taxes and israelis living/doing business in the us

Palo Alto, CAMay 1, 2013

US/IRS Tax Compliance Why should I care and why is it so complicated?

FATCA introduction

Current Climate of Aggressive IRS

What does FATCA compliance mean?

Israel and what’s next Israel-US FATCA agreement and Israeli financial institutions’

response

Current US enforcement efforts

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Reporting my assets in Israel to the Internal Revenue Service – Form 8938

Am I eligible to participate in the OVDP?What are my options?How long does the process take

American Citizen – To be or not to be?Expatriation Updated FBAR FormQuestions and Answers

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IRS Acting Commissioner Steven Miller’s December 6th remarks on cracking down on tax evasion

Taxpayers can expect to see “continued aggressive enforcement” and “aggressive investigations of individuals, promoters, and banks”

The IRS anticipates many more taxpayers joining the Offshore Voluntary Disclosure Program and the new “streamlined” program for foreign residents

The IRS “is looking at quiet disclosures for examination” and “quiet disclosures are at risk”

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Coordination of the United States Offshore Voluntary Disclosure Program (“OVDP”) and other countries

Effect of the IRS 2009, 2011 and 2012 OVDP – enormous database of information secured

Increased Transparency and Information Sharing

Non-compliance, then payment to foreign payee is subject to a 30% withholding

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OVDP – (formerly called OVDI)

FATCA FBAR

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Foreign Account Tax Compliance Act

New Focus on Foreign Financial Institutions

Increased asset and income disclosure requirements on US citizens and Green Card holders

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Introduced on March 18, 2010 as part of Hire Incentives to Restore Employment Act of 2010 (HIRE)

Scope of FATCA is extremely broad

Primary purpose to reduce the compliance burden while maintaining the policy objective of improved information reporting on US persons with assets invested in non-US jurisdictions

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Effects almost every Foreign Financial Institution (“FFI”) including banks, custodians, brokers/dealers, private equity, hedge funds, insurance companies, certain pension plans, trust companies, some trustees and certain family offices (depending on the circumstances)

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Disclosure - certain FFI’s are required to file the

information reports for the 2013 and 2014 calendar years not later than March 31, 2015

Withholding on payments (30%) to recalcitrant account holders or a non-participating FFI beginning in 2014

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Information about income on US accounts must be reported to the US beginning in 2016 (for the 2015 calendar year)

Complete information on US accounts including information about gross proceeds must be reported beginning in 2017 (for the 2016 calendar year)

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FATCA will require foreign financial institutions (“FFIs”) to report certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest

To properly comply with these new reporting requirements, either (i) an FFI will have to enter into a special agreement with the IRS or (ii) Agreement between US and Foreign Country (“IGA”)Model 1 and Model 2

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Goal is to improve international tax compliance

The US is willing to reciprocateUS will automatically share information on

accounts held in US financial institutionsMany countries are working towards a

“common approach to FATCA”

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On November 8, 2012 Treasury announced that it is engaged with more than 50 countries around the world

Treasury Assistant Secretary for Tax Policy Mark Mazur“We are intensifying our ability to combat tax

evasion”Agreement between US-Israel is still

pending

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Israel is moving closer to reaching an agreement with the USIsrael Tax Authority director general Doron

Arbeli recently met with IRS Action Commissioner Steven Miller

Israeli banks reportedly prefer a Model 1 FATCA agreement (the soft model) The banks would only deal with the Israeli authorities But the banks would have to share the identity of their

clients

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Under a FATCA agreement, the US will also give information to Israel

At this point in the negotiations, the US will be required to give less information to Israel than Israel gives to the US

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Executed Form W-9/W-8BEN;Confirmatory letters signed by accountholders (and beneficial owners) confirming that they are compliant with applicable US tax laws and that they have disclosed the existence of foreign bank accounts to the IRS;

Deed of Indemnity.

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Israeli Banks have blocked accounts of recalcitrant US persons;

Israeli Banks have sent information of US accounts to Israeli AML authority of recalcitrant account holders.

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Bank Transfers to the US beneficiary solely;

Bankers’ check to the beneficiary (mentioning “US Person”).

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Completed extensive questionnaire detailing existence of a US person whether directly or indirectly related to an account (even if the account holder is a non US related entity)

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Used to report a “specified person’s” foreign financial assets total value of all specified foreign financial assets in which an individual has an interest and meets certain thresholds.

Filed with the annual Federal Tax Return and must be filed by the due date (including extensions).

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A U.S. Citizen.A resident alien of the United States for

any part of the tax year (‘green card’ test or ‘substantial presence’ test).

A nonresident alien who elects to be treated as a resident alien for purposes of filing a joint income tax return.

Proposed Treasury Regulations issued that will require a domestic entity to file Form 8938.

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Aggregate value of all specified foreign financial assets on last day of the tax year is more than:

OR at any time during the tax year is more

than:

Unmarried taxpayers living in the U.S. $50,000 $75,000

Married taxpayers filing a joint return and living in the U.S.

