Article on Israeli Banks as Targets in Tax Probe (6/8/12)

Asher Rubinstein, bio here, and a Julie Otten, an associate in Asher's firm, have written an article on the Government targeting Israeli banks, Asher Rubinstein, Esq. and Julie Otton, The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny (Ribinstein & Rubinstein LLP web site), here.  Here are a few items I cut and paste to whet readers' interest:

[T]he criminal tax division of the U.S. Department of Justice (DOJ) have now focused attention on three of Israel's biggest banks: Bank Leumi Le-Israel, Bank Hapoalim and Mizrahi-Tefahot Bank, to see if they helped U.S. citizens to evade taxes. 

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The IRS is now scrutinizing banks outside of Switzerland, including Liechtenstein, India and other countries. In the case of Israeli banks, American authorities are concerned with the flow of non-compliant money from Switzerland to Israel in recent years. As Swiss banking secrecy faded over the past few years, and the U.S. extracted once-"secret" Swiss account details, many taxpayers transferred assets from Switzerland to Israel to avoid detection by the I.R.S. Now, the IRS has caught up with them.  

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Whereas until recently, Swiss bank secrecy laws presented a formidable challenge to the IRS, pursuing undisclosed accounts in Israel will not require nearly as much effort. The tax treaty between the U.S. and Israel enables both countries to "exchange such information as is pertinent to . . . fraud or fiscal evasion in relation to the taxes which are the subject of this Convention." Cooperation between the U.S. and Israel is routine in many matters, tax and otherwise. In addition, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a Mutual Legal Assistance Treaty (MLAT). The MLAT states that the U.S. and Israel "express their understanding that this treaty applies to . . . criminal tax offenses . . . ." It is noteworthy that the treaty provides for the exchange of bank records.

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In response to the IRS/DOJ criminal tax investigations, Israeli banks are not waiting until FATCA's 2013 start date to demonstrate their compliance. In March 2012, Bank Leumi sent letters to its U.S. customers requesting IRS Form W-9, the Request for Taxpayer Identification Number and Certification. Customers who fail to declare compliance with U.S. tax reporting requirements may have their Leumi accounts frozen. Further, an Israeli bank can no longer merely rely on an Israeli passport if the bank has reason to believe that the client is also a U.S. citizen or resident. Bank Leumi notified customers that without certification of U.S. tax compliance, the account balance will be transferred in the name of the account holder outside of Leumi Group or via a bankers draft payable only to the account holder. Bank Hapoalim made a similar customer request. The fact that the funds will only be transferred to the named account holder will prevent the account holder from transferring the funds to another "hidden" or "secret" account. 

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Some account holders have closed their accounts and moved the funds elsewhere. In fact, it has been reported that Americans have withdrawn more than one billion dollars of assets from Israeli banks over the past few months. However, simply withdrawing money or closing an account does not remedy the problem. The IRS focuses on non-compliant accounts and unreported foreign income even in prior years. In the UBS matter, the IRS looked as far back as 2000. As a practical matter, closing a non-compliant Israeli account and moving the funds to another bank will lead to source of funds questions and "know your client" due diligence, as well as the current reality that very few, if any, reliable banks will take funds with "no questions asked" and no tax reporting. Moreover, there is almost always a money trail to the new bank which the IRS can discover. Just as the IRS followed money from Switzerland to Israel, it will follow it to other jurisdictions. Most other jurisdictions are also vulnerable to IRS investigations, DOJ legal challenges and the reach of FATCA.