With Israeli Bank Accounts Under IRS Scrutiny, Israel is Becoming the IRS’ Most Severe Enforcer of FATCA

In recent years, there has been increasing cooperation between the taxation authorities of many governments.  For example, when Germany purchased bank account information from bank employee “whistle blowers”, Germany shared this information with other European and North American governments, which resulted in tax investigations of people in various countries.  The Foreign Account Tax Compliance Act (“FATCA”), passed by the U.S. Congress in 2010 and coming into effect this year, provides for foreign governments and foreign financial institutions to share information with the IRS regarding U.S. taxpayers with accounts in foreign countries.  Dozens of foreign countries and thousands of foreign banks have signed on to FATCA.  According to one recent report, a staggering 77,000 foreign financial institutions have agreed to cooperate and share information with the IRS, under FATCA.  The reach of the IRS is now truly global creating a challenge for a foreign asset attorney.

On May 1, 2014, Israel announced that it had reached a FATCA agreement with the U.S.  The agreement is a “Model 1” agreement, by which Israeli banks will provide the required information to the Israeli government, which in turn will provide it to the U.S. government.  The FATCA agreement is reciprocal, meaning that the U.S. can report to Israel regarding Israeli owned U.S. accounts.

Israel’s eagerness to accede to FATCA was apparent long before the May 1 official announcement.  In 2012, the Association of Banks in Israel urged Israel’s central bank, the Bank of Israel, to ask the Israeli government to reach a FATCA agreement with the U.S.  Earlier in 2014, even before the signing of the FATCA agreement with the U.S., the Bank of Israel ordered Israeli financial institutions to begin to implement FATCA procedures, including appointing an officer to oversee FATCA compliance, identify U.S. customers, make U.S. customers sign IRS declarations (such as IRS Form W-9) and expel any clients unwilling to do so.   While some foreign governments faced criticism for “caving in to” U.S. pressures to sign FATCA, Israel appears to have needed very little persuasion; in fact, Israel seems to have backed FATCA, and the reach of the IRS into Israeli banks, willingly and eagerly.

Further, Israel appears to be unique among countries in its vigilance to uphold and enforce FATCA within its own borders.  The Israeli Ministry of Finance has drafted proposed regulations which would impose criminal penalties upon Israeli financial institutions (including banks, brokerage houses and insurance companies) that do not comply with their FATCA reporting obligations.  Individual employees at these financial institutions who knowingly assist clients in avoiding FATCA disclosures could face jail sentences as severe as seven years.

It should be noted that of all the foreign “facilitators” charged criminally by the U.S. Department of Justice (i.e., the foreign bankers, lawyers and other professionals who assisted U.S. taxpayers to commit U.S. tax fraud via “secret” accounts), facilitators from Switzerland comprise the largest group, followed next by Israeli bankers.   With Israel’s eagerness to criminally enforce FATCA under Israeli law, it appears to some that Israel may be overcompensating to now maintain a clean banking image.

While Israel has long been known as a first world country for many industries including science and technology, Israel’s status as a “tax haven” was lesser known, but still real.  As Haaretz reported, seemingly in opposition to Israel’s embracement of U.S. law:

“Israeli banks are subject to laws in Israel, and not to U.S. laws such as FATCA. Until now, Israeli banks were obliged to protect their customers’ privacy and were forbidden from providing information on account holders to any parties unless Israeli regulators explicitly stated otherwise.”  (Haaretz, March 19, 2014).

While Israel’s banking privacy regime was not as well-known as that of Switzerland, Israeli banks have long been utilized by U.S. taxpayers who have not reported their accounts, nor the income earned in the accounts, to the IRS.  As a result, within the last few years, Israeli banks have joined Swiss banks under the scrutiny of the U.S. Department of Justice (DOJ) and the IRS for facilitating U.S. tax fraud.  The Swiss branches of Bank Leumi, HaPoalim and Mizrachi Tefahot have been the targets of DOJ criminal investigations, along with major Swiss banks such as Credit Suisse and Julius Baer.  Although these three Israeli banks have been publicly named as being the targets of criminal tax investigations, it is likely that many other Israeli banks are also being investigated for offering accounts that allowed U.S. taxpayers to escape taxation.

