Tough choice for Bank Leumi US customers

American customers with unreported accounts will now find it costly to own up, but perhaps even more costly if they don’t.

Bank Leumi and its overseas branches are continuing their feverish campaign to locate customers who are obliged to report to the US Internal Revenue Service (IRS), in order to relay information on these customers and their accounts to the relevant US authorities. For months, Bank Leumi has been sending letters to “suspect” customers, that is, customers that the bank has reason to believe have a duty to report to the IRS (for example, US passport or Green Card holders). The letters ask customers to declare their US citizenship to Bank Leumi, or alternatively to declare that they are not US citizens. A false declaration is, of course, a criminal offense.

For customers with a duty to the report in the US who have not declared their accounts, these letters are a signal that the time has come to take remedial action, and make an effort to be included in the amnesty program offered by the IRS to potential tax offenders, the Offshore Voluntary Disclosure Program (OVDP).

“Globes” has learned that despite Bank Leumi’s efforts, quite a few customers remain who have not responded to its approaches. This disregard exposes the customers in question to serious confrontation with the US tax authorities, possibly with criminal consequences, that is liable to cost much more than the penalty (itself high) that is involved in joining the amnesty program.

Bank Leumi undertook to transfer to the IRS information on its US customers in its agreement with the US Department of Justice, following the bank’s admission that it assisted American customers in evading US taxes. A report dated December 22 on The Federal Tax Crime Blog, on Bank Leumi’s admission in the affair states, “According to documents filed in the case, as part of its agreement with the department, the Bank Leumi Group provided the names of more than 1, 500 of its U.S. account holders. As part of the agreement, the Bank Leumi Group will continue to disclose information to the government regarding its cross-border business and provide testimony and information regarding other investigations.”

A US source who has followed the affair closely told “Globes” that the names of the 1, 500 customers provided by Bank Leumi were actually known to the tax authorities. Some of them were Americans who forestalled trouble by approaching the IRS of their own accord to join the OVDP. Others were citizens who had reported their accounts as required. In two cases, the IRS sought to cross-check the information. A third group is made up of account holders about which the tax authorities had their own information not obtained through Bank Leumi, from informers, for example.

From now onwards, Bank Leumi and its subsidiaries and branches overseas will be obliged to report to the US tax authorities the names of all their American customers and their bank accounts, which is the reason for the bank’s urgent approach to its customers in an effort to find those obliged to report to the IRS. According to market estimates, the banks in the Leumi group have accounts of tens of thousands of customers with a US reporting obligation, and some of these presumably also hold Israeli passports.

Adv. Zion Levi of the Washington law firm Dearson, Levi & Pantz, who specializes in US tax law and in representing clients versus the US tax authorities, told “Globes” that the option of joining the OVDP was still open for customers of Bank Leumi and its subsidiaries and branches, but that this option had now become much more costly and painful. The problem is that, without it, the position of unreported account holders at Bank Leumi is liable to be even worse.

This amnesty program is designed to provide a potential tax offender protection against a criminal indictment by paying a set penalty, after paying in full all past unpaid taxes. Section 26 of the program states that the penitent taxpayer will pay 27.5% of the highest aggregate amount of all undeclared financial accounts in the past eight years.

But, and this is a big but, Levi stresses, the 27.5% penalty automatically rises to 50% if the US authorities add the bank in which the undeclared account is held to what is called the IRS blacklist, a list of banks and financial institutions against which an investigation is underway, or banks that have admitted helping customers evade tax. Customers of banks on the blacklist that have used the services of the bank to open or maintain an undeclared account will have to pay almost double to join the amnesty program.

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This is the guillotine threatening Bank Leumi group customers with undeclared accounts who have not yet joined the OVDP. The US tax authorities added the group to the blacklist on December 22, 2104 (even though the investigation began a long time before). The Bank Leumi group is in fine company: USB, Credit Suisse, Zürcher Kantonalbank, HSBC India, and even Stanford Bank in Antigua, formerly controlled by US real estate mogul Allen Stanford, who was sentenced to 110 years imprisonment for running the bank as in effect a sophisticated Ponzi scheme.

Levi says that a Bank Leumi customer who did not join the OVDP before December 22 and now wishes to do so will have to pay a penalty of 50% of all his or her accounts at Bank Leumi and other banks anywhere in the world (even if these banks are not on the blacklist), with the basis of the calculation being the year in which the highest amount was recorded in all the accounts.

This of course is a huge penalty, Levi points out, but the alternative could be much worse. If the owner of an undeclared account who has a duty to report in the US and who has not joined the OVDP is caught in the US authorities’ net, he or she will have to pay a penalty of 50% a year on all accounts, applying to all years in which there was an account open. So if the account was open eight years, the penalty will be 400%. There have been cases in which people have been forced to sell homes, or simply lost all their assets, in meeting the payment of this penalty.

Levi, a leading tax law expert on the US East Coast, says, “The story of most of the Bank Leumi customers who hold unreported accounts is only just beginning, if they have not joined the OVDP up to now.”

Won’t the harsh conditions of the amnesty program dissuade people from joining it?

“Clearly joining the program now is more costly, but I’m not sure that people will choose to ignore it, ” Levi says, “People have to decide: to join the OVDP, or to take the risk of a criminal indictment, the cost of which, if there is a conviction, will be much higher than 50%, not to mention a prison sentence of up to ten years, depending on the gravity of the offense.”

Published by Globes [online], Israel business news – www.globes-online.com