Taxed & Overtaxed

Americans with over $10,000 in an Israeli bank account must report that money to the IRS.

Americans with over $10,000 in an Israeli bank account must report that money to the IRS.

Do you have a bank account in Israel?

If so, let’s hope you filed the correct forms. Otherwise, you could be in for a criminal investigation and some hefty fines.

That’s because early this year, the Internal Revenue Service announced that it was cracking down on people not voluntarily disclosing their inc-ome and funds in Israeli accounts to the U.S. government agency.

In February, court filings revealed that an American citizen pled guilty for failing to report the existence of two bank accounts maintained in the Holy Land to the IRS. As part of a plea agreement, the defendant agreed to cooperate with government authorities and to pay a significant financial penalty.

“It’s important to note,” said Charles M. Ruchelman, a member of the Washington, D.C., law firm Caplin & Drysdale. “Just as occurred in Switzerland, it is now clear that the U.S. government is increasing its focus on Americans who are failing to report Israeli assets.”

Previously, the IRS had focused on accounts in the Caribbean, Switzerland and India. Now, said Ruchelman, the IRS is working closely with Israeli banks and bankers and is ready to investigate and prosecute those who fail to report their funds and accounts, and those who enable this to happen.

Who is the government looking for?

United States citizens who have an interest in, or signature or other authority over, a financial account in Israel with assets in excess of $10,000. Ruchelman said people with these accounts are required to disclose the existence of such accounts on Schedule B, Part III of their individual income tax returns. Additionally, U.S. citizens and residents must file a Report of Foreign Bank and Financial Reports (FBAR) with the U.S. Treasury disclosing any financial account in Israel with assets in excess of $10,000. That form is due June 28, 2013.

If they don’t, according to a statement by the Department of Justice: “A deliberate failure to report can result in a penalty of up to 50 percent of the amount in the account at the time of the violation.”

Why Israel?

Ruchelman said because the U.S. and Israel have close relations and “thousands and thousands of Americans have accounts in Israel … This is very much on the [IRS’s] radar, and it will affect the Jewish community.”

Ruchelman explained that the IRS started focusing on offshore accounts in 2008 or 2009, when a whistleblower who worked with one of the large foreign banks in Switzerland informed the government that Swiss banks were not only allowing Americans to open up accounts but enabling Americans not to report the funds therein.

“Switzerland prided itself on bank secrecy,” said Ruchelman.

This initial investigation led to the criminal prosecution of one Swiss bank, Weglin & Co., and numerous taxpayers, bankers and other professionals.

The IRS leveraged this highly publicized criminal enforcement focus by ecouraging noncompliant taxpayers to participate in its longstanding Voluntary Disclosure program. The 2009, 2011 and 2012 programs provided taxpayers who came forward before the IRS learned of their accounts with both certainty regarding the financial penalties they would incur and assurances that they would not be referred for prosecution. According to a recent GAO study, these programs generated approximately 38,000 disclosures and well over $5 billion in taxes, interest and penalties.

Caplin & Drysdale handled hundreds of these cases.

“The idea is: You come into us before we [the IRS] find you, and we will not prosecute you criminally, and we will not impose the harsh penalty of 50 percent per year of nondisclosure, we’ll only impose 27.5  percent for one year,” explained Ruchelman.

For the Jewish community, Ruchelman said, having a foreign bank account is not … foreign. Many Jews who were living in Germany just before or during the Holocaust caught wind of what was happening on the ground and funneled money outside the area. If they escaped the Nazis and started a new life in the States, they left those accounts abroad as a safety net, a just in case.

But America’s system, he explained, only works if citizens properly self-report.

“If people aren’t self-reporting, the system is breaking down,” said Ruchelman. “It is a lot of assets that have been untaxed over the years.”

Dr. Michael Elman has an account in Israel as well as real estate. He said he’s been reporting on that account for the last 15 years. For him, because he doesn’t make money in Israel, he only has to report the existence of the account. It’s one tax form.

“For me, it is pretty simple,” he said.

Dr. Elman noted that he knows many others with accounts in the Jewish state and the people he knows report properly, but he can see why the IRS would be upset if one was refraining from doing so. Nonetheless, he told the JT, “I happen to think that in either country we are overtaxed. Is that fair? No.”

Still, he’ll keep reporting.

Said Ruchelman: “If you do get caught, you are going to get hit pretty hard.”

Over The Red Line?

