Are you up to date with your FBAR (Reports of Foreign Bank and Financial Accounts)? If not, a cross-border financial advisor might be able to help you get things straightened out.
Eli Noff is a U.S. based cross-border CPA and tax attorney who helps American citizens living abroad be U.S. tax compliant. Specifically, Eli outlines how FBAR reports are a determining factor in tax compliance. He explains who uses the information on the report, and how it is used. Eli highlights the penalties that non-compliance brings. Don’t despair if you haven’t kept up to date with your reporting requirements. Listen to the show to learn more about what you can do.
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Watch Why FBAR Reports are Important on YouTube.Read the Transcript
Interview with Eli Noff
Eli Noff, CPA and attorney at law, discusses the various issues around taxation for U.S. citizens and residents who may be living both inside and outside the United States.
He lays great emphasis on the very significant legal ramifications, including severe penalties, that will result from the willful hiding of assets, and he details what tax returns the U.S. government expects people to report for informational purposes.
Douglas Goldstein: I am very excited to have on The Goldstein on Gelt Show Eli Noff, who is both a CPA and an attorney and who works with people who are cross-border. He’s actually based in the U.S., but he comes to Israel on a regular basis. Eli, it’s a real pleasure to have you.
Eli Noff: Thank you. It’s a pleasure to be here.
Is There Need for U.S. Citizens and Residents to Report Tax If They Live Outside the United States?
Douglas Goldstein: One of the issues that people talk about a lot, or feel isn’t an issue to them, is that they live in Israel now, so they really don’t have to be filing returns anymore because they say that, after all, they’re paying taxes in Israel.
I am sure you’ve heard something like that. Tell me where people like that are going wrong and what they’re missing out on.
Eli Noff: First of all, thanks for having me on the show. The U.S. tax system taxes U.S. citizens and residents on their worldwide income. Therefore, where some people may be going wrong is that they believe that once they move outside the United States, they’ve essentially moved into a territorial tax jurisdiction where their income is no longer taxable in the United States, which is simply incorrect.
Douglas Goldstein: I think one of the reasons why people might believe that is that, in certain places, it’s true. For example, let’s talk about a guy who moves to Israel and is earning $60,000 a year here, and let’s say he doesn’t have investments. He’s not actually going to end up paying taxes to America, is he?
Why Filing Requirements Have to Be Followed
Eli Noff: But the filing requirements are still there. Nonetheless, the citizen or resident must still generally file a U.S. income tax return to report the income. But there is a foreign earned income exclusion that is generally available; it’s indexed for inflation by typically annual waves. Therefore, you may not be required to pay income taxes in the United States.
However, there are additional informational reporting forms that you may be required to file along with that tax return, which people should be sensitive to; the forms could carry significant penalties if not filed. Along with the general requirements of having to file a U.S. income tax return annually.
What Is Supposed to Be Reported, and What Are the Ramifications for Negligence?
Douglas Goldstein: I don’t want to belittle these forms, but if someone says, “Listen, I’ve been living in Israel for 5, 10, 15, or 20 years, and I know that I don’t owe money to America. Do I really have to file these informational forms? I mean, really, what are they all about?” What do you say when someone asks you that?
Eli Noff: Generally, it’s just bringing it down to basics. Some of the forms that require filing are just generally informational reporting forms associated with financial accounts abroad. A U.S. citizen or resident living outside the United States, or even living in the United States who has foreign bank accounts, must file certain informational reports.
There are many of them, but some of them are the FinCEN (Financial Crimes Enforcement Network) Form 114. It’s also known as the FBAR—Foreign Bank Account Report. You must file that if you have over $10,000 in a foreign bank account, which is essentially an account located outside the United States.
Failure to file that form can carry with it penalties of $10,000 per violation. A violation can be, or is generally described as, statutory—a $10,000 penalty per foreign account that has failed to be reported annually.
Say you have a U.S. citizen living outside the United States, in Israel. They have $50,000 in a bank account and another $25,000 in a savings account. They have two accounts, so they could be subject to non-willful penalties of $20,000—$10,000 per violation, one per account—per year.
Typically, the IRS can look back six years for these types of penalties. In that particular scenario, a non-willful penalty can be $120,000, which is six years times $20,000. If the IRS catches it first, and the taxpayer doesn’t have good reasonable cause, they could be subject to those penalties, and they could be fairly significant.
Douglas Goldstein: Wow. So this is talking about not only having to pay a little tax, or a little fee, but actually paying all of the money you didn’t report, plus more, simply for not reporting?
Eli Noff: Correct. It’s purely informational reports; the FBAR does not carry a tax computation with it. But if the account had earned some interest income, surely that should be reported on the income tax return.
However, these are purely informational reports that carry with them severe, draconian penalties. The FBAR is one of the primary forms that people should be concerned with.
Information Sharing between Governments and Banks and the Implications
Douglas Goldstein: We’re speaking with Eli Noff, who is both a CPA and an attorney who’s based in the U.S., though he actually deals with people overseas. A lot of people, like listeners of The Goldstein on Gelt Show, are Americans who have moved to Israel and maybe are not fully up-to-date with all of their U.S. tax reporting and filing.
