The US is gearing up to reach out to American citizens abroad that it believes have not paid their fair share in taxes. Israel is set to begin enforcing new US rules on reporting the existence and activities of accounts in Israeli banks held by American citizens or dual-citizens. That is in addition to a marked increase in audits and investigations of American ex-pats in Israel by the US — to the extent that a rumor has surfaced that the Internal Revenue Service has opened a “branch office” in Israel to handle the volume of audits.
As of Tuesday, Israeli banks will no longer serve American customers who refuse to sign documents that will allow banks to report on their accounts to US authorities. New rules issued by the Bank of Israel will bring the country into full compliance with the requirements of FATCA — The Foreign Account Tax Compliance Act — which imposes harsh penalties on non-US banks that do not comply with US reporting requirements. The rules were listed in a note issued by the BOI to banks in Israel on Sunday.
US citizens — or dual Israeli-American citizens — who have accounts in Israeli banks are now required to sign documents authorizing the bank to reveal information about their assets to the IRS, the US Treasury, and the Justice Department. Customers who refuse to comply will be issued a bank check for the amount of money in their account, which will be closed down.
FATCA reporting requirements officially kick in on July 1 of this year. At that time, banks in countries around the world — including Israel — will have to report to the US government on the amounts and activities of accounts in their institutions belonging to US citizens, as well as accounts belonging to Israelis that American citizens are authorized to sign for. Banks that are not in compliance will find the US Treasury withholding 30% of settlement funds for transactions with American entities. It’s a stiff penalty that no bank wants to be subject to — hence the recent activity by Israeli banks to persuade, or browbeat if necessary, their customers with American passports to sign the required documentation.
The BOI’s note instructed banks to make whatever preparations were necessary to ensure that the reporting process went smoothly, but the note only makes official a process that has been ongoing for months. One bank officer in Tel Aviv told The Times of Israel that at this point, her institution was dealing with the last holdouts who, for one reason or another, had failed to sign documents allowing the bank to transfer the information demanded by the US. “We hate to lose accounts, but we are not going to be able to afford to keep customers who prevent us from complying,” she said. “The penalties would put us out of business.”
Of at least as much concern to American citizens in Israel is a recent upsurge in IRS audits — which many believe is connected to the preponderance of Israelis who over the years have received the IRS child tax credit. “I have over 30 years of experience on the table, of operating in this market, and the audits have increased tenfold, if not more,” said Philip Stein, an American-trained tax accountant. “We do believe it is from the fact that there was a lot of fraud over the child tax credits.”
Since 2001, US citizens have been able to file for a tax credit of up to $1,000 per child. While many US citizens in Israel had filed income tax reports since living in Israel and began requesting the tax credits when the law went into effect, there were others who didn’t file taxes, but began requesting the child tax credits without declaring their income accurately, said Stein.
According to Stein, the IRS considers Israel a top target for fraud investigations because so many people have filed for the credits – especially large Haredi and Orthodox families, who are said to be high on the “suspect” list for fraud. But if there was fraud, it was in most cases not intentional, said Chaim Korn, an authority on US tax issues. “There were some fly by night tax preparers for whom accurate tax returns was not a priority,” said Korn.
Many of these preparers took out ads in local newspapers or spread the word in neighborhoods with large populations of American-Israelis, many of whom were finding their financial way in Israel; the tax credit money was a big help in making ends meet. Unfortunately, said Korn, not all the preparers knew what they were doing, and now their ex-clients are suffering.
With some 250,000 ex-pat Americans in Israel, many of them with large families, the IRS will have its hands full if it plans to audit all or most of those who received the tax credits — and that has led to a persistent rumor in Israel’s financial community that the IRS has opened up a branch office in Israel to deal with these audits.
The IRS did not respond to requests for confirmation, and there is no online information confirming the existence of this office — but the evidence for its existence is out there, if one just looks for it, said Korn. “There are many American-Israelis who have been asked to vouch for their income and submit Israeli pay slips and tax information without being required to translate the documents, as had been the norm in the past — and as one would expect if the documents were being shipped to Washington.”
Many Israeli-Americans have not worked in the US for decades, and some haven’t even been back to visit for many years — but they, too, are included in the FATCA regulations. For better or worse, he said, Israelis who are also American citizens now have two tax men to worry about.