Tea Party Patriots rally to protest the Internal Revenue Service's targeting of Tea Party and grassroots organizations. (SHAWN THEW/EPA/Newscom)

Tea Party Patriots rally to protest the Internal Revenue Service’s targeting of Tea Party and grassroots organizations.

The news that the Internal Revenue Service (IRS) unfairly targeted conservative groups has brought a new spotlight on a 2012 lawsuit filed by the pro-Israel group Z Street. According to Z Street Director Lori Lowenthal Marcus, the IRS singled out the organization and failed to move forward its request for 501 (c)(3) tax-exempt status because Z Street “is an organization that disagrees with the president’s policy.”

Z Street filed a lawsuit against the IRS in 2010. The suit was filed in federal court in Pennsylvania and later transferred to D.C. A judge in Washington will hear the case July 2. Most of the Tea Party groups known to have come under scrutiny applied for 501 (c)(4) status, which allows advocacy groups to avoid federal taxes on their operations budget but doesn’t render donations to the group tax deductible. Both kinds of applications are processed in the same Cincinnati office.

According to the Forward, a second Jewish group, Ameinu, a self-described progressive Zionist group, also reported that the group was red-flagged because of its connection to the Jewish state.

The Z Street case has raised some — but not many — eyebrows in the Jewish community.

Dr. Arthur C. Abramson, executive director of the Baltimore Jewish Council, said he is not alarmed. He said, “I had never heard of them. … I can’t say this was unwanted attention.”

But Lowenthal, whose group still has not obtained its nonprofit stature, is not willing to take this battle sitting down. She expressed “disappointment” at the Jewish community’s response.

“As a general matter, the Jewish community is up in arms about discrimination against other groups,” she said. “The public response for us from the organized Jewish community has been disinterest. When it has not been disinterest, it has been vicious.”

According to Lowenthal, Z Street is a “purely educational” group that works to disseminate information about Israel that one might not see in the headlines of major newspapers. From her vantage point, Z Street was red-flagged not because it does anything wrong, but on the basis of its viewpoint that “I support Jews living and breathing in Shiloh” and other neighborhoods located in Judea and Samaria.

She said the IRS rebuttal to this claim is that any organization that does business in the Middle East (inc-luding in Israel) must be red-flagged because there is a heightened risk of terrorism.

At that, Lowenthal chuckles.

“Israel is not the source of the terrorism,” she said. “Israel is the victim of terrorism. There are not Israeli terrorist groups raising money in the U.S.”

Moreover, noted Lowenthal, Z Street does not provide grants to anyone, including to Jews living in Israel.

But Abramson said he does not see an issue with red-flagging organizations with ties to Israel. He said, “Obviously, the majority of the terrorists are coming from the Arab community, but there are Jewish terrorists.”

Abramson recalled that even over a decade ago when BJC applied for 501 (c)(3) status for the Congressman Elijah Cummings Youth Program in Israel (ECYP), BJC went through what seemed an arduous process. He said tying the name of a congressman with a nonprofit raised a red flag, as did the fact that the organization contained Israel in its name.

“They questioned it. I don’t see anything of note,” Abramson said.

And he also noted that he supports the government’s right to decide if nonprofit funds should be used to support programs over the green line.

Douglas Bloomfield, a syndicated columnist, Washington lobbyist and consultant, said he is less worried about the fact that an organization tied to Israel was red-flagged than he is that there is such uproar that the community thinks it wrong for the IRS to do its job.

“This is not a partisan issue,” he told the JT in relation to the alleged singling out of Tea Party programs, noting that it is not an issue of perspective on Israel or anything else either.

Lowenthal said she thinks knowledge that the IRS may scrutinize one organization over another will lead the community not to trust the IRS. She said, “People [and organizations] will just sanitize their language” to get the status they want. “I know of groups that were having difficulty getting IRS approval, so they changed their names and got what they wanted.”

Bloomfield said he thinks Congress should put an end to that, too  if it is happening, and he is not confident that it is. Congress, he said, has a responsibility to make sure the IRS is properly funded to provide strong oversight to all who apply for 501 (c)(3) and (c)(4) statuses and to offer continual oversight to make sure those organizations are not abusing their power. He said the IRS “should do a full, fair and good job” of vetting each applicant to make sure it is qualified; everyone has to meet the same standards.

“Let the sunshine in,” he said. “Sunshine has the greatest healing/curative power. We need to know who, how much, for what.”