[support1]

A friend of mine moved from germany to California 10 years ago. He had saved around 200,000 euro in earnings he already paid regular income taxes on at the time he moved. But out of lack of understanding he did not declare the interest he made on his savings in germany or the US from there on. We are talking about 60,000 euro in interest earned.
Now he became an US citizen and wants to transfer his savings to the US to purchase a home. He also married an non resident and kept his german citizenship as well.

What is the best course of action to come clean with the IRS and explain where the money is from?
What are the consequences he could face?

[AtlantaTaxExpert]

If he comes forward, amends the returns for the past ten years, and pays the tax (and interest) on this earned interest, the IRS will likely waive any penalties that would normally be due on these taxes.

That waiver makes a BIG difference on the amount of taxes owed.

[IntlTax]

See TaxProf Blog: IRS Offers Amnesty to Those Who Evaded Tax Through Offshore Accounts

[support1]

Thank you for your answers!

What forms would he have to file?

I read the IRS penalty would be 5 - 20% of the highest amount on the accounts within the last 6 years?

He paid regular german taxes on the 200,000 only the 60,000 in interest were never taxed. In this case he faces to pay 52,000 in penalties + taxes and interest which is more than he actually made in interest. How likely will this be the case?

Should he get an attorney?

Thanks

[IntlTax]

Yes, he should talk to an attorney.

[MukatA]

You should start with 2008 tax return. Report foreign interest. Then claim credit for taxes paid in Germany by filing Form 1116. You will owe very little additional tax.
Also make sure to to file Form Form TD F 90-22.1. Read: Your U.S. Tax Return: U.S. Citizen or Resident with Foreign Income

Once you are done with 2008 return, do 2007, 2006... amended tax return. With the tax return request for the waiver of penalty. Penalty is normally based on tax due, and tax due will not be much.

[IntlTax]

Since no German or other foreign taxes were paid on the $60,000, a significant amount of U.S. tax will be due.

[support1]

My guess is 30% of all the interest is tax due which would be 20,000$. In my opinion everything including penalties up to 30,000 would be OK. I talked to some attorneys and they charge around 500 per hour and most of them represent very rich people or corporations I don't know if this really necessary. The 260,000 are all he has he just doesn't want to loose most of it.

How can he find out what his penalty approximately would be?

Anybody knows an accountant around LA who feels he can handle this kind of matter?

[Five Rings]

Under the "Savings Directive" put in place by the EU several years ago it is certain that these accounts had tax withheld (generally 20%). This tax can be credited on Form 1116.

[R_Tax]

Hi Int Tax, one of my friends is NOT a US citizen or resident. His mom is a US Resident. His dad was also a US resident BUT when he visited India a couple of months ago, he got terminally ill and just died a few days ago.

The friend's mom is in the process of selling her all properties in India. She wants to transfer all of the money here in the US through bank transfer.

What do you think the Tax implications would be for this? They had pieces of land there but NOT income generating properties. They did make some interest there in India on their savings though but never showed here on their tax returns due to lack of knowledge.

Will greatly appreciate the response. Thank you in advance.

[MukatA]

1. If the property was in his dad's name, then it is inheritance. Receiver does not pay any tax on inheritance. Cost basis for his mom is the FMV on the date of death. It appears that there may not be any gain on the sale as markets are down.

2. If the property is in his mom's name, then she may have a gain. If it is her main home, she can exclude gain of up to $250,000.
If you owned your main home for two years and lived for two years in past five years, then you can exclude gain of up to $250,000. Read: Your U.S. Tax Return: Profit From the Sale of Your Home

3. If she is transferring her own money, no reporting is needed except Form Form TD F 90-22.1. Read Mandatory Reporting of Foreign Bank and Financial Accounts (FBAR)

4. If she is transferring inherited money, she will file Form 3520. No tax involved.

[IntlTax]

The interest income from the bank accounts in India should have been included on Mom and Dad's U.S. tax return. If the amount is significant, prior year tax returns should be amended (Form 1040X) to include the interest income. As MukatA mentions, if the bank account balance exceeded $10,000 at any time during the year, Form TD F 90-22.1 should have been filed. Because the penalties for failing to file this form can be significant (the greater of $100,000 or half the amount in the bank account), it is recommended that this form be filed for Mom and Dad for the past 3 years. The penalties for this form are not usually imposed, but it is better to be safe than sorry.

Assuming that Dad was a resident of the U.S. for estate tax purposes (i.e. he was domiciled in the U.S.), if Dad had assets worth more than $3,500,000 (including the India assets), he would be subject to U.S. estate tax on his death. U.S. state estate taxes may be imposed on a smaller amount.

You don't mention whether Dad or Mom owned the properties in India before Dad's death and you don't mention who inherited any property held by Dad in the U.S. or in India. Mom's gain on the sale of the India properties will depend whether she owned the property in India before Dad's death.

I also agree with MukatA that transferring the money from India to the U.S. is not the important item. Any gain on a sale of Indian property is taxable in the U.S. to a U.S. resident, even if the cash received on the sale is not transferred to the U.S. The actual step of transferring the money from Mom's account in India to Mom's account in the U.S. has no special reporting.