Israel’s recent willingness to implement FATCA and criminalize FATCA non-compliance as a matter of Israeli internal law, comes at the same time as Israeli banks and bankers are increasingly under the spotlight for aiding U.S. tax fraud.  While Israel announced its FATCA agreement with the U.S. on May 1, one day earlier, on April 30, 2014, Israeli banker Shokrollah Baravarian, of Beverly Hills, California, was criminally charged with assisting his U.S. clients with committing U.S. tax fraud, including utilizing accounts in Israel and the Cayman Islands, and also through the use of offshore entities in jurisdictions such as Nevis and the British Virgin Islands.  Baravarian was a senior vice president at Mizrachi Tefahot.

In 2013, multiple U.S. taxpayers with undisclosed foreign accounts in Israel and Israeli banks with branches elsewhere were prosecuted by the DOJ, among them:  David Raminfard (who failed to disclose his Israeli account, along with a Turks & Caicos entity, and accessed his funds via “back to back” loans); Aaron Cohen (accounts in Israel and Cayman, used “back to back” loans); Moshe Handelsman (account in Israel), and Alexei Lazlovsky (account at the Luxembourg branch of an Israeli bank).  In addition, in 2013, David Kalai and Nadav Kalai, two tax preparers in the U.S. with Israeli clients, were prosecuted for facilitating tax fraud through the use of undeclared accounts at Israeli banks, including Israeli banks with branches in Luxembourg.  Israeli accounts appear to be second only to Swiss accounts as targets of DOJ prosecutors.

Against this background, on June 9, 2014, it was reported that Bank Leumi is in discussions with DOJ to settle the tax fraud probe, and that the bank has set aside one billion Shekel (US$300 million) to pay in settlement, in return for a deferred prosecution agreement which would avoid a formal criminal indictment against Bank Leumi.  Only two weeks prior, Credit Suisse paid $2.5 billion to settle U.S. tax fraud chargesUBS paid $780 million to settle U.S. tax fraud charges in 2009, also in return for a deferred prosecution agreement.  As part of its settlement with the U.S. government, UBS released the names of almost 5,000 Americans with formerly “secret” UBS accounts.

It is possible that Leumi’s settlement with DOJ will also include the release of the bank’s client’s names.  Even if not (as was the case with the Credit Suisse settlement last month), the U.S. can still obtain client names via a treaty request or “John Doe” summons which are frequently approved by U.S. courts and served on foreign banks such as HSBC in India and UBS in Switzerland.  John Doe summonses are also served upon U.S. banks in connection with foreign accounts.  In 2013, a U.S. court approved John Doe summonses upon Bank of New York (Mellon), Citibank, JPMorgan Chase, HSBC Bank USA, and Bank of America to produce information about U.S. taxpayers with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom.   Also in 2013, a U.S. court approved John Doe summonses upon the Bank of New York (Mellon) and Citibank to produce information about U.S. taxpayers who may have had unreported accounts at Zurcher Kantonalbank (“ZKB”) in Switzerland.  Thus, even if the Credit Suisse and Bank Leumi settlement agreements with the U.S. government do not include the banks handing over “secret” account details, the IRS and DOJ can still readily obtain the identities of U.S. clients at foreign banks.

It should be noted that any undisclosed account in Israel, or at a branch of an Israeli bank elsewhere, is vulnerable to discovery by the U.S. government, whether via FATCA, John Doe summons or treaty request.  The threshold for reporting foreign accounts to the IRS is low, only $10,000.  DOJ will prosecute U.S. taxpayers with accounts of all values, not only in the millions of dollars.  DOJ does not want an account owner with, e.g., “only” $50,000 offshore to feel that his or her account is “too low” for IRS scrutiny.  In addition, even if a U.S. taxpayer had an undisclosed foreign account, but did not utilize foreign corporations, back to back loans, and other methods of hiding the foreign funds, the taxpayer could still be the target of an audit, investigation and civil penalties.  Such civil penalties can exceed the value of the foreign account.  Even if the account is depleted by such penalties, the U.S. taxpayer would still be responsible for the deficiency, and the IRS would then proceed against the taxpayer’s U.S. assets.

