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The Bank Leumi Story: Another “Bait And Switch” Or Is It Good News For Some OVDI Practitioners And Taxpayers?

On Behalf of | Mar 13, 2013 | Firm News

Last week, in a move many practitioners found shocking, the Internal Revenue Service informed selected tax attorneys that some of their clients who had been accepted into its offshore voluntary disclosure initiative with once-secret offshore accounts in Bank Leumi, have “upon further review” been disqualified from the OVDI program.  The notices may potentially affect many American taxpayers who had undisclosed accounts at Bank Leumi le-Israel Ltd., Israel’s largest bank.

On Monday March 4, 2013, Bank Leumi made an announcement which disclosed management’s concern over the expenses it will have to incur to comply with a current IRS investigation into the Bank’s practices. Presumably, that expense also contemplates a potential fine for the Bank. The Leumi matter is strikingly reminiscent of the recent Swiss bank cases which were given much publicity.

What is going on here? First, we do not know whether ALL pending, Bank of Leumi OVDI applicants who have received preliminary clearance got a letter. If not, then how many did get a letter and on what basis? Until we find out, most articles on this topic are pure speculation, including this one.  We do know that the letter is essentially a one-liner which simply says “you are disqualified from the program.” We don’t know whether those who got a disqualifying letter received it because they refused “to out the names” of their private bankers,  failed to cooperate in some other way with the investigation, or just out and out lied in their OVDI applications.  If this is the reason for the letters then there is not much else to talk about here. And before anyone concludes that the sky must be falling, remember that the Internal Revenue Manual says, the  voluntary disclosure practice creates no substantive or procedural rights for taxpayers as it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. IRM Part (12-02-2009) Voluntary Disclosure Practice.

And further under Disqualifying Factors (12-02-2009), the IRM advises that a taxpayer could be disqualified if he has “any reason to believe that the IRS has obtained information concerning [his] tax liability.” With all the publicity in and outside of Israel about FATCA and Bank Leumi itself, this factor alone could be cited by the IRS as authority for the disqualifications.  But that said, recall that UBS was in the news for suspected subornation of filing false tax returns for years while individual small time minnows with UBS accounts were being accepted by the dozens on a daily basis into the Program. One could argue that in the Leumi case, IRS CID must be on to some really big targets for investigation and apparently it is going to take some time to sort it out.  Apart from that, it is nothing short of reckless to predict that the IRS’s action last week signals a broad based criminal attack on all the Leumi minnows who might be inclined to seek the OVDI “comfort letter” by entering the program.

We note that an OVDI voluntary discloser signs up to tell the whole truth if asked, about the conduct of any bankers who may have counseled them about how to hide their foreign bank accounts from the IRS.  At the same time, it may be safe to assume that upper IRS management believes it is unseemly at best, for the IRS to use some poor guy’s case as a stalking horse just because his name was placed on his parent’s account for their convenience anticipating their senility. Arguably, in the eyes of DOJ prosecutors, tightening up the Bank Leumi project until all the criminal targets have been identified just makes things neater and easier to deal with.  There is a wide-spread, long-standing IRS enforcement policy which favors the full development of all criminal matters before most civil proceedings are allowed to proceed. This reflects the conventional wisdom that nothing ticks off a DOJ prosecutor in Washington more, than having to inherit a file for prosecution after a bunch of revenue agents and office auditors have put their fingerprints all over the file.

Remember, the Criminal Investigation Division, working closely with IRS and DOJ attorneys have been enjoying a treasure trove of juicy low-hanging fruit since OVDI came in in 2009.  The IRS doesn’t want any really bad guys connected to Leumi to slip through the cracks. That said, if your client has an unreported account at Leumi and was contemplating entering the Program, practitioners would be well-advised to not jump to the conclusion that OVDI is no longer an option. It may be a good idea for a Bank  Leumi client with FBAR disclosure issues to file for preliminary clearance anyway even in light of the recent developments.  In the “vanilla” fact patterns where experience teaches that the front line OVDI operatives are beginning to exercise some discretion and good judgment, a Bank Leumi American client contemplating a disclosure should request preliminary clearance any way to see if the IRS takes the bait. If they do, they are well on their way to laying a foundation for a “bad faith” argument against the IRS in the highly unlikely event that a taxpayer who got a disqualifying letter ends up the object of a criminal investigation.  Unless of course the file shows a pattern of lies and deception when the taxpayer first entered the program or that he refused to cooperate once it got under way.

