For Israelis With Millions in Swiss Bank Accounts, Now's the Time to Come Clean

The Tax Authority is cracking down, but alongside intimidation and arrests, tax-dodgers can get lower fines if they voluntarily disclose.

Bloomberg

“A 60-year-old man came to us with a tattered plastic bag, and it turned out that he had 14 million shekels in a Swiss bank account. The man said that his father had fled some country, hidden the money in Switzerland because everybody said that was where the money should be kept, didn’t touch it for 30 years and he inherited it. In another case, a woman of about 90 who fled the Holocaust with gold bars put them in a Swiss bank. At one point bank officials asked her to convert the gold to dollars or euros, and now she has a bank account of 15 million shekels that she wants to prepare for the next generation.”

That is how attorney Uri Goldman of the law firm Goldman & Company describes some of the Israelis who hold Swiss bank accounts. His company deals with dozens of requests submitted for voluntary disclosure, most of them anonymously.

“Management is usually very solid, so the yield is low, and so are the taxes,” he says. “These are very private people who usually do not give their real names at the first meeting. We call them ‘Jacob files,’ and they add their names only later, before the lawyer declares, as procedure requires that he has power of attorney,” Goldman says.

The arrests of Israelis who hold unreported bank accounts in Switzerland, the searches that were conducted in their homes, the publication of their names and occupations, and the exposure of the amount of money in their accounts are all part of the campaign of intimidation that the Tax Authority has been waging in recent months.

The data revealed last week by Ronny Hacham, deputy head of the Tax Authority’s investigations and intelligence division, shows that since September, 620 Israelis have taken advantage of the opportunity for voluntary disclosure, which allows them to own up to unreported income and avoid criminal proceedings. The total sum in question is 2.5 billion shekels ($640 million), an average of $1 million for each person who came forward – all of it previously unreported.

The new voluntary-disclosure procedure, which allows those who have hidden capital from the government for many years to negotiate anonymously, is a temporary measure that began in September 2014. People report to the Tax Authority through their attorneys or someone else who holds power of attorney.

Under the Tax Authority’s system, those who hold such talks may decide whether to reach an agreement – in other words, to reveal their identities – report their capital and pay the required tax, or remain anonymous and continue breaking the law. But if the Tax Authority should find anyone who chose to remain anonymous, he or she risks criminal indictment and a higher tax payment.

The Tax Authority does not give those who disclose their accounts voluntarily an exemption from interest and linkage, nor has it promised to exempt them from fines. Still, attorney Tal Atsmon, the head of the tax department at the law firm Goldfarb Seligman, who has dealt with dozens of cases of voluntary disclosure worth hundreds of millions of shekels, says that in preliminary hearings officials tend to signal their attitude toward fines.

He says that only those who can furnish proof of the source of the unreported money will not be asked to pay tax on the principal. Those who cannot could find themselves paying 10% to 15% of the principal in taxes, even if the principal was not at all subject to tax in Israel. This is a kind of fine beyond the tax that they will be required to pay on the profits from the capital and the interest on the account.

A common interest

“Unlike the previous system, which may have been bureaucratic and not uniform but did not require full proof of the source of the money if none existed, the Tax Authority is making a big deal about it this time,” Atsmon says.

“Under the previous system, they would look at who you were, and if they saw that you were a gym teacher and that a million dollars had suddenly appeared in Switzerland in your name 15 years ago, they knew perfectly well it had not come from teaching gym in Switzerland. We would say that it was a gift from your wealthy mother-in-law, bring the proof that your mother-in-law was wealthy and that there was indeed an inheritance – and it would be over. It’s clear that money transferred to you 15 to 20 years ago can’t be used as proof, since after all, everybody hid the money and the person who bequeathed it had probably died long ago.

“Now the Tax Authority is going further and wants me to show the smoking gun. If full proof does not exist, even if they say they believe us, it means a fine that could be as much as 10% to 15% of the principal. The amount of the fine is set according to the tax assessor’s judgment, how much he sees the proof on the one hand and doubts on the other.”

As far as the tax calculation of the principal, all the possibilities are open to negotiation, but for the most part when an old account is involved, officials consider the amount that was in the account on January 1, 2005 (if there were deposits since then, of course, they are taxable). In other words, the principal is the balance that was in the account, including profits that the account accrued over the years, and the profits since 2005 are taxed in any case.

The green queue

Goldman says that in the case of an account whose balance has dropped over the years, the tax on the principal will be calculated on the higher amount. For example, a client of his who had 40 million shekels in 2003 and has only a million shekels left now will pay the higher amount.

“Taxing the principal is the biggest variable in voluntary disclosure, since we can plan for everything else, more or less. It’s absolutely unfair to tax the principal. After all, if the situation were reversed and the Tax Authority were to seize the account and wanted to begin criminal proceedings, they would have to prove the source, and how could they prove something that happened 80 years ago?” asks Goldman

He answers: “They have to be lenient with anyone who does voluntary disclosure. If the source is not clear, that should not be punished. That is what annoys people the most. How can a 90-year-old woman bring proof of the money that her parents deposited 80 years ago?”

The new system includes a Green Channel – although for the time being the option is only available for one year – for those with no more than 2 million shekels of capital and the income from it liable for tax is no more than 500,000 shekels. Those who qualify can voluntarily reveal their income and be exempt from any legal proceedings in a fast-track process that involves no negotiations with the authority.

The authority said it would impose no fine for those who report through this channel, but taxes are imposed on the principal, which is generally set at a relatively low rate. In cases where it can be proven that the money was gotten through an inheritance, it won’t be liable for tax.

The average figure of a million dollars per case of unreported capital squares with the number that tax officials obtained when they arrested a Swiss private banker in Tel Aviv last June. Investigators found a list of clients on his laptop that showed on average they had $500,000 to $1 million deposited in unreported accounts.

The list was found almost entirely by chance. The authority was pursuing Boris and Avisar Weissman, who owned a chain of medical clinics overseas and were suspected of not reporting income from Swiss bank accounts. The investigation led them to the banker, Roni Elias, who worked for Switzerland’s UBS and his client list, which has since led to the arrests of 32 people.

The Tax Authority say there are three other lists unconnected with Elias. The list that has been acted on doesn’t include tycoons or top businesspeople, but mostly upper-middle class people. Among those is a district court judge and his wife, an attorney, an executive for an engineering firm, a relator and a university lecturer.

Perhaps the most surprising person to appear on it is a 42-year-old social worker from Holon, who was arrested on suspicion of having secret accounts in three different banks in the United States and Switzerland holding $1 million.

Social worker or not, authorities say that a search of her home uncovered documents that showed she was receiving hundreds of thousands of dollars from trusts domiciled in known tax shelters like Liechtenstein and Panama, and transferred by overseas bank accounts registered in her name. Her husband is also being investigated for tax evasion.

Atsmon says that most cases of voluntary disclosure that he has seen involves “ordinary people who have ordinary standards of living for people of the upper middle class, and nothing more. Nothing in their lives would indicate that someone in their family ... put money in Switzerland for a rainy day, which then grew to half a million or a million dollars,” he says.

“A smaller percentage of the people who come to me have left some of the money they earned from business overseas. They had a few opportunities to earn money abroad in some deal, and decided to leave in a secret account. The account earned money and grew to a million dollars.”