We have previously written about Israel’s willingness to enforce the Foreign Accounts Tax Compliance Act (FATCA) on behalf of the IRS. See, for example, my article “Israel Is Becoming the IRS’s Strictest Enforcer of FATCA” (Tax Notes International, Volume 75, No. 6, August 11, 2014). Recent events in Israel further support that conclusion. The lesson is that if you have foreign financial accounts in Israel that are not in U.S. tax compliance, the window to come into compliance is closing rapidly.
Earlier this month, the Israeli Supreme Court rejected a challenge to the implementation of FATCA in Israel. The plaintiffs in Israel argued that FATCA violated Israeli sovereignty and violated their individual privacy. The Israeli Supreme Court rejected these arguments and thereby cleared the way for banks in Israel to report account information to the Israeli Tax Authority, which will then transmit the information to the IRS. This most recent challenge to FATCA failed in Israel, following similar failed challenges in the Cayman Islands and Canada.
September 30, 2016 is the FATCA implementation date in Israel. Any financial accounts in Israel belonging to a U.S. citizen or green card holder or with any connection at all to a U.S. person (including a U.S. telephone number or email address), will soon after be transmitted to the IRS.
Note that taxpayers still have thirty days to object to the inclusion of their banking information in the transmission from Israel to the United States under FATCA. However, under U.S. law, such a challenge must be reported to the U.S. Attorney General.
It is not too late to bring Israeli assets and Israeli income (whether bank interest, investment gains, rental income, business income, etc.) into U.S. tax compliance. However, every additional day of non-compliance only heightens the risk of discovery by the IRS because the transmission of information from Israel to the U.S. is imminent. As long as the IRS does not already know about the foreign assets and as long as the taxpayer is not already under IRS audit or investigation, a taxpayer can come forward voluntarily, declare the foreign assets and pay a much lower penalty than if the IRS discovers the foreign assets or learns about the Israeli assets from the FATCA transmission. Moreover, taxpayers whose non-compliance is deemed to “non-willful” (i.e., more benign, less “guilty” of intentionally hiding assets or income), the penalties are even lower (0% if the taxpayer resides abroad).
Please contact us for a consultation regarding U.S. tax compliance for offshore assets, whether in Israel or elsewhere. FATCA has now been adopted by 113 foreign countries, all of which will report account information and income data to the IRS.