IRS Steps Up Probe of Offshore Banking in Israel

Several weeks ago the U.S. Department of Justice unleashed indictments against three tax preparers doing business under United Revenue Service (URS). U.S. Department of Justice attorneys say that the tax preparers with URS helped wealthy Americans open accounts in Israel and failed to file the required Report of Foreign Bank and Financial Account (FBAR) with the IRS.

Having a bank account outside the U.S. is completely legal so long as certain information about the account is disclosed to the IRS. This information includes the amount held by the bank, and the amount of interest accrued annually. This information is required in the annual FBAR. When these are not properly submitted to the IRS penalties can be quite extraordinary. Willful failure to file an FBAR carries prison time and fines of $100,000 or 50% of the account balance for each year the account is not reported; whichever number is greater. Although, a foreign account holder may be able to avoid this penalty if their failure to report was unintentional. In some cases the individual could negotiate with the IRS to pay a lesser onetime penalty.

The tax preparers in the recent indictment allegedly not only failed to file an FBAR but also actively tried to conceal the account holder’s identity by helping the customers set up sham corporations in Belize. These sham organizations are known as nominee corporations. The corporation is named as the bank account owner so that any inquiries into the account will only show the corporation’s information rather than the true account owners.

However, URS’ actions were unlawful because banks have a legal duty to disclose the owners who benefit from corporate accounts. This makes the chances of getting caught by the IRS even greater.

To combat this problem the IRS has also stepped up monitoring of lawyers, accountants, and individual bankers over the past years to stop them from setting up sham corporations to mask the true identity of offshore account holders. When these professionals have been accused of engaging in tax evasion in most cases they turn over the list of their customers to the U.S. Department of Justice in order to receive reduced fines and jail time.

Customers of the Israeli banks targeted in the recent indictment should take action immediately. The IRS’ plan is to charge the tax preparers who set up the nominee organizations in order to get enough information to next target the account owners who benefitted from the scheme. However, account owners can protect themselves by reporting themselves to the IRS first. The IRS has a first contact policy which means that the IRS may waive criminal prosecution if you come forward before the IRS contacts you. However, if the IRS contacts you in anyway including by mail, phone, or in person, the first contact policy will not apply.

Foreign account holders still have time to come into compliance and avoid penalties or prison time. The IRS has an amnesty program known as the Offshore Voluntary Disclosure Program, or OVDI. Persons who report their activity under OVDI benefit from fixed and reduced penalties. Persons who self report under OVDI also avoid an audit and criminal prosecution.


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