As noted, the account holder need not have employed sophisticated methods of offshore concealment.  The following examples, all much more benign, are all still subject to IRS reporting:

  • Use of an account in Israel in connection with Israeli real estate (and if such real estate gives rise to rental income unreported to the IRS, then the taxpayer has a double problem);
  • Use of an account in Israel in connection with the support of relatives in Israel;
  • Israeli accounts that remained open following immigration to the U.S.

In addition, the following scenarios could also trigger IRS reporting requirements:

  • Americans who immigrated to Israel (made Aliyah), still remain U.S. citizens and are obligated to report to the IRS their foreign accounts and Israeli income;
  • Israeli children of American citizens, who may never even have visited the U.S. nor have any U.S. tax nexus, but are still subject to U.S. tax law and reporting requirements.

The tentacles of the IRS are clearly global, both in terms of the extra-territorial reach of U.S. tax law and reporting obligations, as well as the willingness of foreign governments and foreign financial institutions to join FATCA and report to the IRS.  In the case of Israel and Israeli financial institutions, the IRS seems to have found ready, willing and eager partners, more so than in any other foreign country.

In light of the DOJ and IRS investigations and prosecutions of U.S. taxpayers with undeclared accounts in Israel, coupled with Israel’s eagerness to join FATCA and assist the IRS, U.S. taxpayers with undisclosed accounts at Israeli banks must take steps to come into U.S. tax compliance.  There is an opportunity to come into U.S. tax compliance pre-emptively, avoid criminal prosecution and pay lower penalties than if the IRS learns about the accounts first (such as via FATCA).  If you have unreported foreign assets, you must see a U.S. tax attorney with experience in offshore accounts and IRS compliance.  Come speak with a foreign asset attorney, before the IRS finds you.

 

For additional information, please see the following articles:

The Next Wave of IRS Offshore Account Enforcement:  Israeli Banks Under Scrutiny

Did You Receive a Letter from a Foreign Bank Urging you to Report Your Account?

Should Everyone with Undeclared Foreign Assets Make a Voluntary Disclosure to the IRS?  Are There Less Costly Alternatives to a Voluntary Disclosure?

IRS Targeting Undeclared Accounts in Israel for Tax Fraud

 

Credit Suisse Pleads Guilty; Asher Rubinstein Quoted in Businessweek

As we’ve previously written, Credit Suisse had been under investigation by the U.S. Department of Justice (DOJ) for the past few years for facilitating tax fraud by U.S. clients with “secret” Credit Suisse accounts in Switzerland.  On May 19, 2014, Credit Suisse pleaded guilty to the charges and agreed to pay a fine of $2.5 Billion to Federal and New York authorities.  Credit Suisse was allowed to stay in business, which had been an open issue, since a bank which pleaded guilty to a federal crime could have its banking license cancelled.  It is very likely that DOJ and the IRS will now proceed against American taxpayers with undisclosed Credit Suisse accounts.

Asher Rubinstein was quoted in Bloomberg Businessweek on the end of Swiss banking secrecy.  Please see:  http://www.businessweek.com/articles/2014-05-20/the-end-of-the-swiss-bank-account-as-we-know-it

For additional articles on Swiss banking secrecy and Offshore tax issues, please see the following:

 

 

2013 Year End Notes, Part 3: Offshore Considerations

During 2013, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”.  The IRS’ success against UBS and other banks eroded Swiss banking secrecy, effectively ending “going offshore” to hide money from the IRS. Going offshore for asset protection from civil creditors, however, is still viable and effective, but must be tax-compliant. Continue reading

Should Everyone with Undeclared Foreign Assets Make a Voluntary Disclosure to the IRS? Are there Less Costly Alternatives to a Voluntary Disclosure?

We have written extensively about the erosion of foreign banking secrecy, IRS discovery of undeclared foreign accounts, and the IRS Offshore Voluntary Disclosure Program (OVDP) to come into tax compliance before the IRS discovers the foreign assets. However, entering the OVDP means that you will pay a 27.5% penalty on the highest aggregate value of the foreign assets.  We recognize that this penalty, although much less than civil and criminal tax fraud penalties, is still quite onerous.  The question thus becomes: are alternatives available to come into IRS compliance, and, at the same time, to also avoid the 27.5% penalty of the OVDP?

