The IRS and U.S. Department of Justice (DOJ) continue their investigations into foreign banks that assisted U.S. taxpayers in hiding assets from the IRS. There have been reports that Bank Leumi and other Israeli banks are now under investigation. Taxpayers with undeclared accounts at Israeli banks are vulnerable to discovery and prosecution.
The new focus on Israel follows the IRS’ success against Swiss banking secrecy. In 2009, U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to pay $780 million to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation. In a stunning breach of hitherto ironclad Swiss banking secrecy, UBS was also compelled to disclose to the IRS the identities of thousands of Americans with formerly “secret” accounts. In February, 2011, DOJ charged bankers at Credit Suisse with offering undeclared accounts to taxpayers. The Credit Suisse bankers were also accused of advising their U.S. clients to transfer funds to Bank Leumi in order to avoid discovery by U.S. authorities. Bank accounts in Israel appear to be one of the next targets. People with undeclared accounts in Israel should take action in light of the IRS crackdown on offshore accounts that are not tax compliant.
Many American Jews maintain bank accounts in Israel for various reasons: business ties, costs associated with owning real estate in Israel, accounts to assist family members, etc. It is completely legal to have an account in Israel, provided that (1) the account is disclosed to U.S. authorities on IRS Form 1040, Schedule B and on the FBAR, Report of Foreign Bank Accounts, Form TD 90.22-1, and (2) income earned in the account (including interest, dividends and capital gains) is reported to the IRS and taxes paid on this income. So long as those two conditions are met, the account is tax compliant. If the account is not tax complaint, a U.S. taxpayer who owns or has beneficial interest in an Israeli account can be prosecuted for civil and criminal tax fraud.
Israel is in a unique situation vis-a-vis the IRS because of ties between Israel and Jews around the world, including Jews who have inherited “Holocaust accounts”. One example of a “Holocaust account” is an account established in Switzerland by European Jews prior to the Holocaust, in an attempt to safeguard their assets from the rise of Nazi Germany. Another example is an account established after World War II by a Holocaust survivor in order to receive German reparation payments. In either case, tax avoidance was not the motivation behind the establishment of the accounts. (The same can be said of Greeks fleeing persecution in Turkey, who put their funds in Switzerland for reasons of safety and stability, or Egyptian Jews fleeing the military coup and dictatorship of Gamal Nasser, or various other refugees who put their money is Swiss banks to preserve and protect their assets in the face of persecution and upheaval.) Now, many decades later, their descendants who have inherited these accounts are in a position of unintended tax non-compliance because they were not aware of their obligation to annually report these accounts to the Treasury Department on the FBAR, even if no tax was due.
Some U.S. taxpayers mistakenly believe that the IRS is reluctant to investigate Israeli banks because of Israel’s close ties with the U.S. However, there is no indication that Israeli banks, unlike Swiss banks, would be immune from the IRS. In fact, Israel and the U.S. have a long history of close cooperation in tax matters.
Whereas Swiss bank secrecy laws presented a formidable challenge to the IRS prior to the UBS case, pursuing undisclosed accounts in Israel will not require nearly as much effort. The tax treaty between the U.S. and Israel enables the two countries to “exchange such information as is pertinent to . . . fraud or fiscal evasion in relation to the taxes which are the subject of this Convention.” Cooperation between the U.S. and Israel is routine in many matters, tax and otherwise. According to the Israeli Ministry of Justice, “the [Israeli Government] has cooperated with requests from U.S. law enforcement in matters of financial crime . . . .” Although this statement refers to Israel’s fight against money laundering, it is not a stretch to conclude that the Ministry would cooperate with requests from the IRS in matters specifically pertaining to undisclosed bank accounts.
In addition, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a Mutual Legal Assistance Treaty (MLAT). The MLAT states that the U.S. and Israel “express their understanding that this treaty applies to . . . criminal tax offenses . . . .” It is particularly noteworthy from an offshore banking perspective that for “serious [fiscal] offenses involving willful, fraudulent conduct,” the treaty even provides for the exchange of bank records.
It is unlikely that the IRS is specifically targeting “Holocaust accounts”. Indeed, whereas the 2011 IRS Offshore Voluntary Disclosure Initiative imposes a 25% penalty for offshore accounts, a specially reduced 5% penalty applies, in certain circumstances, to inherited Holocaust accounts. The presence of undeclared assets in Israel (whatever their source, including the cash-heavy jewelry trade) presents a desirable target to the IRS. Along these lines, in 2010, Bank Leumi took the extraordinary step of sending letters to its U.S. customers, strongly advising them to disclose their accounts to the IRS. That Credit Suisse bankers allegedly advised clients to transfer funds to Bank Leumi also presents the IRS with a roadmap to Israeli accounts.
It was the substantial U.S. presence of UBS, that made it vulnerable to U.S. prosecution. Likewise, large Israeli banks like Bank Leumi, with a U.S. banking license, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars of assets in the U.S., are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.
Amidst the specific enforcement action against individual banks, the larger context is the decline of banking secrecy world-wide.
The IRS has opened field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens”, including Liechtenstein and Monaco. Even Switzerland changed its internal law to allow for cooperation with foreign governments in tax investigations. While the IRS is intensifying its presence and its available tools around the world, there are indications that the IRS is concentrating more particularly on Israel.
Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in Israel must consider bringing such accounts into compliance.
In February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI), which closely mirrors the 2009 Offshore Voluntary Disclosure Program (OVDP), with a few refinements. The new penalties are 25%, greater than the 20% penalty under the prior OVDP, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.
The new OVDI presents an opportunity for taxpayers with foreign accounts, in Israel and elsewhere, who did not come forward under the former OVDP but still want to avoid criminal prosecution, to bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and Israel appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.