Before Big Brother was a high-rated TV show, it was a term coined by George Orwell to describe a situation in which individuals live under strict supervision and monitoring. Orwell coined the phrase in a novel he wrote, but did his prophecy come true? We’ll leave you to answer this question. Nonetheless, you should know exactly what American Big Brother (also known as the U.S. Tax Authority) knows about your Israeli bank account.
Reporting Obligations to the IRS (U.S. Tax Authority)
The first, and perhaps most obvious way in which the American tax authorities receive information about what is happening in your Israeli account is through your annual tax report, a form you are required to submit, also known through Form 1040.
If you are a U.S. citizen or a U.S. green cardholder, you are required to report your worldwide income to the U.S. Tax Authority once a year. The term worldwide revenues refer to the income you have in Israel, whether this income is direct or indirect. In this context, you will therefore be required to report on funds and assets you hold in Israel.
This is true even if you have American citizenship in addition to Israeli citizenship, and even if you have never visited Israel.
if you choose to file a joint tax report with your Israeli spouse, you may also have to report about their income and bank accounts. It should be noted that filing a tax report as a married applicant separately (or failing to report their accounts and incomes completely), may actually increase your tax liability.
Reporting Duty to the U.S. Revenue Service
American Big Brother’s oversight doesn’t end here. U.S. citizens and U.S. green card holders must additionally report their foreign bank accounts. This reporting obligation is done using FBAR Form – which is used to report to the U.S. Treasury Department foreign financial accounts in which the taxpayer is an owner/partner or even just a signatory.
The reporting obligation relates to all financial accounts (including passerby, securities, deposits, etc.), in which at some point during the tax year there was a total of over $10,000. Failing to report may result, as we will further describe in the following segments, in heavy fines.
It should be noted that in practice those who submitted the annual report to the IRS probably already reported the above accounts since American citizens must report their worldwide income.
However, according to this obligation, one must report not only revenues but also any holdings of various financial holdings (whether or not they yield a profit). Moreover, this report is sent to the U.S. Treasury Department, not the Tax Authority, increasing the scope of the information disclosure.
International Financial Information Exchange Treaties
In order to ensure accurate supervision of U.S. citizens’ financial activities, the state signed data exchange treaties with a large number of countries.
As part of these treaties, the United States promises to transfer information regarding financial accounts involving citizens of both countries (as owners/partners). The State of Israel is also a signatory to the Data Exchange Treaty with the United States.
In fact, if there is a suspect that the account is held by an American citizen, the customer will be asked by the bank to sign a form stating his American citizenship. If in such a case the customer refuses to sign, the bank may deduct the tax rates from the account at a rate of 30%.
Not only that, but the fines for lack of reporting or underreporting can be extremely heavy: $10,000 per unreported foreign account, and a fine of up to 75% of tax liability in the event of fraud.
So, what can we do?
So far, we have learned that American citizens have comprehensive reporting obligations, and financial institutions transfer information to the U.S. tax authorities. The American involvement and supervision of citizens’ financial activities are extremely large.
This means that the reports must be extremely accurate and that experts in the field of U.S. taxation should be consulted on an ongoing basis in order to avoid fines and other sanctions.
The MasAmerica team is at your disposal for any questions and will be happy to advise you on this matter and other issues.