It seems there are a lot of legal implications for not doing this, and it’s not just that you owe money on a tax return because maybe you earned some interest, but also the importance of reporting for informational purposes.
Eli, I know that recently the U.S. and Israel have been getting closer and closer in terms of how they share information. Is there some sort of in-depth information sharing these days, or is that coming very soon?
For example, if someone says, “Well, listen, I may have an account at Bank of Polin, but who’s ever going to know?”—that’s the old way. Is the new way simply going to be that the IRS and Mas Hachnasa, the Israeli tax authority, are going to be sharing information regularly?
Eli Noff: Sure, if some of those banks are already sharing information with the U.S. government and additional banks are being pressured to do so. Therefore, there are already banks that are cooperating with the Internal Revenue Service and providing information with respect to U.S. citizens or residents who hold accounts in Israel or outside the United States at those financial institutions.
The information is flown to the IRS, when the other shoe drops, so to speak, for that particular person. Whether or not they are an attractive person for examination is the big question mark when enforcing this.
However, it does put that particular person at significant risk because, although we discussed how FBAR penalties alone could be significant, there are additional informational reporting forms. Depending on the value in that account, those penalties can be severe and stacked upon the FBAR penalties as well.
Also, aside from the penalties on the non-willful side that we discussed, there’s also potential for criminal prosecution for people who are willfully hiding their assets abroad. I think that’s something that should be taken seriously.
Douglas Goldstein: First of all, I really appreciate the fact that you have a very calm voice as you talk about something that a lot of people should really be getting very nervous about.
Tell me something: Does it go both ways? America has been the 800-pound gorilla in the room as far as governments and banks all over the world are concerned, demanding that they provide information about American citizens who live outside the United States.
But does America give back? Are they, for example, providing any information as well to the Israeli government?
Eli Noff: That’s an area that’s been a little bit lagging. Since the fall of the Swiss banks, the U.S. has ratcheted up the pressure on foreign jurisdictions to provide information. But I think there’s a certain reciprocation that we’re beginning to see with respect to information flowing back to the United States to other jurisdictions abroad to help them combat tax evasion, just like they’ve helped the United States.
What Are the Recommended Solutions?
Douglas Goldstein: I am sure there’s a lot more scary stuff to discuss, but we’ve certainly spoken about the problems that people have.
In the last few minutes, let’s just touch on the solutions. Let’s say that someone is listening in and he says, “You know, I made a mistake and didn’t realize that I needed to do this, but now I realize that this is pretty important. What am I supposed to do?” What is he supposed to do?
Eli Noff: That’s a good question. Essentially, the IRS has put in place these amnesty programs—voluntary disclosure. These are processes in which a U.S. person can correct their noncompliance.
There are a few different programs, and without getting too technical, there is one for willful people, which it was just announced is going to be coming to an end in September 2018. Therefore, whoever has willful exposure in hiding their foreign assets should consider using these programs.
It’s called the Offshore Voluntary Disclosure Program, and essentially it requires eight years’ amended tax returns and eight years’ informational reporting forms. In exchange for waiving the statutory penalties—all those stacking penalties that we discussed—the government charges 27.5% penalty of the highest bounce in the account in the last eight years.
For example, if there was $1,000,000 at one point, it’s a $275,000 amnesty penalty. That is the Offshore Voluntary Disclosure Program, and it ends with a disclosing agreement, with a contract. That’s essentially for willful taxpayers.
Douglas Goldstein: And you’re not a criminal, right? Just to be clear, that means you’re not going to be subject to going to jail?
Eli Noff: Correct. It’s not a guarantee of nonprosecution, but the government doesn’t forward these types of disclosures for prosecution because it would take the wind out of the sails for people coming in. It would be a disincentive.
I’ll mention that there is a 50% penalty in that program if your bank is listed on the dirty bank list, so to speak. If your bank is already on that list, you have to pay a 50% penalty, and there are about 150 names on that list that you might want to reference, to check. That’s the willful people who use that program.
For the non-willful people, there’s essentially what’s called a Streamlined Disclosure, and there are two of them. One is if you’re living in the United States, and one if you’re living outside. The basic tenets are your major tax returns and you file your FBARs—three years returns, six years FBARs. For people living in the United States, you pay a 5% penalty on your offshore assets in the past six years—the highest year on balance. Taxpayers living outside the United States actually get a pass, and they pay zero penalty if they have reasonable cause and can certify that they’re non-willful.
They get a better deal. So a lot of your listeners who are outside the United States and are in Israel may want to utilize the streamlined offshore procedures and potentially make a disclosure. Also, they should get into a compliance and have penalty waivers so that they don’t have to worry about their noncompliance coming forward.
Douglas Goldstein: That certainly sounds like a much better option and makes me breathe a sigh of relief for people who may be able to benefit from this.
Eli, this has been very helpful, and I am sure a lot of people benefited from what you told us today. In the last few seconds, just tell me, how can people follow you?
Eli Noff: Sure. I can be found on frosttaxlaw.com, and they can feel free to reach out at any time. My phone number is (410) 497-5947. I’d be glad to have a free consultation and discussion to see how we can help out.
Douglas Goldstein: Eli Noff, thanks so much for taking the time.
Eli Noff: My pleasure. Take care.