Lately, we were contacted by several American citizens who received letters from Bank Hapoalim requesting that they provide proof that their account at the bank was properly declared to the Unites States tax authorities (the IRS). In addition, the bank requested from the clients to sign on a waiver of confidentiality and consent to report to the IRS information regarding the account. Even if the American citizen refuses to sign the waiver, the bank may still be required to transfer the information to the United States.
What was surprising regarding these calls is that the people receiving these letters closed their account at the bank years ago, even as far back as 2009. This is similar to Bank Mizrahi who sent letters to clients who closed their accounts in 2010.
According to U.S. law, all U.S. citizens (including green-card holders) have an obligation to pay U.S. taxes on their worldwide income regardless where they live. In addition, in cases where the aggregate value of all their accounts out of the Unites States exceeds $10,000 at any time during the calendar year they have to report this information on a special form commonly known as the FBAR.
American citizens have several options in order to fix their non reporting U.S. tax situation before the bank has exposed their name to the IRS.
The two main options are either participating in the Offshore Voluntary Disclosure Program or participating in one of the Streamlined Filing Compliance Procedures.
- Offshore Voluntary Disclosure Program (OVDP): This program provides a uniformed penalty structure for American citizens who come forward voluntarily and report all their previously undisclosed foreign accounts and assets. The voluntary disclosure period is the most recent eight tax years for which the due date has already passed. At the moment the program includes years 2009 through 2016 and there is no set deadline to apply. This procedure has a few stages, and can take a year or two until a final agreement is reached with the IRS after which it closes the file. If the taxpayer is accepted into the program, he will be cleared from any criminal prosecution. Once that occurs, the taxpayer will need to prepare and submit income tax returns and FBAR forms for the last 8 non compliant years together with other documents that need to be submitted as well.
Through this program, the taxpayer is obligated to pay all income tax due including any interest and accuracy penalty involved, and an FBAR penalty, of either 27.5% or 50% (depending on which bank the taxpayer had an account at), of the highest aggregate balance during the period covered by the voluntary disclosure.
In addition, if the taxpayer lives in the United States, there may be a requirement to amend state tax returns and report the undisclosed foreign income. Each state has its own rules regarding the procedure that needs to be followed in order to become compliant.
- Streamlined Filing Compliance Procedures (either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures): Through this program the taxpayer needs to file delinquent tax returns, for the past three years only, and to file delinquent FBAR's for the past six years. In addition, the taxpayer is required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBAR's was due to non-willful conduct. Non-willful conduct is conduct that is due to “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law”.
Through these programs, the taxpayer is obligated to pay all income tax due including any interest, and an FBAR penalty, of either 0% or 5% (depending on which of the Streamlined Procedures he is participating in) of the highest end year balance during the 6 year period covered by the Procedures.
These procedures are much shorter and less "painful" on the taxpayers wallet but take note that the IRS has full discrepancy to decide to accept the case into the Streamline Procedures or not. In addition, returns submitted under the Streamlined Procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate.
The receipt of the tax returns will not be acknowledged by the IRS with a closing agreement or otherwise, and once a taxpayer makes a submission through the Streamline Procedure he can no longer participate in the OVDP. So if there is a risk that a taxpayer might be prosecuted it is best to participate in the OVDP, because once an application is submitted through the Streamline Procedure one cannot participate in the OVDP anymore.
Conclusion:
American citizens with undisclosed foreign accounts, assets, and income should consider seeking legal advice and assess their options. This compliance issue is now even more pressing as the foreign banks are clearly under extreme pressure to identify their U.S. clients to the U.S. authorities even if the account was closed many years ago.
If you have received a letter from Bank Hapoalim or if you still own an unreported account at any bank we highly recommend that you come forward and disclose it to the relevant tax authorities, before it is too late.
The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances