Finance: The US taxman cometh to Israel, with a vengeance

Israeli banks may be turning information on their American account holders over to the IRS, setting off financial nightmares for people who haven’t filed properly.

By
August 22, 2013 22:53
4 minute read.
shekel and dollar exchange

shekel versus dollar 370. (photo credit: REUTERS)

Everyone knows the adage about death and taxes, but Americans living in Israel might not know the part where the IRS comes and takes half of their maximum account balance for holding an unreported account in Israel.

Since 2007, the United States has been aggressively working to counter tax evasion, going after foreign banks to find out what assets Americans are hiding within, and threatening to shut them out of the US financial system if they don’t comply.

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Just this year, the IRS convinced notoriously secretive banks in Switzerland, such as UBS and Credit Suisse, to disclose information on their American account holders. Prosecutions followed.

When Swiss branches of Bank Hapoalim, Bank Leumi and Mizrahi Tefahot came under suspicion of helping Americans evade taxes, the IRS turned its cross-hairs on Israel. But its aggressive, all-encompassing approach may pick up a lot of people who were not intentionally trying to hide money.

In theory, Americans with bank accounts in Israel have until July 2014 before the IRS finds them out; that’s when the 2010 Foreign Account Tax Compliance Act (FATCA), which requires international financial institutions to turn over all the information on their US account holders, goes into effect.

But there are indications that Israeli banks have already begun turning some information over, which could spell serious trouble.

“We believe that one or more Israeli banks could have turned over limited information on various US taxpayers to the IRS similar to what has happened in Switzerland,” said Jonathan Strouse, a partner at international law firm Holland & Knight.

Even if they haven’t lived there for decades, and even if they earn less than the $97,600 threshold excluded from US income taxes, Americans are required to submit 1040 tax forms to the IRS each year. Those forms ask them whether or not they hold a foreign bank account. If they do, and “the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported,” they must file another form: the Report of Foreign Bank and Financial Accounts (FBAR).

“If you didn’t mark the box or marked it wrongly and you were lying, those are both problematic,” said Strouse.

The IRS penalties for failing to report foreign accounts are “extremely draconian,” including fines of up to 50 percent of the account balance for each year of each violation.

“If you’re American, you have real exposure if you haven’t done things right. If you don’t file that and the government decided it was willful, you can go to jail and have to pay 50 percent of the highest balance in the account for each account,” said Kevin Packman, chairman of Holland & Knight’s Offshore Compliance group. “You can quickly find yourself facing huge civil penalties, and it can go criminal.”

In dire cases, some people even choose to give up US citizenship altogether. Expatriation, however, requires certifying compliance with US tax laws under oath under penalty of perjury.

Fortunately, there is an Overseas Voluntary Disclosure Program (OVDP) for people who have violated the law, which requires them to come clean about their mistakes, file their old taxes, and pay a lower (though possibly still substantial) fee.

“These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years,” the IRS wrote in its 2012 guidance on the program. The IRS has already collected over $5 billion through that program.

But there’s a catch, said Strouse. The rules surrounding the amnesty are subject to change, and it is not available to anyone already under investigation.

“If they’re auditing you, you can’t get it. You don’t know when or how that door will close,” he said.

When the FATCA law goes into effect in July 2014, and Israeli banks have to start turning over account information, the amnesty option for many might close.

In two separate incidents earlier this year, California residents (Zvi Sperling and Guity Kashfi) were charged over hiding assets in accounts held at Bank Leumi and Mizrahi Tefahot Bank. In July, Saratoga’s Moshe Handelsman pleaded guilty over a 2007 tax return that excluded an account at an unnamed Israeli bank.

Bank Leumi sent letters to its American customers in December urging them to disclose their accounts. But in July, Forbes reported that the IRS did an about-face, saying that it would no longer accept amnesty for Leumi account holders who had disclosed. The IRS said US law prohibited it from discussing such cases.

“While there is nothing reported publicly stating that Bank Leumi turned information over or cooperated with the US, the fact that the US has barred Leumi account holders from participating in the voluntary disclosure program is indicative of the fact that they have received information from the bank,” said Packman.

Asked to specify its level of disclosure, Leumi spokesman Lee Neumann said, “The bank has been cooperating with US authorities on tax-related issues, both in providing information and in the procedural steps required, as allowed by law. In general, Israel law determines the handling by financial institutions in Israel regarding suspicious transactions, consistent with international standards.”

The bank would not, however, discuss “matters relating to its customers or to communications it may have with authorities in Israel, or elsewhere.”

Americans with Israel accounts have taken note. In July, Globes reported that US citizens had withdrawn $4b.-$5b. from Israeli banks ahead of Israel’s required FATCA compliance.

US taxpayers with unreported Leumi accounts, Packman said, should immediately seek guidance from a US tax attorney. As for account holders at the other banks, he added, “the bigger issue is: Are they cooperating with the US? At present, we don’t know that. It hasn’t been publicized. I venture to say yes they are.”


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