The wheels of justice are sometimes slow but the government usually wins, especially when the target is a bank. In July of 2011 we first posted that the IRS and Justice Department were looking into Israel’s Bank Leumi. Since then, many customers have come forward to disclose unreported acccounts there. This week we learned that the bank is cooperating with state banking regulators to resolve accusations that the bank helped Americans avoid FBAR filings and evade income taxes.
What is especially interesting about this week’s announcement is the emergence of the New York Department of Financial Services working along side the U.S. Department of Justice. IRS and DOJ typically spearhead investigations into offshore banks. NY’s banking superintendent, Benjamin Lawsky, however, has been very aggressive in pursuing bank misconduct.
Why is the state investigating Bank Leumi? The bank has offices in four states including New York. Although customers opening accounts at a U.S. branch need not report those accounts on an FBAR, accounts opened at branches in Israel and other countries do need to be reported. Given New York’s large Jewish population, many folks there have opened accounts directly in Israel. Because Bank Leumi’s US operation uses a New York bank charter, the state also has significant legal leverage.
Another reason behind Lawsky’s decision to investigate may be the spillover effect from unreported federal taxes. Although reporting foreign bank accounts is a federal obligation (there are no state FBAR forms), most states taxes are based on federal adjusted income. If a New York taxpayer fails to report income at the federal level there is a trickle down to the state level.
Bank Leumi has previously reported that it reserved $250 million to settle allegations that it helped Americans hide accounts in Israel. A Bloomberg news report claims that New York alone may ask for $300 million to settle their probe. That would presumably be in addition to anything the feds may demand.
Bank Leumi isn’t the own Israeli bank in the government’s sites. Other Israeli banks rumoured to be targests of DOJ investigations include Bank Hapoalim, Bank Mizrahi Tefahot and HSBC Israel.
If you have an unreported bank account in Israel (or any other country) time is running out. The IRS generally operates on a first contact basis meaning taxpayers that come forward before they are caught generally are treated much better. The IRS has said there may be no opportunity to make a deal, however, if the government announces that it has obtained customer names from a particular bank or has issues a subpoena to that bank.
As we have noted in many previous posts, the civil posts associated with unreported FBARs are huge. Until a couple years ago, the odds of hiding an account from the IRS were pretty good. No more. Now the odds favor the government. It simply isn’t worth the risk.
Need more information? Mahany & Ertl is a full service tax law firm that offers IRS tax services worldwide. Our practice concentrates on FBAR filings, FATCA and other offshore reporting concerns. For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. All inquiries protected by the attorney client privilege and kept in complete confidence.