In the United States, the IRS is offering a new amnesty program for US citizens, including dual citizens who live outside the US, which may be very important for US expats living in Israel. The new IRS program, which became effective September 1, and the existing IRS partial-amnesty program provide an opportunity for US persons with unreported foreign accounts to come clean under US law. But participation in these programs requires careful analysis.

US citizens subject to US tax on worldwide income
US citizens and former US long-term residents (green-card holders) who live outside of the US are still subject to US tax on their worldwide income. There are very strict rules requiring reporting of foreign accounts, and there are draconian penalties for failure to comply with these rules.

One of these rules requires US individuals to file an FBAR (Report of Foreign Bank and Financial Accounts) if they have non-US accounts with a total value of over $10,000, even non-interest-bearing accounts.

The failure to file an FBAR can result in penalties of up to 50 percent of the highest balance of the account per year, which could mean the loss of the entire account (and more), in addition to potential criminal liability.

Therefore, anybody who failed to file US tax returns and FBARs reporting their foreign income and accounts in prior years was faced with a very difficult dilemma.

Many US citizens and green-card holders living abroad are not fully aware of their continuing US tax and reporting requirements. The IRS established the amnesty initiative to help such individuals. This new program supplements an existing partial-amnesty program.

The IRS recovered more than $5 billion in back taxes, interest and penalties from 33,000 taxpayers who participated in the offshore voluntary disclosure programs in 2009 and 2011.The success of these programs prompted the IRS to extend the existing program and establish this new amnesty program.

Foreign governments around the world have entered into agreements with the US to disclose banking and financial records. Clearly the era of bank secrecy is coming to an end.

Many Israeli banks have notified US citizen customers that their account will be closed unless they certify that they are reporting the account to the IRS.

Some accountants in Israel indicate they are seeing increasing IRS audits of their US citizen clients. Therefore, US expats must be extremely careful about reporting their foreign income and foreign accounts.

New IRS streamlined amnesty program
On June 26, 2012, the IRS announced new streamlined-filing compliance procedures for nonresident US taxpayers to go into effect on September 1, 2012. Additional details were published by the IRS on August 31. These new procedures are for nonresidents including, but not limited to, dual citizens who have not filed US income tax and information returns.

This streamlined procedure is designed for taxpayers who present a low compliance risk (see below). For those taxpayers, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the past three years and to file delinquent FBARs (Form TD F 90- 22.1) for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns.

This procedure is available for nonresident US taxpayers who have resided outside of the US since January 1, 2009, and who have not filed a US tax return during the same period.

Low risk will be predicated on simple returns with little or no US tax due. Absent any highrisk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.

The risk level may rise if any of the following are present:
• If any of the returns submitted through this program claim a refund
• If there is material economic activity in the US
• If the taxpayer has not declared all of his/her income in his/her country of residence
• If the taxpayer is under audit or investigation by the IRS
• If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter
• If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence
• If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence
• If there is US-source income
• If there are indications of sophisticated tax planning or avoidance.

The new amnesty program represents a significant benefit for eligible US expats who previously had few viable options to bring their US tax and filing obligations into compliance. However, caution should be exercised before deciding to participate in this program. Submissions with higher compliance risk profiles are not only ineligible for the program, but may also trigger a more thorough examination going back more than three years. Also anybody filing in the amnesty program cannot participate in the 2012 Offshore Voluntary Disclosure Program (OVDP).

Tax ‘tshuva’: OVDP partial amnesty
The OVDP is an expansion of two previous voluntary disclosure programs in 2009 and 2011 intended to bring US persons into compliance with their tax-reporting obligations for foreign financial activity. Because the new IRS amnesty program will only apply in certain limited circumstances, the 2012 OVDP will remain a very important avenue for US persons who have not been reporting their non-US income and foreign accounts.

Participants in OVDP must submit tax returns for the past eight years, FBARs and information returns, as well as other information about their offshore accounts. OVDP participation provides protection from criminal prosecution. However, OVDP is just a partial amnesty program; it does not provide for a complete waiver of penalties.

Under OVDP, participants pay a one-time penalty of 27.5% (or 12.5% or 5% in limited circumstances) of the highest aggregate account balance of their undisclosed foreign accounts for the past eight years. Although this penalty can be substantial, it is in lieu of a number of other penalties that could amount to much more. OVDP participants must also pay an accuracy-related penalty equal to 20% of the underpayment of tax.

Israeli tax amnesty
In addition to US taxes, Israeli residents have been subject to Israeli tax on worldwide income since 2003. If they did not comply and now want to, there is a temporary Israeli tax amnesty on offer. The deadline for applying is September 27, which is the day after Yom Kippur.

The deal on offer under this temporary amnesty is basically: pay the tax; no interest or penalties on the overdue tax (which can otherwise be substantial); no criminal procedures; indexation for inflation may be party or wholly abated; applicants must identify themselves at the end of the process, but their names should not be published.

The following is a non-exhaustive list of examples of cases where the temporary Israeli amnesty may apply: unreported income from foreign assets received by way of inheritance or gift from a foreign resident; unreported income from foreign assets acquired with money derived from income generated in Israel or abroad on which tax was paid or no tax was due in Israel; unreported income from foreign assets on which the liability to tax arose since the 2003 tax year, following the Israeli tax reform of 2003 (which made Israeli residents taxable on worldwide income instead of Israeli-source income).

Time for action
In the US the IRS may end the OVDP at any time. The terms could be subject to change.

And probably most important, if the IRS discovers you first, you are not eligible for the amnesty program or OVDP. Additional details of the dual-citizen amnesty program are expected soon.

Therefore, for any US citizens or US greencard holders who have unreported non-USsource income or foreign accounts, now is the time to start considering coming clean through one of the IRS special programs.

In Israel, the deadline for any Israeli resident to apply for the temporary Israeli tax amnesty is September 27. That leaves precious little time to organize the paperwork, run the calculations, consider applying for the amnesty and actually apply.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

hmiller@burnslev.com
leon@hcat.co

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd. Harry S. Miller is a partner in the law firm of Burns & Levinson in Boston with a focus on international and domestic tax matters. Jennifer B.Green is an associate in the law firm of Burns & Levinson in Boston with a focus on tax controversy issues.

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