The taxman knows about your foreign assets and is giving you a chance to revise ITR

The Income Tax (IT) department is taking a lenient approach this year to address the non-disclosure of foreign assets in income tax returns filed in the current assessment year. This week, the department has sent out emails to taxpayers who have not reported foreign assets, asking them to revise their tax return. 

This approach is different from the usual process where the defaulting taxpayers would be summoned by the tax department for investigation, which sometimes resulted in penalties for those unable to comply.

“This looks like a new initiative from the tax department, wherein instead of directly sending summons of investigation under section 131(1A) of the Income Tax Act, it is giving taxpayers a chance to revise their ITR,” said Bhawna Kakkar, a Delhi-based chartered accountant and founder, Kakkar & Company, Chartered Accountants.

An email sent by the IT department to an assessee, reviewed by Mint, said, “As part of ongoing collaborative efforts to ensure compliance with tax regulations, we have received information concerning foreign assets and income, from the USA, such as Bank account, interest, dividends, etc, that may be associated with you. Our records show that Schedule Foreign Assets has not been filled in your return for AY 2024-25…Accuracy in reporting for tax purposes is important. We urge you to review and revise your income tax return to ensure it reflects all relevant information, including any foreign assets or income you may have held or earned during the relevant financial year…”

Also Read: Here's how to accurately declare assets in Schedule AL of your ITR

What is the requirement?

The IT Act requires residents to report all their foreign assets and income in their ITR under schedule FA. Disclosing ownership of foreign assets and reporting income from them are two different requirements in the ITR, both of which need to be done. Taxpayers have to mandatorily report all foreign assets they own in their ITR each year, irrespective of whether it created income or not. 

The government of India has partnered with over 100 countries to get information on foreign assets held by Indian residents overseas. Kakkar said this information helps the tax department know the global income of its resident taxpayers and to identify taxpayers who may not have disclosed their foreign assets and income. 

When the tax department identifies such cases, its foreign asset investigation unit (FAIU) summons concerned assessee for investigation under Section 131(1A) of IT Act. These summons can be concerning for taxpayers as the assessee has to physically report to the tax office for questioning.  

“While most other assessments are now conducted faceless, this investigation is still physical with a tax officer. The assessee has to be present either themselves or through an authorised representative,” said Kakkar. 

Chartered accountants have pointed out that most taxpayers miss reporting foreign assets while filing ITR due to a lack of awareness and yet have to go through this ordeal. 

This year, the IT department has softened its stance in giving taxpayers a chance to rectify the return by 31 December instead of directly starting an investigation. 

“This is a taxpayer-friendly move by the income tax authorities. Most of the taxpayers would have missed to report foreign assets or foreign income due to ignorance/inadvertence and not for evasion. Informing them upfront helps them correct the mistakes which might have been made by those taxpayers,” said Prakash Hegde, a Bangalore-based chartered accountant. 

Also Read: Options for correction of mistakes in past income tax returns

Penalty for non-disclosure

In a note sent to taxpayers and the email communication, the IT department said failure to disclose foreign assets and income can attract stringent penalties and prosecutions under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. 

Kakkar said taxpayers should avail this opportunity given by the department to revise their ITR, otherwise, on account of non-disclosure, the department could have levied minimum penalty of ₹10 lakh.

“We are glad that the tax authorities are moving in the right direction by reaching out to the taxpayers and educating them rather than waiting for several years and issuing summons/notices with a threat of penalty and prosecution,” Hegde said.

Taxpayers who fail to disclose foreign assets despite receiving communication from the tax department might be considered wilful defaulters. As a result, the matter may be treated under the Black Money Act, which can even lead to seven years of imprisonment if the department has reason to believe that the taxpayer did not disclose these assets wilfully. 

Also Read: Budget 2024 reduces time limit for ITR reassessment, gives compliance relief to taxpayers with foreign assets