Israeli banks to be targeted in US tax sweep

Authorities aren’t waiting for new reporting laws to go into effect to track down Americans who they say owe money

The US needs money — and it’s willing to go to the ends of the earth, including Israel, to track down deadbeats who are evading their taxes. Israel was named specifically as a country where US authorities were tracking down tax cheats, implementing policies that leave banks little choice but to comply and hand over account information to the American authorities.

The investigations are part of an overall effort Washington embarked on in 2010 to collect taxes from Americans abroad. The US requires American citizens to report all income they earn, no matter where they earn it (Since 2003, Israel has required this as well). Even if they have lived abroad for many years, American citizens are supposed to file tax returns.

To ensure that it gets what’s coming to it, the IRS, Justice Department, Treasury Department, and Congress have hatched a series of laws and requirements. For example, US citizens who have bank accounts with at least $10,000 in US or equivalent foreign currency are supposed to fill out the FBAR – the Foreign Bank Account Report (also known as Department of the Treasury Form 90-22.1 Report of Foreign Bank and Financial Accounts), naming the accounts and the amount they hold.

As far as the IRS and Justice Department are concerned, the crowning achievement in the tax collection effort is FATCA — the Foreign Account Tax Compliance Act. While individuals may be tempted to forgo the FBAR, FATCA targets financial institutions, imposing rules that are likely to make them much more amenable to helping the US tax man get his due. Beginning July 1, banks in countries around the world — including Israel — will have to report to the US government the existence of accounts in their institutions belonging to US citizens. If they don’t, the government will require that 30% of all funds transferred to that institution be withheld.

It’s a stiff penalty that no bank will want to be subject to. As a result, banks in dozens of countries have gotten US citizen account holders to sign waivers granting the bank permission to forward the information the US is demanding. If they don’t sign, they are welcome to close their accounts and move on.

But the government is not waiting for FATCA to kick in before going after tax cheats. Already in 2009, the Justice Department began investigating banks in several countries — notably Switzerland — that had the reputation of being “tax havens,” where institutions allegedly helped American clients hide their assets and avoid paying taxes. Practically overnight, the reputation of the Swiss bank account as the ultimate “secret” repository of questionable funds — where customers were identified not by name, but by account number — was upended when the US subpoenaed information about US account holders in several Swiss banks. After attempting to resist, banks like UBS eventually complied, reporting to the Treasury Department the identities of their American account holders.

The investigation program has been wildly successful, according to Deputy US Attorney General James M. Cole and Assistant Attorney General, Tax Division, Kathryn Keneally. In a statement to the Senate during a hearing about tax compliance, the two said that although only a few dozen bankers and account holders have been prosecuted (many of those indicted are in hiding).

However, they said, the real success has been in persuading people to pay up even without legal action. “These high-profile enforcement actions created pressure on non-compliant taxpayers to correct their tax returns to report previously undisclosed accounts,” the statement said. “According to the IRS, since the inception of the investigation against UBS, over 40,000 taxpayers have reported previously secret accounts through the IRS’s offshore voluntary disclosure programs, and have paid over $6 billion in back taxes, interest, and penalties.”

Now, said the two officials, institutions in other countries — including Israel — will be getting the “Swiss Bank treatment,” with aggressive investigations of account holders the Justice Department suspects of having more than they admit to. “While the Department’s enforcement focused initially on cross-border activities in Switzerland, it has expanded to include wrongdoing by US account holders, financial institutions, and other facilitators globally, including publicly disclosed enforcement concerning banking activities in India, Israel, Liechtenstein, Luxembourg, Barbados, and other Caribbean countries,” the officials said.

Why Israel? According to Chaim Korn, an authority on US tax issues, one major reason for Israel to be targeted is “apparently related to the banking activities of Swiss branches of three major Israeli banks,” including Bank Leumi, Hapoalim, and Mizrachi. “These banks, along with many banks in Switzerland, have been under investigation from the US authorities for suspicion of helping their customers avoid reporting and paying taxes to the IRS. The Treasury has decided, it seems, to investigate the parent banking institutions in Israel and several other countries, as well.” Regardless of the reason, said Korn, American citizens in Israel would do well to get their tax house in order, as the process of having the IRS do it for them is likely to be painful, to say the least.

Credits: Time of Israel