On this tax law blog, we frequently caution taxpayers holding foreign, undisclosed accounts that the U.S. government continues to redouble its efforts to detect and prosecute offshore tax evasion through secret accounts. A significant portion of these efforts has been directed at implementing FATCA at home and in nations across the globe, including in Israel.
According to the U.S. Department of the Treasury, to date, the U.S. government has signed Model 1 or Model 2 international government agreements (IGAs) with more than 80 nations. Of these 80 nations, FATCA is already in effect and in force in more than 60 nations. The U.S. government has also reached agreements in substance with more than 30 nations. In jurisdictions where FATCA is in effect, U.S. taxpayers with undisclosed accounts face a significant risk, if not a near-certainty, that their foreign financial institution will report the account to the U.S. government.
Israeli Supreme Court Clears Path for Foreign Account Disclosure to IRS, DOJ
In a number of nations, including Israel, privacy advocates have expressed high levels of concern or outright outrage over the proposition that domestic (Israeli) banks would be required to provide account and financial information to a foreign government (the U.S. Government). Unfortunately for privacy advocates and individuals holding undisclosed accounts, these efforts have been predominately fruitless. The decision in the Israel Supreme Court case is not an exception to this general handling of privacy concerns.
The roots of the matter arose in 2014 when the Israeli government signed a Model 1 IGA and a related agreement with the U.S. government. Knesset (parliament) had issued final approval for the law enacting FATCA in Israel on August 1st, 2016. A number of petitioners including dual American and Israeli citizen, Rinat Schreiber, had challenged the law claiming that its requirements were a violation of her privacy and Israel’s Basic Laws of Human Dignity and Liberty. Earlier in September 2016, an Israeli court had placed a temporary injunction in place halting the implementation of the law.
Without delving into an analysis of Israeli law which is beyond the scope of this blog, the court ruled against the petitioners finding that FATCA did not violate Israeli citizen’s privacy or rights under the nation’s laws. Justifying the three-judge panel’s decision, Israeli Justice Menahem Mazuz stated that, “Privacy in modern life is very limited. This is nothing new, the only change is that the regulations have now been codified into law.” Another Justice on the panel stated that “As long as the US law is in force, there is a presumption of constitutionality in regards to its purposes.”
What Does FATCA Mean for Holders of Secret Israeli Accounts?
For a variety of reasons, Israel has long acted as a relatively safe and convenient location for many individuals to open accounts. For some, their dual-citizenship status and frequent presence in both nations makes it convenient to hold foreign accounts. For other individuals, a belief that Israel was a safe and confidential place to keep their assets spurred their actions.
Unfortunately for dual citizens, FATCA has already resulted in unexpected difficulties. Some Israeli banks, such as Bank Leumi, have refused to open new accounts for U.S. citizens due to risk and regulatory burdens. The bank has even gone so far as to close accounts of U.S. citizens containing less than $50,000. However, aside from introducing inconvenience and difficulties to the day-to-day lives of expats and others, the law can result in serious tax penalties.
Under FATCA, foreign banks are extremely likely to comply due to the extreme withholding penalties that can be imposed by the U.S. government. Foreign financial institutions that fail to comply with FATCA are subject to a penalty of up to 30 percent on U.S. source income.
As such, taxpayers who fail to make timely, annual disclosures are likely to face FATCA, FBAR, or other reporting penalties. Under FATCA, an initial failure to file Form 8938 or comply with other aspects of the obligation can be punished by an initial penalty of $10,000. Continued noncompliance with the disclosure requirement can result in additional fines and penalties up to $50,000. When there is an underpayment of tax attributed to a non-disclosure of foreign assets, an additional 40% substantial understatement penalty can apply. Penalties for additional failures to disclose foreign accounts can also apply.
Secret Accounts in Israel? OVDP May Provide a Way Out
If you have secret, undisclosed accounts in Israel, the window to take advantage of voluntary disclosure laws that can mitigate the fines and penalties you could face is rapidly closing. Both Streamlined Disclosure and standard OVDP are available and it’s important to consult with a tax lawyer to understand which program is appropriate for your situation. However, if your undisclosed accounts are discovered before making your voluntary disclosure, OVDP will be unavailable and you can theoretically face the full force of fines and penalties.
If you have concerns about your undisclosed financial accounts in Israel, the time to take action is now. Contact the Tax Law Offices of David W. Klasing to discuss your foreign disclosure options. Our tax professionals can work to mitigate the situation and penalties you face. To schedule a confidential, reduced-rate consultation, call our tax law firm’s Los Angeles or Irvine offices at 800-681-1295 today.