Continue reading

If You Have an Unreported Foreign Account, You Really Should Be Thinking about Tax Compliance

 

If You Have an Unreported Foreign Account,
You Really Should Be Thinking about Tax Compliance

by Asher Rubinstein, Esq.

If you have a foreign account that you have not declared to the IRS, you really should be giving thought to how to bring the foreign account into compliance now.  It will only get more difficult to keep the account open, to access your offshore funds, and to keep the IRS from discovering the account. And, when the IRS does eventually discover the account, it will only get more expensive to correct the non-disclosure and defend against a tax fraud prosecution.

Foreign Banks Are Freezing and Closing Accounts and Limiting Access to Your Money

If you don’t bring the foreign account into IRS compliance, you will have problems trying to access the funds. Many foreign banks are simply freezing the accounts of Americans until the account holders provide signed IRS Forms W-9 or otherwise demonstrate evidence of U.S. tax compliance. If you provide a W-9 to the bank, the bank will likely share your identity and your banking information with the IRS.

We have had many clients tell us that their foreign bank has frozen their account, and they request that we intervene to get the bank to release their money. While we can often assist in that regard, the larger issue is: what are you going to do about the IRS finding the account?

In addition to freezing accounts, many foreign banks are simply closing the accounts of Americans, or of foreign nationals suspected of having a U.S. address or a U.S. tax nexus. These banks do not want to deal with the IRS and with U.S. compliance burdens. These banks are concluding, as a business matter, that it makes better sense for the banks to cease offering banking services to people with a U.S. nexus.

We have assisted clients in keeping open their compliant foreign accounts, and we have assisted other clients in locating new foreign banks to take their compliant foreign funds. If you have an undeclared foreign account, and your bank is telling you to leave, you will have to anticipate the successor bank asking the same sort of “know your client” and source of funds inquiries, and asking you to sign a IRS Form W-9. It is getting harder and harder to simply leave foreign Bank A and move the account to foreign Bank B. Very few foreign banks remain willing to take your non-compliant funds.

You Will Have Difficulty Getting Your Money Back to the U.S.

Wiring the funds back to the U.S. is not advisable. A sudden wire transfer of a large dollar amount into a U.S. account would likely lead to the receiving bank asking questions about the wire transfer, the source of funds, and whether the funds are tax-compliant. Banks will not ignore their due diligence and “know your client” obligations, no matter how friendly you might be with your banker. The compliance and legal risks to the bank are too significant.

Moreover, an inbound wire transfer could cause the bank to file an SAR (Suspicious Activity Report) with the U.S. Treasury Department, and there is no requirement that the bank even let you know that it is filing an SAR. Even if you try to deposit a foreign bank check and avoid a large wire transfer, the U.S. bank will likely ask the same questions.

Finally, even assuming that you can get your foreign funds safely back into the U.S., you still have to worry about the IRS discovering the past non-compliance when the funds were offshore. As discussed below, the IRS is interested in the past history of the non-compliant foreign account, even if that account is now closed.

Your Options Are Limited as to Where to Keep the Funds Outside the U.S.

As noted above, it will not be easy for you to simply find a new foreign bank, one that will overlook the fact that your funds are not U.S. tax compliant, one that will not ask you to sign a Form W-9, one that is not concerned about FATCA (the Foreign Account Tax Compliance Act) which will require the bank to report information to the IRS.

FATCA is a U.S. law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts. Essentially, every foreign bank becomes an agent of the IRS. If a foreign bank or financial institution does not agree to FATCA reporting, then the U.S. will penalize it by withholding significant amounts of U.S.-source income. Recently, many countries have signed on to FATCA, including Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland. Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the U.S., including South Africa, Singapore and Liechtenstein.

