Once again, FATCA is in the local news here in Israel as reported in an article yesterday in Haaretz.com. They report that because banks have not been given any guidelines by the government, they have unilaterally started to demand that their clients make declarations of compliance with U.S. tax reporting commitments. Bank Leumi warned their customers that their Israeli accounts would be frozen at the beginning of May if they failed to make a declaration that they have reported their bank accounts to the IRS. Some Israeli banks have even asked customers for documentation that they are reporting properly to the U.S. authorities. They aren’t taking any chances because if these banks and, in fact, any financial company including those insurance institutions managing my meager retirement accounts, does not report me to the IRS by only eight and a half months from now, any income from investments that they have which are in any way remotely connected with the United States, will be attached and withheld. How, you ask, can the United States force a bank in Israel to comply? The answer is quite simple and clear. Banks invest money and as an example, if my bank invests in, let us say, an international bond fund which almost certainly has some of its money invested in bonds from the U.S., income to my bank will be grabbed by the IRS before that income leaves American shores. What with globalization of financial investing, all financial institutions in all countries have investments in all other countries. So it would behoove my bank here in Israel to cower when the IRS says that they are going to cut the flow of money to my bank. My bank will surely comply with the demand that I prove to them that I have reported my savings here by completing and submitting the Foreign Bank Account Report (FBAR) to the IRS. This is a huge administrative nightmare of my bank as they must first find out which of their customers are US persons and must then demand their compliance, and finally, report all of this to the United States Internal Revenue Service. It is a mass of paperwork over and above what they had to do previously. And it is likewise, an additional mass of paperwork for the IRS, not to mention, for me. Will this enable them to catch the tax evading criminals? Will they generate more money for the U.S. Treasury than it costs them to accomplish? Your guess is as good as mine. I have my doubts.
There seems no question that the IRS is focusing on some countries by increasing their auditing of the tax returns of expats in Singapore, Hong Kong, and Israel.
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