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My friend sold a property in India and he has funds in his bank account in India. He was thinking about either buying another property with that money to avoid taxes or something like that. (You have up to two years to buy another property to avoid capital gain taxes in India).

The problem is he just found out about the Report of Foreign Bank and Financial Accounts (FBAR). What to do now? It's going to be two years since he opened the account and the money has been in his account I think.

To make the matter maybe more complicated, I don't think he filed taxes for the past year (he didn't have enough income).

He is a U.S. citizen - born in India. He has been in U.S. for a decade, I think.

Ellie K
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2 Answers2

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The IRS allows filers to attach a statement explaining the reason for late filing. I have had clients do this in the past, and there has never been an issue (not that that guarantees anything, but is still good to know).

Generally, the IRS is much more lenient when a taxpayer voluntarily complies with a filing requirement, even if it's late, than if they figure it out themselves and send a notice.

superjessi
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As I understand it, capital gains from real estate sales in India can be shielded from income tax entirely if the proceeds of the sale are invested in certain specific types of bonds (Rural Highway Contruction Authority of India?) for a period of three years beginning no later than x months (6 months?) after completion of the sale. Perhaps this applies to sales of inherited real estate only and not to commercial property or residential property acquired by purchase since there is no step-up of basis on death as occurs in the US, and in all likelihood, records of the purchase price of the inherited property are lost in the mists of time, and so the basis of the investment is effectively zero (or treated as such by the revenue authorities) The interest paid by these bonds is included in taxable income. Perhaps @Dheer will be willing to correct any mistakes in the above.

So, it may be necessary to check whether

(a) the interest income from the bonds was declared on Form 1040 Schedule B for each year

(b) whether the appropriate boxes (the ones that ask whether the taxpayer has signature authority over foreign accounts etc) were checked on Schedule B or not,

(c) whether Form TD 90-22.1 was filed each year or not (this is the FBAR requirement)

Note that if the total value of the accounts is less than US $10K during the entire year, then the taxpayer is supposed to check NO on Schedule B and need not file Form TD 90-22.1. Also, there is a separate requirement to file a Form 8938 for certain specific types of investments. There was a two-part article describing these rules in Forbes magazine some time ago, and this is available on-line (Part 1 and Part II)

As @superjessi says, the IRS might be lenient if the only issue is not filing the forms in timely fashion, and the taxpayer is voluntarily coming into compliance even though the filing is late. They are likely to be less forgiving if the foreign income was not reported, and still remains unreported even after filing the various forms.

Dilip Sarwate
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