A recent precedent-setting ruling in a U.S. Federal court reflects the enormous fines U.S. citizens are at risk of paying if they hold bank accounts overseas that are unreported, even by mistake. These fines can reach up to half of the amount in such accounts.
This ruling is relevant for American citizens and green card holders living in Israel, who are required to report bank accounts they have in Israel or in other countries.
In contrast to the system prevailing in Israel and most other countries, American citizens must report bank accounts held outside the United States, as well as any revenue accrued anywhere in the world, even if they are not U.S. residents. According to U.S. law, anyone holding more than $10,000 overseas must fill an annual Foreign Bank Account Report (FBAR). The fine for non-disclosure is 50% of the highest balance in that account in the preceding year.
The case of Alice Kimble: a lie or a mistake?
The ruling was a result of the case of Alice Kimble, who had two Swiss bank accounts, with UBS and HSBC. She failed to fill a FBAR report and did not report the accounts in her annual tax returns.
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In 2009, the IRS opened a voluntary reporting program for reporting overseas accounts. It included avoiding a criminal record in exchange for reporting undisclosed accounts. The program was launched after it turned out that many U.S. citizens were using the services of UBS to avoid paying taxes in the U.S. Kimble joined the program and presented corrected tax returns, but in a report for 2007, in a box asking whether she had foreign accounts she indicated she didn’t.
The Internal Revenue Service fined her for half of the highest balance in her account that year, in this case $700,000. She paid the fine but appealed, asking the court to be reimbursed.
The ruling, given in December 2018, stated that the fact that she replied “no” to a question about foreign accounts was an evasion of her lawful obligation, not enabling her to argue that she was unaware of her error.
Kimble did not tell her accountant about her foreign accounts and did not ask him how to answer the question when filing her returns. The ruling stated that the fact that the law does not oblige her to seek an accountant’s help did not make it less likely that she was consciously lying.
According to the ruling, checking a box indicating no foreign accounts, even if done in error, cannot be a basis for arguing later that there was no intention of cheating, since with such violations all that’s necessary is to prove the facts. An erroneous filling of a return can result in other fines as well.
The tax system gets more complicated
FBAR reports are filed separately from regular tax returns and must include any financial arrangement that can be construed as a bank account, including securities, corporate accounts, trust accounts, and possibly pension and professional development funds. The law is not new but only in recent years has there been a growing awareness of the need to strictly adhere to its stipulations. The Kimble ruling sheds light on these legal requirements, which are ignored by many people.
According to some estimates, there are hundreds of thousands of U.S. citizens and green card holders living in Israel. Over the last decade, the U.S. administration has tightened its supervision over foreign accounts held by Americans. For U.S. citizens living outside the country, this makes dealing with the American tax system – already a tough proposition – even harder and more complicated.
Giving up on America
The result of all this is a growing number of people giving up their American citizenship. Their numbers across the globe rose from 930 in 2012 to 5,400 people in 2016. In 2017 it dropped for the first time, to 5,133 people. Last year it dropped further, to 1,100 in every one of the first three quarters of 2018.