$100,000 $150,000

Married taxpayers filing separate returns and living in the U.S.

$50,000 $75,000

Unmarried taxpayers living abroad $200,000 $300,000

Married taxpayers filing a joint return and living abroad

$400,000 $600,000

Married taxpayers filing separate returns and living abroad

$200,000 $300,000

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Specified foreign financial assets include:Financial accounts maintained by a foreign financial

institution. A financial account is any depository or custodial

account maintained by a foreign financial institution (or one organized under laws of U.S. possessions) as well as any equity or debt interest in a foreign financial institution (other than interests that are regularly traded on an established securities market).

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Foreign Financial Assets include investments other than in an account maintained by a financial institution:

1. Stock or securities issued by someone that is not a U.S. person;

2. An interest in a foreign entity;3. Stock issued by a foreign

corporation; 4. A capital or profits interest in a

foreign partnership

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Interest in a social security, social insurance, or other similar program of a foreign government is not included.

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Maximum value of a specified foreign financial asset means a “reasonable estimate” of the asset’s maximum fair market value during the taxable year.

Temporary Treasury Regulations §1.6038 D-5T(b).

Foreign currency must first be converted to U.S. dollars and show the conversion rate.

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If asset is jointly owned with someone other than a spouse, each joint owner includes the entire value of the jointly owned asset.

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Failure to file a correct Form 8938 within 90 days after the IRS mails a notice.

The failure to file may subject an individual to a $10,000 penalty for each 30 day period.

After the 90 day period has expired the maximum penalty is $50,000.

Reasonable cause exception may be available.

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Revised Form (November 2011) requires taxpayers amending a previously filed FBAR to complete a new Form in its entirety as opposed to simply making the needed change and attaching a copy of the prior Form. No need to attach original Form.

Taxpayer must wait at least 120 days to amend the previously filed FBAR after the original was filed as opposed to waiting 90 days.

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Any United States person who has a financial interest in or signature

authority or other authority over any financial

account in a foreign country, if the aggregate

value of these accounts exceeds $10,000 at

any time during the calendar year.

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Announced on January 9, 2012 Written guidance and updated FAQ’s were to be issued within approximately one month. It is anticipated that such information will be released in two (2) weeks or so.

No definitive deadline Program can be “closed down” at any time

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2009 and 2011 programs were deemed very successful and offered consistency and predictability to taxpayers in determining the amount of tax and penalties they faced by coming forward voluntarily.

Major change – penalty amount increased to 27.5% instead of 25%

5% penalty for Foreign Resident will apply if specific criteria is satisfied as per FAQ 52 Part 3

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Taxpayer who is a foreign resident must meet the following three (3) tests to have the reduced 5% penalty:◦ Taxpayer resides in a foreign country◦ Made a good faith showing of timely complying with all tax,

reporting and payment requirements in the country of residence

◦ Taxpayer has $10,000 or less of U.S. sourced income each year.

Most importantly the actually penalty will not apply to non-financial assets, including real property, business interest, or outwards purchase of funds for which the taxpayer “can establish that all applicable taxes have been paid, either in the U.S. or his country of residence.

Compliance with U.S. tax return filingsFBAR documents filed by June 30th of each

yearGift tax exclusion of $5.2M in 2013Significant gift and estate tax planning

opportunities in 2012Use of defective Irrevocable Grantor TrustsTraps for the unwary regarding U.S. located

property as opposed to Israeli based property

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Continued criminal indictments/prosecutions relating to Foreign Accounts; will policy on extradition change over time?

2 recent situations where people were stopped by US immigration officials regarding outstanding tax liabilities

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Pending bill in Congress to deny entry if significant tax compliance issues

Still no ability for foreign lien or levy attachments- will this change with FATCA ?

Because of FATCA, there is increased dialogue between banks doing business in the US and the Treasury Department

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Employee vs. Independent ContractorCovenants not to competeHow to secure capital gains treatmentUse of Section 83B election for certain

stock received – pay tax now with benefits later

Question and Answers

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Employee – Federal and State employment taxes withheld, Federal and State unemployment taxes and benefits may be given

Independent Contractor (which means self employed) generally includes doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors who are in an independent trade or business wherein they offer their services to the general public.Need to analyze the facts of each case to

determine if the payer has the right to control or direct merely the result of the work and not what will be done and how it will be done.

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Net earnings of an independent contractor is subject to self employment tax

Self employment tax rate is a flat 15.3% -- for years 2011 and 2012 this rate was reduced by 2% to 13.3%. The rate includes 12.4% for Social Security and 2.9% for Medicare.

IRS Form SS-8 – determination of worker status for Federal Employment Taxes and Income Tax Withholding

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Treating an employee improperly as an Independent Contractor – new IRS voluntary classification settlement program Optional programProvides an opportunity to “reclassify” workers

as employees for future tax periods – pay 10% of the employment tax liability on compensation paid to the workers for the most recent tax year

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