As U.S. turns up heat on tax laws, Americans in Israel start to sweat

An increased commitment by the U.S. to enforce more strictly tax laws regarding the declaration of offshore accounts have some American-Israelis who never bothered filing the appropriate form worrying about the right way to proceed. While some accountants with worried clients say it is time to come clean, others say the government is focusing on those trying to use Israel as a tax haven.

According to U.S. law, Americans are required every year to file a document called "Report of Foreign Bank and Financial Accounts," or FBAR, if they own or have signature authority over accounts outside the U.S. whose combined maximum value exceeds $10,000. In the wake of a recent tax evasion scandal involving the Switzerland-based UBS bank, the government has updated the FBAR, asking for more detailed information, and stepped up its efforts to hunt down those who fail to file the form.

For the first time this year, the FBAR requires the filer to report the exact value of each account. Previously, the form asked only for a range. Another significant change is that the requirement to file an FBAR now applies not only to U.S. citizens and residents but to anyone who enters the country to do business there. The deadline for filing the form is June 30. Different from a U.S. tax return, there are no extensions for the FBAR.

While filing an FBAR does not necessarily mean paying higher taxes, the form helps the Internal Revenue Service identify and investigate instances where taxpayers have used foreign accounts to evade U.S. taxes. Last July, the United States Senate estimated that the state loses around $100 billion annually due to offshore tax evasion.

"The U.S. government always had this law on the books but the compliance worldwide, including Israel, appears to have been somewhat lax," said Alan Deutsch, an American-born accountant who lives in Beit Shemesh. "But since the IRS has allocated more personnel to pursue non-compliant people and since the penalties have gotten much more stiff, those who may not have complied in the past are well-advised to take heed of the new rules." He added the assumption that "a very large percentage" of Americans in Israel need to file the FBAR. According to the new guidelines, the civil penalties for failure to file can be up to 50 percent of the balance of the undeclared account, Deutsch told Anglo File.

Blame it on Obama

President Barack Obama is making good on one of his campaign pledges by promoting the more strict enforcement of tax laws, Deutsch continued. "He's not only causing a lot of change in the political world but also in the financial realm," he continued. "He's trying to shake people up and cause them to comply, as it's been known for a long time that there are U.S. citizens who may have undeclared accounts and he wants to bring them into the fold." He added: "It takes a few test cases and cases made public to get a lot more people to comply. I would expect the government to go after a few people, so that the word gets out that they're serious about this."

Phillip Stein, a Herzliya-based accountant, told Anglo File that while President George Bush's government did not really enforce the law, the Obama administration has made it clear it will go after those who don't declare their offshore accounts. Another reason why some Americans in Israel are "panicking," he said, has to do with the fact that Congress recently linked the requirement to file the FBAR to the U.S. Patriot Act, effectively making the failure to file a criminal offense in addition to a civil offense. According to the IRS Web site, "failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000." However, the site elsewhere states that, "If you learn you were required to file FBARs for earlier years, you should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. No penalty will be asserted if the IRS determines that the late filings were due to reasonable cause."

Stein said the IRS recently started "to get tough in the enforcements of these rules." Yet most American-Israelis don't need to be scared, he added. "The focus is less on people who live here but rather on those who live outside of Israel but use Israel as a tax haven." Many U.S.-Israelis are alarmed because the IRS has publicized its expanded efforts to crack down on tax evaders, Stein said, but "the IRS is only as good as the information it gets from a third party. If they don't have third-party information it's difficult for them to track someone down."

Together with the stricter rules for the FBAR, the IRS announced changes to help taxpayers comply with the law by voluntarily disclosing previously their unreported foreign accounts, Stein added. "If you come forth now and declare these accounts, the IRS won't impose the criminal penalties, however, you will have to pay a 20 percent penalty of the highest balance you had in the accounts."

While offering somewhat of a carrot, this policy can lead to "terrible scenarios," Stein said. "Let's say someone was buying an apartment [in Israel] for $500,000. His [American] bank sent the money to his [Israeli] account for just one day, and from there, it went straight to the purchase of the apartment. Technically, under the rules of voluntary disclosure, he or she owes the IRS $100,000 [if he or she didn't file an FBAR that year]. People like that have a real dilemma: if they do nothing and the IRS catches them, there could be criminal charges. On the other hand to report it under this new program and pay $100,000 is a bit absurd."

For more information about filing the FBAR, turn to a certified public accountant or e-mail FBARquestions@irs.gov.