December 3, 2014
Article by Mirit Reif, Adv.
It has come to our attention through various panicky phone calls we have had in the past few days that Israeli banks are requesting from their former clients that are American citizens to come to the bank and sign on a W9, even though the relevant account has been closed for a few years.
A W9 is a form that requests US citizens to provide their identification number and other personal information for U.S. tax purposes. This information is then provided to the US Tax Authority (the "IRS"). Once the IRS has the information provided they can check and see if you have complied with your tax duties according to their files. Refusing to sign on such a form can result in the bank freezing your account.
As you all may know by now, according to U.S. law, all U.S. citizens regardless where they live have an obligation to pay taxes on their worldwide income. In addition, in cases where the aggregate value of all foreign accounts exceeds $10,000 at any time during the calendar year they also have to report this information on a special form commonly known as the FBAR.
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in accounts outside the United States (hereinafter “foreign accounts”). Under FATCA, foreign financial institutions (banks, hedge funds, pension funds, insurance companies etc.) are required to report to the U.S. tax Authorities (the IRS) certain information about foreign accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest
Since FATCA is imposed on foreign financial institutions, the financial institutions themselves (e.g. banks) are required to report the fact that you have a bank account, thus handing over to the IRS the knowledge of your non-compliance with your U.S. tax obligations.
Israel signed on a FATCA agreement with the USA on June 30, 2014, and has already started to compile lists of their US citizens a while ago. The first deadline for filing FATCA information reports with the IRS by Israeli foreign financial institutions is September 30, 2015. This will cover the 2014 tax year.
So even if up until now the individual thought he could get away with not reporting his foreign income and/or not paying income tax to the IRS on these accounts, the banks will force him to take action, since they will be the ones reporting his name to the IRS. This is apparently still relevant even if you had already closed your account with the bank and transferred the money to another bank or made other investments with that money.
As a US citizen you have several options in order to fix your non reporting US tax situation before the bank has exposed your name to the IRS.
The two main options are either participating in the Offshore Voluntary Disclosure Program or participating in the Streamlined Filing Compliance Procedure.
a. Offshore Voluntary Disclosure Program (OVDP) - This program provides a uniformed penalty structure for U.S. 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 2006 through 2013 and there is no set deadline to apply. This procedure has a few stages, and can take a year or two until you reach a final agreement with the IRS after which it closes your file. If you are accepted into the program, you will be cleared from any criminal prosecution. Once that occurs, you 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, you have 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 you had the account), of the highest aggregate balance during the period covered by the voluntary disclosure.
In addition, if you live in the US, 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 be compliant.
b. Streamlined Filing Compliance Procedures (either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures). Through this program you will need to file delinquent tax returns, only for the past three years and to file delinquent FBARs 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 FBARs 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”.
If the IRS agent accepts the case brought before him as appropriate for the Streamlined Procedure, the review of the case will be expedited and the IRS will not assert penalties or pursue follow-up actions. This procedure is much shorter and less "painful" to your wallet but take note that the IRS has full discrepancy to decide to accept the case into this streamline procedure or not.
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. It is important to note that filing returns through the Streamlined Procedure does not eliminate the risk of criminal prosecution. So if there is a risk that you might be prosecuted it is best to participate in the OVDP, because once you submit through the Streamline Procedure you cannot participate in the OVDP.
What should I do now?
U.S. 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 under extreme pressure to identify their US clients to the US Authorities even if the account was closed many years ago.