[R_Tax]

The interest income from the bank accounts in India should have been included on Mom and Dad's U.S. tax return. If the amount is significant, prior year tax returns should be amended (Form 1040X) to include the interest income. As MukatA mentions, if the bank account balance exceeded $10,000 at any time during the year, Form TD F 90-22.1 should have been filed. Because the penalties for failing to file this form can be significant (the greater of $100,000 or half the amount in the bank account), it is recommended that this form be filed for Mom and Dad for the past 3 years. The penalties for this form are not usually imposed, but it is better to be safe than sorry.

Assuming that Dad was a resident of the U.S. for estate tax purposes (i.e., he was domiciled in the U.S.), if Dad had assets worth more than $3,500,000 (including the India assets), he would be subject to U.S. estate tax on his death. U.S. state estate taxes may be imposed on a smaller amount.

You don't mention whether Dad or Mom owned the properties in India before Dad's death and you don't mention who inherited any property held by Dad in the U.S. or in India. Mom's gain on the sale of the India properties will depend whether she owned the property in India before Dad's death.

I also agree with MukatA that transferring the money from India to the U.S. is not the important item. Any gain on a sale of Indian property is taxable in the U.S. to a U.S. resident, even if the cash received on the sale is not transferred to the U.S. The actual step of transferring the money from Mom's account in India to Mom's account in the U.S. has no special reporting.

Thank you both MuktA and Intl. You guys are awesome. To intel's quesiton, mom and dad had properties in both India and US before dad's death. So, it would then mean that she is going to have to include the gain in the amended returns with the exemption for up to $250,000 as MuktA mentioned ? Is it correct? Also to your second question, his properties will be divided between his wife and his non-resident son not sure how though at the moment.

Thank you once again- you guys are fantastic.

[R_Tax]

The interest income from the bank accounts in India should have been included on Mom and Dad's U.S. tax return. If the amount is significant, prior year tax returns should be amended (Form 1040X) to include the interest income. As MukatA mentions, if the bank account balance exceeded $10,000 at any time during the year, Form TD F 90-22.1 should have been filed. Because the penalties for failing to file this form can be significant (the greater of $100,000 or half the amount in the bank account), it is recommended that this form be filed for Mom and Dad for the past 3 years. The penalties for this form are not usually imposed, but it is better to be safe than sorry.

Assuming that Dad was a resident of the U.S. for estate tax purposes (i.e., he was domiciled in the U.S.), if Dad had assets worth more than $3,500,000 (including the India assets), he would be subject to U.S. estate tax on his death. U.S. state estate taxes may be imposed on a smaller amount.

You don't mention whether Dad or Mom owned the properties in India before Dad's death and you don't mention who inherited any property held by Dad in the U.S. or in India. Mom's gain on the sale of the India properties will depend whether she owned the property in India before Dad's death.

I also agree with MukatA that transferring the money from India to the U.S. is not the important item. Any gain on a sale of Indian property is taxable in the U.S. to a U.S. resident, even if the cash received on the sale is not transferred to the U.S. The actual step of transferring the money from Mom's account in India to Mom's account in the U.S. has no special reporting.

MukatA, and Intel: Also - will there be any tax or reporting implication if her mom trasnfer some of the money (after she wired transferred here in her US account from the foreign account) to her non resident's son account which is here in the US?

Thank you in advance.

[AtlantaTaxExpert]

R Tax:

Your friend's Mom should contact a knowledgeable tax professional like IntlTax or myself to review her case in detail. Assuming the couple were green card holders, the capital gains on the property sales are definitely subject to U.S. taxes and probably Indian taxes as well. Use of Form 1116 and Schedule D appear to be in order, plus some amendments may be needed.

[R_Tax]

R Tax:

Your friend's Mom should contact a knowledgeable tax professional like IntlTax or myself to review her case in detail. Assuming the couple were green card holders, the capital gains on the property sales are definitely subject to U.S. taxes and probably Indian taxes as well. Use of Form 1116 and Schedule D appear to be in order, plus some amendments may be needed.

Thank you, I will let him know to contact some experts from here. Thank you for the informaiton as well.

[Five Rings]

After reading all this, I believe the following should apply.
While the taxpayer was resident in Germany and a national thereof and not a US citizen the income earned in that state is nontaxable in the US. As authority I cite:

Further, Congress recognized that an individual who would be treated as a resident alien under section 7701(b)(1)(A) might be treated as a nonresident alien under the so-called "tiebreaker" rules of the income tax treaties to which the United States is a party. The legislative history makes it clear that Congress did not intend for section 7701(b) to override any treaty obligations of the United States:
TAM, PRESP-165857-01, UILC: 7701.21-00; 871.02-06; 86.00-00
Release Date: 8/30/2002


“The conferees do not intend that the conference agreement override treaty obligations of the United States. For example, an alien who is a resident of the United States under the new statutory definition but who is a resident of a treaty partner of the United States (and not a resident of the United States) under a United States income tax treaty will be eligible for the benefits that the treaty extends to residents of the treaty partner.”
H.R. Rep. No. 861, 98th Cong. 2d Sess. 967 (1984).

[Five Rings]

Never mind, I misread the backgound circumstances.