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Indians in US discuss tax woes with IRS

August 30, 2011 16:03 IST

With the August 31 deadline for the Offshore Voluntary Disclosure Initiative nearing, four community representatives met Internal Revenue Service officials in Washington, DC, August 18, to voice the concerns of Indian Americans.

Though the IRS did not make any concessions, it was news to them that the community had so many complaints. "It seemed that they too were not fully aware of the intricacies involved in the OVDI program," Dr Thomas Abraham, founder president, Global Organization of People of Indian Origin, said.

Others in the team were Lal Motwani, president, National Federation of Indian Associations; Shailesh 'Sly' Patel, director, Asian American Hotel Owners Association; and Maya Chadda, professor of political science, William Paterson University.

The meeting was facilitated by the office of Ohio Congressman Steve LaTourette. The IRS was represented by Rosemary Sereti, director, international individual tax compliance; Jennifer Beth and David Vorley, attorney advisors to the deputy commissioner; and Suzanne R Sinno, legislative counsel, office of legislative affairs.

"They agreed to send out all the information in a timely manner to create awareness in the community. We pointed out the problems of the people due to the blanket application of the rules," Abraham said. "We got the impression from the discussions that people with genuine cases involving smaller amounts can opt out of the automatic application of penalty."

The group also pointed out that accountants and attorneys were charging huge fees on tax matters, and the IRS officials asked people to directly deal with them rather than going through an accountant or attorney.

Inder Singh, chairman, GOPIO, said people with larger amounts might be the IRS's first target, but the agency might also reach out to those with smaller amounts.

Citing the example of a person with only $14,000 who went through rough times with the IRS, he said, "If a distant relative in India gives a property to you worth Rs 20 million ($437,207) in India, it will also have tax implications here, though the money was entirely from Indian sources.

Several people are parking their money in India as the interest rate there is much higher than in the US. Different people have different reasons. I think that we have a large number of people with accounts in India. Nobody ever thought that they will face such a problem with the IRS."

The group has advised the community to be more alert on this issue and voice their concerns to congressmen.

Report assets even if there is no tax liability

Jain Jacob

Even though currently the focus is on interest income from bank accounts, (especially HSBC) the exposure is also for other types of income and gains including capital gains from the sale of tangible assets like flats, houses, land including agricultural property, sale of Indian stocks and pension and other types of income.

One of the misconceptions of most of our people is that if they report the foreign income in the US, they are paying double tax, once in India and then in US. This is not true.

The US and Indian tax rules has provisions where most of the time you get credit for taxes paid in a foreign country. In addition there are special provisions in the India-US tax treaty that you can take advantage of. For example, India does not tax agriculture income or capital gain from the sale of agricultural land.

You can use these provisions to reduce your tax liability here.  But even if there is no ultimate tax liability, if you do not report these items in your returns you end up paying substantial penalties.

Also any gifts or inheritance you received needs to be properly reported on time. Penalties for not reporting these items can be substantial and you end up paying the total value of these gifts in penalties. Let us say you bought a flat in Cochin with cash received from your father and later sold it and kept the money in a bank account there for few years earning interest.

Now you have three problems: First not paying tax for the interest income, second capital gain from the sale of flat, third the source of the fund used to buy the flat. If you don't report the gift of cash on time on your gift tax return, the IRS can assume that the money you paid to buy the flat is non-tax paid income and can assess income tax for that amount. So, the problems can explode to several levels.

Our community thinks that these are not their problems, but of some millionaires. If the penalties for not reporting interest income seems severe, if you consider all the penalties for not reporting gift and estate taxes can wipe out not only all your foreign assets, you may also end up paying from your assets in the US. It makes you wish you never had inherited anything.

My recommendation is that however small you think your asset or situation is, speak to a CPA or tax attorney. Provide complete and accurate information, including the future potential for any inheritance you may receive. The CPA can do a tax planning based on the facts even if they may not have to do anything under the current OVDI.

Jain Jacob, a certified public accountant in Rockland County, New York, spoke to Geroge Joseph.

George Joseph in New York