United States citizens who have accounts or financial assets in Israel soon will have even more incentive than previously to disclose them to the Internal Revenue Service (IRS).
The Foreign Account Tax Compliance Act (FATCA), which takes effect July 1 in Israel, is meant to combat tax evasion and fraud by requiring foreign banks to report to the IRS information about accounts owned by Americans exceeding $50,000. (Technically, Americans already have had to report worldwide accounts if the aggregate value is more than $10,000.)
This has been four years in the making, since the law passed in March 2010. The U.S. Department of the Treasury already has negotiated FATCA agreements with more than 50 countries.
The impact in Israel could be significant, as the act also applies to U.S. citizens living abroad. There are roughly 150,000 to 200,000 Americans residing in Israel with accounts there, according to Dave Wolf, tax partner of Hacohen Wolf Law Offices based in New York, Jerusalem and Tel Aviv.
Reactions among those affected have been mostly negative, he said.
“People are confused, worried and angry and are looking into ways to become compliant even if they thought they already were,” Wolf said. “Also, some are considering giving up their U.S. citizenship.”
As a result of the agreement, Israeli firms will need to report U.S. accounts to the Israel Tax Authority, which in turn will send the information to the IRS. Foreign firms that don’t comply with FATCA provisions face a 30 percent withholding tax on any transaction made from the United States.
“Every bank in the world that takes deposits from American-related entities or manages their investments becomes a de facto reporting agent for the IRS and Department of the Treasury,” said Selwyn Gerber, CPA and founder of Gerber & Co., a full-service accounting firm in Century City.
“For the U.S., it’s a win. They’ve collected billions, and there’s probably much more coming, so it’s been a revenue enhancer,” he continued. “For the global economy, having such huge and onerous obligations on banks puts them in a whole different position to be policemen and whistleblowers as well as bankers. It’s a whole new world for the international banking industry.”
Because of the new requirements, foreign banks are now reluctant about — if not outright against — accepting American clients, according to Wolf.
“Many foreign banks simply refuse Americans as new clients and will tell the old ones to move their assets, even if they are compliant,” he said. “Americans are now persona non grata in the international banking world.”
That isn’t the only reason Americans with accounts in Israel may be more likely to close them when FATCA takes effect, according to Gerber, who pointed to the costs and additional reporting requirements.
“When you have accounts overseas, you have to disclose all details of those assets,” he said. “In the U.S., you basically just have to pay tax on income earned on U.S. portfolios. You don’t have to report the assets you own in the U.S.”
Foreign banks once provided the secrecy necessary for money laundering and tax evasion, and FATCA’s goal is to prevent such cases. Its impact is wide-ranging, though, affecting Americans living in the United States who have accounts abroad, U.S. citizens who have not lived in the States for years, and those who have signatory rights on foreign accounts they share with a U.S. citizen.
According to Chaim Korn, a U.S. finance and tax consultant in Israel, it affects many who have never lived in the United States as well as green card holders.
“It has affected, I believe, many American citizens overseas deciding not to obtain U.S. citizenship for their newly born children,” he said.
It also means penalties for those who don’t pay taxes on their accounts. Non-compliance can be considered both a civil and criminal offense, with up to five years of jail time and fines amounting to close to $100,000 or 50 percent of the highest balance.
For those who haven’t been paying the required taxes, there are two main options. One provides a penalty structure for those who voluntarily report all their formerly undisclosed foreign financial assets and accounts. The disclosure period is the most recent eight tax years for which the due date has already passed. If accepted into this program, individuals will be cleared from any criminal prosecution.
The other option is available only for nonresident U.S. taxpayers who have lived abroad since Jan. 1, 2009, and who haven’t filed a U.S. tax return during that period. It requires the filing of delinquent tax returns from the past three years, as well as the filing of a Report of Foreign Bank and Financial Accounts for the past six years. If the IRS accepts the case, it will not assert penalties.
Just make sure, Gerber said, that you contact the IRS before the IRS finds you.
“If you have a foreign account, you need to come clean now; the sooner the better,” he said. “The one strategy that won’t work is the hope that it will go away — because it won’t go away.”