People suggest to us that foreign jurisdictions still exist which could act as shelters for non-compliant assets. We hear that certain countries are “the next Switzerland”. Since 2008, when UBS became the target of DOJ’s civil and criminal prosecution, the flow of funds exiting Switzerland for Singapore, for example, has been significant.

However, no reputable financial jurisdiction (including Singapore) would risk its financial reputation to harbor non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the U.S. on a FATCA-type of agreement. In addition, a new Singapore regulation requires banks to identify all accounts that may harbor the proceeds of tax evasion, and close them. Failure to abide by this new law will result in criminal charges for the Singaporean bankers.

Virtually all reputable financial institutions around the world – – at least the credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS. Nations “off the grid” may welcome dollars, but one must ask whether depositing assets in an unsafe or unstable jurisdiction is a prudent move. Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?

Finally, even assuming that you find a new harbor for your foreign assets, there will almost certainly be a paper trail of where your assets went. The last bank statement from your prior account will show an outward transfer. That will be a road map for the IRS once it obtains the statement by subpoena, summons, treaty request or settlement agreement.

Closing the Account May Not be Enough

Merely closing a foreign account is not a viable solution, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. DOJ’s request to Liechtenstein trust companies and other fiduciaries sought records back to 2001.

In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a U.S. account (or account elsewhere) creates an easy trail back to the foreign account, and also gives rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.

The Era of Bank Secrecy is Over

It seems that with every passing year, bank secrecy continues to decrease and the risk of discovery increases. In 2013, the following events occurred:

Switzerland agreed to a settlement with the U.S. Department of Justice (DOJ) whereby almost all Swiss banks will begin to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests.

– Liechtenstein agreed to sign a global treaty allowing for increased bank transparency and automatic exchange of tax information. It is also expected that Liechtenstein will sign on to FATCA.

– All reputable countries are agreeing to the exchange of information and banking transparency. In 2013, Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015. Likewise, Austria, the last remaining EU member holdout, agreed in 2013 to share banking data.

– The U.S. Department of Justice has sent summonses and requests for banking information to the following: Bank Julius Baer, the Liechtenstein Foundation Supervisory Authority, CIBC First Caribbean International Bank, Bank of Butterfield, HSBC and others. DOJ is investigating many Swiss banks, Israeli banks, banks in Luxembourg, the Caribbean and elsewhere. IRS and DOJ are not stopping at Switzerland. U.S. investigators are paying particular attention to “leaver accounts”, i.e., the accounts of those people who leave Swiss banks in favor of banks elsewhere, in an attempt to continue to evade the IRS. It should be noted that under the 2013 Swiss-U.S. settlement agreement discussed above, Swiss banks are required to identify “leaver accounts” specifically, and report them to DOJ.

In 2014, foreign banks will begin to report information to the IRS under FATCA.

The Window of Opportunity to Come Into Compliance Could Close Anytime

It is possible to bring your foreign assets into tax compliance by disclosing the assets to the IRS before the IRS learns of those assets, and to participate in a partial amnesty program known as the Offshore Voluntary Disclosure Program (“OVDP”). If the IRS learns about your foreign assets (through any means, including from a foreign bank or foreign government, as a result of an audit or investigation, or even because of a whistle blower such as an ex-spouse or adversary), then the IRS will not accept your disclosure and the full weight of tax fraud penalties will apply, including criminal prosecution. If accepted into the OVDP, such consequences can be avoided, although back taxes, interest and penalties will be due.

However, at any time the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset and to participate in the OVDP. Under the most recent terms of the Voluntary Disclosure Program, the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure. The significance is that U.S. clients can no longer wait for an announcement of a DOJ summons or a treaty request before they decide to come forward. The door to come forward can be closed by the IRS much earlier and without warning. That is a new variable in the opportunity to make a voluntary disclosure. It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance. Timing, once again, is everything, and the IRS can close the door at any time.

Conclusion

The common theme through all of the above is that if you have a foreign account or other asset that is not U.S. tax compliant, it will only get more difficult to keep the IRS from discovering the account, to maintain the account in a safe and secure institution, and to access your funds. Now is the time to consult with U.S. tax counsel on what to do about your offshore assets, how to minimize your exposure, how to bring the assets into compliance, and how to safely access your money.

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