(photo credit: Courtesy)
American citizens holding accounts in Israeli banks may have an opportunity to benefit from a new initiative of the US Internal Revenue Service to offer an offshore voluntary disclosure program to Americans living abroad.
Two weeks ago, IRS Commissioner Douglas Shulman said the IRS was “seriously considering” a new partial amnesty program for taxpayers who report offshore bank accounts.
The initiative has serious implications for US citizens living in Israel, as most of them only became aware of the reporting issue last year and many missed the 2009 deadline for the old Offshore Voluntary Disclosure Program (OVDP).
Dave Wolf, a US and Israeli tax attorney from Hacohen Wolf Law Offices in Jerusalem, said that under the old OVDP, which expired in 2009, there was a maximum penalty of 25 percent on the tax due on the unreported income. In addition, there was a 20% penalty of the unreported foreign bank account’s highest value during the prior six-year period that the old OVDP covered.
After the expiration of the old OVDP, the penalty was increased to a maximum of 60%.
It is expected that the new penalties will be around 25%- 30% of the unreported foreign bank account’s highest value. Wolf said that those who fail to use the opportunity and don’t come forward may face huge income tax and penalties for not reporting their foreign bank accounts.
He added that the new OVDP will give Americans living in Israel (or other countries), who have never reported their foreign bank accounts, a unique opportunity to avoid criminal prosecution and heavy civil penalties.
According to Wolf, this is also a way to pass on assets to the next generation without creating or passing on criminal and civil tax issues to one’s heirs.
Those who don’t use the opportunity face serious consequences, as starting on January 1, 2013, a 30% withholding tax will be imposed on certain US source payments made to foreign financial institutions that have not reached an agreement with the IRS to provide annual information concerning their US account holders.
Examples of such payments include dividends and gross proceeds from the sale of assets, such as stocks and securities.
Wolf said that some Israeli banks have already asked their US clients to move their accounts. Other local banks require their US clients to sign forms declaring that they are American citizens and declare their Israeli bank account to the IRS.
Most local banks have already started to impose restrictions on their US clients regarding their investments, limiting the investments for those clients to currency deposits.
“Once an Israeli bank would welcome US citizens with a red carpet. Now
they are showing them the door out,” said Wolf. “It is highly
recommended that US citizens who are interested in entering the new OVDP
consult a US tax lawyer to discuss all the options.”
Speaking at the annual Institute on Current Issues in International
Taxation in Washington, Shulman said the IRS may repeat a voluntary
disclosure program such as the one that drew nearly 15,000 taxpayers in
2009 and another 3,000 after the original 2009 deadline passed.
According to Shulman, “Collecting additional revenue for past misdeeds –
as important as that may be – is not the only important consideration
here. It is equally important that we are bringing 18,000 US taxpayers,
and counting, back into the system... back into compliance...so they
properly report and pay their taxes for years to come.”