Many Indian-origin taxpayers in the United States are now under increased scrutiny by the IRS due to global financial transparency initiatives, FBAR enforcement, and noncompliance with foreign account reporting. Several Indian taxpayers unknowingly make errors-such as underreporting Indian income, failing to disclose foreign accounts, or misunderstanding the U.S.-India tax treaty.
The real problem? Most tax preparers are unfamiliar with international tax nuances, especially those involving India. This leads to costly errors, audit red flags, and serious IRS notices.
At Kewal Krishan & Co, we specialize in helping Indian-American taxpayers comply with IRS rules, avoid audits, and structure their finances properly. Our tax strategies have saved clients thousands of dollars-while reducing risk of penalties or litigation.
IRS Code References and Forms
- IRC §6038D – Reporting of foreign financial assets.
- IRC §6012 – Filing requirements for U.S. persons with global income.
- IRC §6662(j) – Substantial understatements and international penalties.
- Form 8938 – Statement of Specified Foreign Financial Assets.
- FBAR (FinCEN Form 114) – Required for foreign bank account reporting.
Top Reasons for Increased IRS Audits of Indian-Origin Taxpayers
- Unreported Indian Bank Interest
- Interest earned in India (even if not withdrawn) is taxable in the U.S. under IRC §61.
- Failure to File FBAR or FATCA Forms
- If you hold $10,000+ in Indian accounts (even for a single day), FBAR is mandatory.
- PFIC and Mutual Fund Errors
- Indian mutual funds are treated as Passive Foreign Investment Companies (PFICs), triggering Form 8621 filings.
- Claiming Incorrect Foreign Tax Credits
- Misapplying Form 1116 for Indian taxes paid, or double-claiming foreign income exclusions.
- Receiving Form 1042-S or 1099 from Indian Payers
- These income sources must be reconciled correctly in Form 1040 or 1040-NR.
Example Scenario
Case:
An Indian national on H-1B has:
- ₹15 lakhs in Indian FDs (interest ₹1.2 lakh)
- ₹8 lakhs in Indian mutual funds
- Rental property earning ₹25,000/month
He reports only U.S. W-2 income, omitting Indian interest and rental income.
IRS Flags:
- No FBAR filed (foreign accounts > $10,000)
- No Form 8938
- No PFIC filing (Form 8621)
- Interest income not disclosed under IRC §61
- IRS initiates audit under IRC §6662(j)
Penalty Exposure: $10,000-$50,000+
Step-by-Step: How to Stay IRS-Compliant as an Indian-Origin Taxpayer
- Identify All Foreign Financial Assets
- FDs, PPF, NPS, mutual funds, Demat accounts, rental properties, etc.
- Prepare FBAR (FinCEN Form 114)
- File electronically by April 15 (automatic extension to October 15).
- File Form 8938
- If total foreign assets > $50,000 (single) / $100,000 (MFJ).
- Report All Indian Income
- Include interest, dividends, capital gains, and rental income in your Form 1040.
- File Form 8621 for Indian Mutual Funds
- Choose Mark-to-Market or Qualified Electing Fund (QEF) method.
- Use Form 1116 for Foreign Tax Credit
- Claim Indian TDS (tax deducted at source) to avoid double taxation.
- Keep Documentation
- Maintain PAN statements, Form 16A, bank certificates, property ledgers.
- Avoid Misuse of Treaty Benefits
- The U.S.-India treaty doesn’t override FBAR or PFIC filing.
Conclusion
With IRS enforcement rising and international data-sharing becoming the norm, Indian-origin taxpayers cannot afford to ignore foreign account and income reporting. The penalties are steep, and many audits are now initiated due to small oversights.
Proper documentation and filing of FBAR, FATCA, and PFIC forms can protect your assets, avoid penalties, and ensure peace of mind.
Call to Action
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the U.S., IRS Enrolled Agent, and cross-border tax strategist assisting Indian and American clients with complex U.S. tax compliance, foreign asset reporting, and audit resolution.
We help you comply with all IRS foreign asset reporting rules while minimizing tax liability. Let’s get your situation handled before IRS flags it.
About Our CPA
Anshul Goyal is a U.S. CPA, EA, and FCA who works extensively with Indian-Americans and U.S. expats. He specializes in tax compliance involving foreign income, accounts, real estate, mutual funds, and the U.S.-India tax treaty. His team has saved taxpayers millions by preventing audit exposure and correcting compliance gaps.
Disclaimer
This blog is intended for general informational purposes and does not constitute legal or tax advice. U.S. taxpayers with Indian financial interests should seek professional guidance to comply with IRS requirements. Filing requirements may vary based on residency, income levels, and account values.
Top 5 FAQs
1. Why am I being audited if I never received U.S. income from India?
Even if you don’t bring the money to the U.S., global income is taxable under U.S. law.
2. Is FBAR the same as Form 8938?
No. FBAR is filed with FinCEN. Form 8938 is filed with your tax return. Thresholds and penalties differ.
3. Do I need to file PFIC Form 8621 for all Indian mutual funds?
Yes. Even small holdings in Indian mutual funds can trigger PFIC filing.
4. What happens if I forget to report Indian FDs?
IRS may assess penalties for underreporting and issue an audit notice.
5. Can I claim TDS paid in India as a foreign tax credit?
Yes, through Form 1116, but you must meet eligibility and documentation rules.