Mishpacha Magazine - No Cheating Allowed: US Cracks Down on Foreign Bank Accounts

Thousands of Americans face potential fines and penalties in UBS tax case as IRS cracks down on tax cheats.

Following a year in which financial scandals have dominated the headlines, the Obama administration crackdown on US citizens who cheat on taxes by not reporting earnings from bank accounts held overseas is nearing its peak.

A September 23rd amnesty deadline looms for Americans who have a financial interest in or signatory or other authority over accounts valued at $10,000 or higher in foreign financial institutions, but have not yet filed a "Report of Foreign Bank and Financial Accounts," known as FBAR. The filing requirement applies equally to Americans living in America and Americans living overseas, such as the 250,000 US citizens living in Israel who bank in Israel.

Apprehension is running high after Switzerland inked a deal last week with the US to divulge heretofore confidential information on 4,450 of the estimated 52,000 accounts held by US citizens in Swiss institutions. The deal could set a precedent that puts accounts held in other countries that American citizens thought were "safe havens" within reach of the tax man.

"I have a feeling we are going to be shocked and surprised to see some of the names on this list, which will include titans of industry, entertainers, athletes, politicians and even some liberal Democrats," said CPA Michael Rozbruch, a founder of the Encino, California based Tax Resolution Services, in a telephone interview with Mishpacha than the account's total value.

"The government will go after high-profile In most cases, there is nothing to fear As much as $13 trillion may have been from merely filing the report, says Jeff socked away over the years in overseas Melamed, a CPA based in Israel who accounts by US citizens and corporations. serves a mainly American clientele. The Congress's Joint Committee on Taxation FBAR form is just that - a report - and estimates that the potential haul from does not trigger a tax liability in and of collecting taxes just from US-controlled itself. "If a person living in Israel has an overseas corporations could total $56 billion account in an Israeli financial institution, cases that have a lot of money overseas and prosecute them with a vengeance to serve as a deterrent for the rest of the country."

Some press reports indicated the crackdown is also specifically targeting dual US-Israeli citizens as part of Obama's overall policy of pushing Israel's various

Lesser of Two Evils

As much as $13 trillion may have been from merely filing the report, says Jeff socked away over the years in overseas Melamed, a CPA based in Israel who accounts by US citizens and corporations. serves a mainly American clientele. The Congress's Joint Committee on Taxation FBAR form is just that - a report - and estimates that the potential haul from does not trigger a tax liability in and of collecting taxes just from US-controlled itself. "If a person living in Israel has an overseas corporations could total $56 billion account in an Israeli financial institution, cases that have a lot of money overseas and prosecute them with a vengeance to serve as a deterrent for the rest of the country."

While some Americans are just becoming aware of reporting requirements for the first time, others are well aware of the tricks of the trade. In recent years, some people made offshore deposits and then used a credit card attached to that account to spend the untaxed income stashed there.

As is often the case, by playing it straight, the "losses" could be far less than the price to be paid if one is caught. A person who holds $100,000 in an offshore bank and earns $2,000 a year in interest might pay $200-$700 of that in taxes, depending on his tax bracket. But if he doesn't report the existence of the account at all, the fine and penalties could be higher than the account's total value.

In most cases, there is nothing to fear from merely filing the report, says Jeff Melemad, a CPA based in Isreal who serves a mainly American clientele. The FBAR form is just that - a report - and does not trigger a tax liability in and of itself. "If a person living in Isreal has an account in an Isreal financial institution, he will typically be paying taxes on that in Isreal and generally speaking, there is not double taxation."

However, there are a number of "gray area" issues that are worrying dual US/Israeli citizens. Since one purpose of FBAR is to combat money laundering, someone who "parked" money in an account even for a short period of time, which is typical of money launderers, may be required to file. This could apply to someone who sold an apartment in Jerusalem and deposited the money in a bank for a few days before purchasing a different apartment. Problems may also arise for first-time FBAR filers who may find out that they owe back taxes to the IRS. In such cases, it is absolutely essential that individuals consult with a qualified CPA or tax expert in advance.

"I am advising my clients to be especially careful this year when filing their tax returns," says Mr. Melamed. "In general, I have been encouraging people to file an FBAR report for 2008, and from now on to be more conscientious and make sure all foreign income is reported on your tax return."

- Binyamin Rose, Mishpacha's News Editor