Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, a penalty is provided for failure by a resident taxpayer to furnish or furnishing inaccurate particulars of foreign assets or foreign incomes in the return of income. The penalty is ₹10 lakh, and the only exception is for a foreign bank account whose balance was less than equivalent of ₹5 lakh during the year. The CBDT, in a circular issued in 2015, had clarified that non-disclosure in Schedule FA (Foreign Assets Schedule) of the tax return, of a foreign asset acquired out of disclosed income, would attract the penalty.
A recent tribunal decision upholding levy of penalty on a taxpayer for three years brings out how draconian such a provision is, if interpreted literally. In this case, the taxpayer and her husband had remitted funds from India to a bank account abroad under the Liberalised Remittance Scheme, and invested jointly in an overseas fund from such bank account. Interest income from the fund was disclosed as income in the first year, and the capital gains was offered to tax in the fourth year. The taxpayer, however, did not disclose her investment in the fund in the Foreign Assets Schedule for the first 3 years, nor did her husband.
A penalty of ₹10 lakh was levied for each of the first three years on the taxpayer, but not her husband. The taxpayer claimed that it was a genuine mistake, and that the asset was not an undisclosed foreign asset, as it was acquired out of taxed funds remitted from India. The tribunal confirmed the levy of the penalty for all three years, on the ground that for such penalty, it was not necessary that the asset was acquired out of undisclosed funds, and there was nothing to show that it was a genuine and bona fide error.
In other earlier similar cases, the tribunals have taken a more lenient view of the matter, holding that the language of the law showed that there was a discretion as to whether to levy penalty or not in such a case. In the context of penalty generally, the Supreme Court has taken a view that penalty should not be imposed merely because the law permits levy of such a penalty. It should be imposed only where the law was deliberately flouted, or there was dishonest conduct or an obligation was consciously disregarded. The tribunals have therefore earlier held that in such genuine cases of oversight to include such assets in Schedule FA, penalty should not be levied.
Another interesting aspect is that the law does not require the asset to be disclosed only in Schedule FA of the return—any disclosure in any part of the return should suffice. Disclosure of income from such assets in the return, besides amounting to an indirect disclosure of the existence of the foreign assets, also clearly demonstrates the bona fide of the taxpayer—that the intention was to pay tax on all such income and disclose such assets.
There are a large number of cases where foreign assets have been acquired out of disclosed incomes, and the income from such assets has been offered to tax, but the foreign assets may not have been separately declared in Schedule FA due to oversight. Notices are being issued in many such cases for verification. If penalty is imposed in all such cases and matters have to be disputed in appeal before the Tribunal, it would lead to unnecessary litigation, tension and expense for taxpayers. In many such cases, the amount of penalty for all the relevant years may even exceed the value of the asset which was not included in Schedule FA.
Should the penalty not match the gravity and size of the offence? Can it be so disproportionate, with a large penalty being levied for mere oversight, which is normally the case where the asset was acquired out of disclosed funds? Would a nominal penalty not be more appropriate in such cases? Unfortunately, the law requires levy of either no penalty or a penalty of ₹10 lakh.
The whole purpose of the Black Money Act was to punish offenders who had acquired foreign assets out of undisclosed income. Such assets of course attract a penalty of three times the value of the asset, again linked to the size of the offence. The penalty for non-disclosure in Schedule FA was maybe intended also for such cases.
The government needs to take a view as to whether levy of such penalty on so many taxpayers, and the cost of the resultant litigation is in the interest of the country or not. The mere fact that a notice is issued should suffice to warn taxpayers of the possible consequences of negligence in filling up the return, and ensure that they are more diligent in doing so. A clarification or action in this regard would save many genuine taxpayers from unnecessary harassment.
Gautam Nayak is partner at CNK & Associates LLP.
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FAQs
The maximum penalty for unreported offshore accounts is still $10,000 per year (regardless of how many accounts were unreported) if the taxpayer can prove the reason for noncompliance was inadvertent or “non-willful” behavior. That's still $10,000 per year for failing to file an FBAR, best case scenario.
What is the penalty for US taxpayers who underpay the tax due on undisclosed foreign assets? ›
In addition, FATCA amended Internal Revenue Code Section 6662 to permit the IRS to impose a 40 percent penalty on any portion of an underpayment of tax attributable to a transaction involving an undisclosed financial asset that should have been reported under Internal Revenue Code Sections 6038, 6038B, 6046A, or 6048.
What is the IRS reporting threshold for foreign assets? ›
If you are not married, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. income tax return.
Is NRI required to disclose foreign assets? ›
Foreign assets acquired during the period when the foreign citizen was a non-resident of India are not required to be reported, as long as no income is derived from these assets during the current previous year.
What is the penalty for non disclosure of foreign assets? ›
Currently under the Act, even if the taxpayers fail to disclose a foreign asset worth Rs 5 lakh, they have to pay a Rs 10 lakh penalty on it. “At present if the taxpayer is holding any asset abroad, which is not declared in the income tax return then there is a penalty of Rs 10 lakh.
What is the penalty for failing to file 8938? ›
Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).
Can FBAR penalties be waived? ›
The examiner may determine that the facts and circ*mstances of a particular case do not justify a penalty. If there was an FBAR violation but no penalty is appropriate, the examiner must issue the FBAR warning letter, Letter 3800.
What is the FBAR penalty? ›
The standard penalty for willful failure to file is $100,000 or 50% of the account's maximum value at the time of the violation, whichever is higher, for each year a person didn't file a required FBAR. In some cases, willful non-compliance results in criminal penalties, including a prison sentence.
What is the penalty for unreported foreign income? ›
Civil Penalties for Failure to File FBAR
If you committed a non-willful violation which was not due to any reasonable cause, you may face a civil penalty of up to $10,000 per violation.
Which foreign assets should I report to IRS? ›
And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterpart that is not a U.S. person.
Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts.
How does IRS know about foreign accounts? ›
FATCA Reporting
In accordance with FATCA (Foreign Account Tax Compliance Act), more than 110 different foreign countries and more than 300,000 foreign financial institutions are actively reporting us account holder information to the IRS.
What is the new NRI rule in India? ›
Rules Implemented
NRIs are mainly Indian citizens residing abroad and persons of Indian origin who visit India for less than 182 days in the whole financial year. But as per new income tax rules, the government reduced the tenure from 182 days to 120 days for all those NRIs whose annual income exceeds Rs 15 Lakhs.
What happens if you don't disclose foreign bank account? ›
Individuals can be penalized with up to $500,000 and a prison sentence of up to 10 years for failure to file an FBAR. Even more serious than non-disclosure is a failure to pay taxes on income earned and deposited into a foreign bank account.
How much foreign income is tax free in India? ›
Q- Is foreign income taxable in India? Whether foreign income is taxable in India depends on your residency status: Resident (according to Income Tax Act): All income, domestic and foreign, is taxable in India. Non-Resident Indian (NRI): Generally, foreign income is not taxable in India.
What if I forgot to report foreign income? ›
For any years when you failed to report foreign income, you'll need to file an amended return using Form 1040X. This will correct the record with the IRS and ensure you properly report the worldwide income. On the 1040X, you'll recalculate the tax due based on the updated income figures.
Do I have to report foreign property to the IRS? ›
You do not have to report your foreign property on your tax return. However, if you are renting the foreign property you must report foreign rental activity on your U.S. tax return just like you would report any owned U.S. property.
What is the penalty for not reporting foreign bank accounts? ›
The standard non-willful penalty for failure to file can be up to $10,000 per form for each year a person didn't file a required FBAR. This penalty amount can be higher, depending on the year's inflation adjustment.