IRS Is Coming for American Tax Evaders in Israel

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Pay Up: A man holds a sign reminding Americans to file their taxes before the IRS deadline.
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Pay Up: A man holds a sign reminding Americans to file their taxes before the IRS deadline.

By Nathan Guttman

Published May 09, 2014, issue of May 16, 2014.
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Israel may still be a safe haven for Jews around the world, but it is no longer their tax shelter.

Thanks to a new agreement signed on May 1, Israel will turn over to the U.S. Internal Revenue Service information on all American citizens holding accounts in Israeli banks. As a result, Americans trying to hide income and assets in Israeli financial institutions will now be exposed to the IRS.

This is certain to lead a significant number of Americans to be confronted with penalties and back payments for money deposited in their Israeli accounts.

But the accord, which was signed under the 2010 Foreign Account Tax Compliance Act, has also caused a scare among many Americans who had never thought of themselves as tax evaders. These include American Jews who own real estate in Israel, children of American citizens who had never even lived in America and Green Card holders who maintain accounts in Israel. Many of them are now in a frantic rush to comply with American laws they did not even know applied to them.

Ofer, an Israeli in his 30s whose American parents immigrated to Israel before he was born, had never paid attention to the fact that he holds American citizenship. It’s been years, he said, since his U.S. passport had been renewed. But now, said the resident of central Israel who, for fear of alerting the IRS, would only agree to be identified by his first name, he may have to pay significant fines to a country he has never lived in.

“This came out of the blue,” Ofer said. “I’ve been paying taxes in Israel all my life, and didn’t think I was doing anything wrong.”

At the advice of his tax accountant, Ofer sent a letter to the IRS, asking for lenience. But if rejected, he could face a hefty fine.

Israel was not given much of a choice about joining FATCA. Had it refused, Israeli banks would have been barred from doing business with financial institutions in the United States, effectively shutting down much of the banks’ activity. “The agreement,” said the Israel Tax Authority’s deputy supervisor for state revenue, Frieda Israel, “provides Israel the status of a country with a signed agreement with the United States. It will make it easier for the necessary financial institutions to provide the information on American accounts in Israel.”

FATCA does not target Israel specifically, and is part of a global effort by the United States to do away with tax havens that have allowed citizens to hide billions of dollars offshore. It is directed at the banks rather than the customers, and requires them, once an agreement is signed, to identify and hand over to the IRS all documentation and information of American account holders.

Twenty-eight countries have already signed FATCA agreements, and discussions are underway with another 75. Lack of compliance could lead not only to closing the doors for banks doing business with America, but also to huge fines, such as the $780 million paid by the Swiss bank UBS for concealing information about account holders from the U.S. government.

Under the new agreement, Israeli banks must now inquire whether customers opening new accounts are American citizens or permanent residents. They will also have to comb through existing accounts to identify Americans based on their previous declarations, birthplace or any other information the bank may hold. Once identified, the names and account information will be turned over to the IRS.

U.S. law requires citizens to file a yearly tax report regardless of their country of residence and regardless of taxes they’ve already paid in their host country. The first $96,600 in income earned abroad is generally excluded from taxation, and some countries have reciprocity agreements with the United States that enable American taxpayers to offset taxes they may have paid a foreign government against what they would otherwise owe Uncle Sam. But Americans still must file the appropriate yearly tax forms documenting they qualify for these exemptions. Americans are also obliged to report all overseas bank accounts that have a balance of more than $10,000.

FATCA’s reach is not limited to American citizens who have moved to Israel; it includes many who had had little to no contact with the United States.


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