The Internal Revenue Service has turned its attention to U.S. citizens living in and outside of the United States, with foreign financial assets — including in Israel — that have not been reported on their tax returns.
U.S. law requires that taxpayers file a Report of Foreign Bank and Financial Accounts (FBAR) for all foreign financial accounts that exceed $10,000 at any point during the calendar year.
In the eyes of the IRS, failing to file tax returns and an FBAR is not kosher, and penalties can be severe. The ability to fly under the radar screen is over, and anyone who thinks he or she is not likely to get caught should think again. Failure to report foreign accounts can result in financial penalties of up to 50 percent of the account balance for each year of the violation, or worse — potential jail time for tax evasion.
Pursuant to the Foreign Account Tax Compliance Act (FATCA) passed in 2010, many countries, including Israel, are entering into an intergovernmental agreement with the United States, which will require foreign financial institutions to report to the IRS all information that is required under the law. Among the information required is the taxpayer’s name, address and account balance as of the last day of the year.
FATCA requires foreign banks to report to the IRS all assets belonging to U.S. citizens, regardless of whether they are living at home or abroad. These filing obligations have been in existence for many years; however, the existence of FATCA and related intergovernmental agreements increase the likelihood that the IRS will receive information from a foreign government or foreign financial institution regarding foreign accounts held by U.S. citizens.
Recently, some prominent U.S. taxpayers have been caught and are facing jail time (for example, billionaire H. Ty Warner, the creator of Beanie Babies). But it’s not only the prominent and super-wealthy that need to be careful. For example, if your child studied abroad in Israel, you may have set up a bank account there for him or her and he or she will need to report any income held in Israel on the U.S. tax return. If not, your child could face penalties.
Or, say you have a family member in Israel whom you visit often so you set up a bank account for yourself in Israel — you better make sure to report that money.
What if you failed to report this foreign money in past years? The penalty for willful failure to file the FBAR report is the greater of $100,000 or 50 percent of the account balance. The penalty applies year after year and is not limited to the account balance itself. You need to consider taking action now before the IRS has your name. U.S. citizens who have overseas accounts and who have failed in previous years to file U.S. tax returns or report the income from a foreign account should consider making a voluntary disclosure.
Taxpayers participating in the voluntary disclosure program must agree to file FBAR forms and tax returns or file amended tax returns for eight years, pay any tax and interest due, plus penalties.
One cannot participate in the voluntary disclosure program if the IRS has already initiated an examination, or if the taxpayer is already under criminal investigation. Once the IRS has you in its sights, it is too late to enter the voluntary disclosure program.
Although the tax, interest and penalties associated with voluntary disclosure can be expensive, waiting until the IRS receives the taxpayer’s name through a FATCA partnership and commences a civil audit or criminal investigation is likely to be far more expensive and can result in possible jail time.
It’s not all doom and gloom. The statute of limitations for the IRS to assess additional tax, interest and penalties is three years from the required due date (April 15, 2014, for a 2010 tax return). The statute of limitations is six years if there is a “substantial omission of income.” A substantial omission of income generally means an omission of more than 25 percent of the income required to be reported on a tax return. The statute of limitations for the FBAR filing is six years.
Accordingly, if there is a relatively minor amount of unreported income due an account that the holder was simply not aware of or overlooked, then the account holder should discuss with legal counsel, as well as his/her tax adviser, to determine if it is actually necessary to go into the voluntary disclosure program. The adviser may conclude that it would be satisfactory to simply file late FBAR returns and amend any U.S. and state or local tax returns for the omitted income.
FBAR filings are not limited to individuals. It is quite common for U.S. corporations, partnerships, estates and trusts to have foreign accounts. These entities must also file the FBAR returns. A U.S. corporation with a foreign subsidiary or division where a U.S. person has signature authority on a foreign bank account with funds in excess of $10,000 must also file.
In a nutshell, it is time for you and your loved ones to get real about Israeli accounts and consider a voluntary disclosure before the IRS gets your names, Social Security numbers and foreign bank account information.