In this article, Asher Rubinstein, writes about the US Foreign Accounts Tax Compliance Act, or FATCA and a country that has been in the news for very different reasons recently: Israel.

In this article, Asher Rubinstein, writes about the US Foreign Accounts Tax Compliance Act, or FATCA and a country that has been in the news for very different reasons recently: Israel.

The offshore-onshore jurisdiction of Israel has, unlike most states, put its full governmental weight behind the efforts of the United States to scrutinise the foreign bank accounts of its citizens.

On 1 May Israel announced that it had reached an agreement with the US Internal Revenue Service to enforce the American Foreign Account Tax Compliance Act. The Model 1 agreement, under which Israeli banks will have to provide the required information to the Israeli government, which in turn will provide it to the US government, is reciprocal.

Israel’s eagerness to accede to FATCA was apparent long before the May 1 official announcement. In 2012 the Association of Banks urged the government to sign. Today, Israel appears to be unique among countries in its vigilance in upholding and enforcing FATCA within its own borders. Its Ministry of Finance has drawn up, but not yet passed, regulations to impose criminal penalties on Israeli financial institutions (including banks, brokerage houses, and insurance companies) that do not comply with FATCA's reporting obligations. Employees at private banks who knowingly assist clients in avoiding FATCA disclosures could face jail sentences as severe as 7 years.

This might have something to do with the fact that of all the foreign bankers, lawyers, and other professionals whom the US Department of Justice has prosecuted for helping American taxpayers commit fraud through the use of secret accounts, Israeli bankers comprise the second largest group, after the Swiss.

Note that any undisclosed account in Israel, or at a branch of an Israeli bank elsewhere, is open to discovery by the US government, whether through FATCA, a John Doe summons, or a treaty request. [Editor's note: this is more than one can expect from other jurisdictions such as Switzerland, which does not accept John Doe requests which seek the identities of unknown potential defendants.] The threshold amount for reporting foreign accounts to the IRS is low at only $10,000. The DOJ will prosecute US taxpayers with accounts of all values.

Israel’s banking privacy regime is not as well-known as that of Switzerland, but US taxpayers who have not reported their accounts, or the income earned in those accounts, to the IRS have long been using Israeli banks. As a result, within the last few years, Israeli banks have fallen foul of the DOJ and IRS for facilitating US tax fraud. The DOJ has investigated the Swiss branches of Bank Leumi, Bank Hapoalim, and Bank Mizrahi-Tefahot along with major Swiss banks such as Credit Suisse and Julius Baer. It is likely that many others are also being investigated for offering to set up accounts that have allowed Americans to escape taxation.

In 2013, the DOJ prosecuted many US taxpayers with undisclosed foreign accounts in Israel and at Israeli banks with branches elsewhere, among them:

-- David Raminfard (who failed to disclose his Israeli account, along with a Turks and Caicos entity, and accessed his funds via back-to-back loans);
-- Aaron Cohen (who had accounts in Israel and the Caymans and used back-to-back loans);
-- Moshe Handelsman (who had an account in Israel); and
-- Alexei Iazlovsky (who had an account at the Luxembourg branch of an Israeli bank).

Also in 2013, David Kalai and Nadav Kalai, two tax (i.e. tax-return) preparers in the US with Israeli clients, were prosecuted for facilitating tax fraud through the use of undeclared accounts at Israeli banks, including some with branches in Luxembourg.

Against this background, on 9 June, it was reported that Bank Leumi was trying to reach a settlement over the tax fraud probe with the DOJ and had set aside 1 billion shekels ($300 million) that it wanted to pay in return for a deferred prosecution agreement, the aim being to avoid being charged with a crime.

Even if a US taxpayer were to have an undisclosed foreign account without using foreign corporations, back-to-back loans, and other methods of hiding the foreign funds, he could still be the subject of an audit, an investigation, and civil penalties. Those penalties could exceed the value of the foreign account; even if they were to deplete it, the American taxpayer would still be responsible for the deficiency. The IRS would then proceed against his US assets.

As we have noted, the account holder need not have employed sophisticated methods of offshore concealment.

The following examples, all more benign, are still subject to IRS reporting:

-- the use of an account in Israel in connection with Israeli real estate (and if that real estate gives rise to rental income unreported to the IRS, then the taxpayer has a double problem);
-- the use of an account in Israel in connection with the support of relatives in Israel; and
-- Israeli accounts that remained open following immigration to the US.

The following scenarios could also trigger IRS reporting requirements:
-- Americans who immigrated to Israel (made Aliyah), still remain US citizens, and are obligated to report to the IRS their foreign accounts and Israeli income; and
-- Israeli children of American citizens who may never have even visited the United States or do not have any US tax nexus, but are still subject to US tax law and reporting requirements.

The tentacles of the IRS are global, both in terms of the extraterritorial reach of US tax law and in terms of the willingness of foreign governments and foreign financial institutions to sign up to FATCA and send reports to the US. In Israel's government and financial institutions, the IRS seems to have found partners that are readier, more willing and more eager than those of any other foreign country.