August 31 Amnesty Deadline for Indian Bank Accounts: DOJ and IRS Pair Up to Target Indian Off-Shore Bank Accounts at HSBC

Anyone with an off-shore bank or brokerage account in India who has not yet reported the account on his or her tax return has until August 31, 2011 to take advantage of a U.S. government-sponsored amnesty program to remedy that situation. Those neglecting to take advantage of this opportunity prior to its deadline face possible criminal prosecution and the imposition of maximum monetary penalties, according to the program established by the IRS and the U.S. Department of Justice (DOJ).

Several years ago, the IRS and DOJ announced that they would pursue persons with off-shore bank accounts if those persons had not properly reported to the IRS the monies held in those accounts. The government’s stated purpose was to get taxpayers located in the United States to subject off-shore monies to both U.S. tax reporting as well as taxation in the United States. As part of this initiative, the government offered an amnesty program. The key to the program was the avoidance of criminal and full civil penalties for those who came forward during the amnesty program. In order to benefit from the amnesty program, an account holder needed to voluntarily disclose the account information and other pertinent information before the IRS located the account and identified the account holder. The IRS and DOJ announced that if they found the person first, they would criminally prosecute the person plus seek the imposition of the maximum monetary penalties. The current amnesty program regarding bank and brokerage accounts held in India ends August 31, 2011.

By way of background, U.S. citizens and residents have an obligation to report to the IRS on Schedule B of their U.S. Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. They further have an obligation to report all income earned from foreign financial accounts on their tax return and to pay the taxes due on that income. Separately, U.S. citizens and residents with a financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year also must file an FBAR form with the Department of the Treasury disclosing such an account by June 30 of the following year. Failure to satisfy these obligations can subject the account-holder taxpayer to both criminal and civil penalties.

With regard to this government initiative to identify and tax more monies held overseas, the government’s first targets were accounts located at UBS in Switzerland; the initiative was later expanded to other Swiss banks. Based on what appeared to be a sign that the government was going to be able to access these Swiss bank accounts, many persons flocked to the amnesty program. From the government’s perspective, the program was a success. Indeed, because it had worked so well, they initially extended the amnesty date to provide further opportunity for account-holders to take advantage of the program. The government was successful in obtaining the account information from several Swiss banks. Since that time there has been a steady wave of criminal charges and guilty pleas related to Swiss accounts where the account-holders did not take advantage of the amnesty program and did not report the accounts as required.

More recently, on April 7, 2011, the government announced that it shifted its focus in this off-shore bank account initiative to off-shore bank and brokerage accounts held in India. On that date, the government sought an order from the federal district court in San Francisco compelling HSBC Bank USA to produce information regarding U.S. residents holding accounts at HSBC India; the court granted that request and ordered the bank to produce that information to the government. In addition, similar to the Swiss initiative, the government rolled out another amnesty program in February 2011. This program again offers the same benefits as the earlier program, with the exception that the penalties to be avoided are not as attractive as were present for the first program. The government obviously wants to send the message that even if it continues the amnesty program, those first in the door get the best deal. The current amnesty program ends August 31, 2011. True to its word, as discussed above, the government intends to prosecute to the full extent of the law those it finds first — in other words if they knock on your door before you knock on theirs, they will criminally prosecute you. To that end, just last week the government announced the first HSBC-Indian-related indictment (see http://tinyurl.com/6ba822q).

What does this all mean? It means that if you have an off-shore account in India (or elsewhere) that has not been reported on your tax return and you have not already taken advantage of the amnesty program, you have no time to waste. There are only a few exceptions to being eligible for the program.

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Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following:  

Pamela L. Johnston
Chair, Government Enforcement, Compliance & White Collar Defense Practice
Los Angeles, California
213.972.4632
[email protected]

Thomas F. Carlucci
Partner
San Francisco, California
415.984.9824
[email protected]

Jamshed J. Patel
Partner
Milwaukee, Wisconsin
414.297.5742
[email protected]

Peter J. Elias
Partner
San Diego, California
619.685.4613
[email protected]

Zhu Julie Lee
Partner
Milwaukee, Wisconsin
414.297.5504
[email protected]