, wilful evasion is. The only thing I am uncertain about is the monetary thresholds. For example is $10 wilful evasion criminally prosecutable? Whether IRS will prosecute or not is a different issue, but is it prosecutable?