It seems every time there is an announcement regarding taxes and US citizens, there is a new wave​ of​ headlines reflecting panic among holders of US passports. Recently​,​ we were informed that Israel and the US had entered into a Model 1 Intergovernmental Agreement (IGA), which was quickly accompanied by headlines that “Israeli banks will be turning over information to the IRS”.

A Model 1 IGA should be welcome news for Israeli banks and US citizens living in Israel. The Israel banks should be pleased because they will not have to do any direct reporting to the IRS, rather they only have to report to the Israeli Treasury Ministry (which they already do). US citizens living in Israel should also be pleased, because this announcement means that if they are tax compliant in Israel, then it should be easy to report that same information to the IRS. In fact, since Israeli banks automatically withhold taxes on any investment income earned in the bank, they are in fact by default tax compliant and in most cases there should not be any additional taxes to pay to Uncle Sam.

That is not to say that this announcement does not reflect a major change in how governments share information about their citizens, but we must remember this is merely a part the trend that became inevitable as we entered the digital age. In 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA), the law Congress passed in 2010 to get more information about its citizens foreign bank holdings. Part of FATCA requires US citizens and Green Card holders to self ​- report their holdings, but FATCA also put a mechanism in place to confirm the taxpayer’s declarations. In short FATCA will put into place a duplication of the US reporting system ​ with which all​ that any US taxpayer ​s​ ​are​ ​familiar.​

For example, if a US taxpayer has a bank account in​ Citibank and earns a $1,000 of interest ,​ he or she is obligated to report that income on his US tax return. In the event the taxpayer forgets to report that interest income​,​ the taxpayer will get a letter from the IRS within 12 months ​,​ telling him that Citibank has reported to the IRS that the taxpayer has earned a $1,000 of interest, and now the IRS wants to know why the taxpayer did not report it on his tax return.

FATCA merely expands the example above to to the international arena, meaning that eventually a US citizen who fails to report the same $1,000 earned at Bank Hapaolim will get a similar letter from the IRS. FATCA in fact takes the sharing of information to a new level, not only sharing information about income earned but also about identity of bank accounts and their highest balances.

Despite the signing of the IGA between Israel and the US ​,​ many questions remain:

1. How will currencies be converted? In other words, what if the taxpayer converts his shekel interest income at one exchange rate and the IRS uses a different rate, will the taxpayer get a letter?

2. How will the Israeli Treasury report income of account holders who are tax exempt either because they are new immigrants or tourists to the IRS?

3. How will Israeli banks report the highest balances to the Israeli Treasury?

4. Will the Israeli banks simply rely on Form 867 as their reporting format?

These and other questions remain open, but one thing that any US citizen reading this article should conclude, if ​one​ ha​s​ not been reporting ​his Israeli investment income to the US, he​ had better consult a tax professional as soon as possible to understand ​his​ options ​ for​ becoming​ compliant. The signing of the IGA should be a clear signal to taxpayers who have been non​-​compliant that time is not on their side.

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