What to do?  Do the menacing “you’re disqualified” faxes  mean that all previously undisclosed Leumi  accounts held by American citizens are now going to be assigned to a special agent for a two year criminal investigation?  Would a quiet disclosure be a good idea here to stay under the radar?  What are these people supposed to do now?

First, it is highly unlikely that a broad based criminal investigation will be commenced against those who received preliminary clearance unless they refused to cooperate with the IRS as required under the program or their application is false or fraudulent.  It certainly is clear that the IRS is unlikely to spend the resources or desire to investigate the typical case where thousands of “accidental” second and third generation Americans living in Israel had no clue about the requirement to file FBAR’s.  Nor is the IRS interested for criminal purposes, in the thousands of Israelis who are recent immigrants to the United States as well as the many Israeli green card holders who are now working in the United States, but were never told they might have to file an FBAR with the US Department of Treasury to disclose their Israeli accounts.

Quiet Disclosure? If it was a bad idea before the Leumi dis-invitation OVDI mass mailing, it is probably not a good idea now. Some people will try it on their own but a practitioner licensed to practice before the IRS is well-advised to avoid any connection between his advice and a silent side door entry into compliance after the Service not only announced it doesn’t like quiet disclosures but also, that they want to take a closer look at some of the Bank Leumi customers and transactions.

What Bank Leumi depositors should do?  As of this writing, it seems clear that the menacing “bait and switch” faxes to practitioners ARE NOT advising them to tell their clients to come in and get ready for a criminal investigation. CID has firm leads and targets in the Leumi investigation and the first order of business is  to explore any connection at all between a Leumi private banker under IRS scrutiny and their clients. It would be fool hardy to hit the panic button by saying the letters amount to a broad-based announcement signaling an expanded criminal investigation. The Department of Justice may need a Leumi depositor as a material witness against a Leumi private banker but there is no way CID is planning a mass prosecution of a bunch of little fish.

For those Leumi private banking clients who survive the first level of IRS scrutiny, (the preliminary clearance letter,)  who are of no interest  criminally by the IRS  are at some point,likely to get a  a chance to show that they acted at all times upon the reasonable advice of a professional to abate any asserted FBAR penalties under the extensive and detailed FBAR Mitigation provisions of the Internal Revenue Manual, or make some other arguments in support of limited or no penalties.

Noisy Disclosure Outside The Program: Bank Leumi clients, who have still not filed, but believe that relief under OVDI was previously thought to be a good option based on all the facts and circumstances, should still consider this option.  For those Leumi customers who are now in limbo wondering what to do if they were thinking of going into the program but are now afraid  they will be rejected, consider this scenario: if for example the facts show that a substance over form analysis leads to the conclusion that the foreign account does not really belong to the taxpayer because their name was placed on the account for testamentary planning purposes or for the convenience of their parents, FAQ 17 might provide a possible approach.  There, if no tax is due, taxpayers are advised to  prepare delinquent FBAR’s and explain with a good cover letter why they goofed up by not filing in the first place.

If the IRS says Quiet Disclosures are bad and at the same time, announces that something is not strictly kosher at Bank Leumi, the response should not automatically be to just do nothing or try to sneak in any way through the side door, but rather prepare the requisite amount of amended returns and delinquent FBAR’s and file them with a good cover letter explaining why the taxpayer finds himself in this mess in the first place.

Conclusion:  It is far from clear that the Bank Leumi’s dis-invitation Letters represent a “bait and
switch” on the part of the IRS. With all the tasty and juicy low hanging fruit gathered since 2009, it is doubtful the IRS would water down it’s in terrorum message which clearly targets big fish.  It is also highly doubtful the IRS is going to dilute its message by going after some poor Chaim Yankel who just learned his name is on a bunch of his parent’s accounts.  The IRS would prefer to make a big splash by
building a case against a private banker who actively suborned the filing of false tax returns by maintaining secret accounts in Israel.  The IRS also does not want to scare away the thousands of accidental Israeli-Americans living in Israel or recent immigrants to the United States from Israel.  If a practitioner is counseling a client who may be a potential candidate to make a full disclosure under OVDI despite the Leumi dis-invitation letter, some clients may be well advised to file anyway and use the opt out procedures, or in a regular audit,   argue no FBAR penalties under the Mitigation Rules. The result should be the same for “Leumi Rejects” as well as for prospective Leumi OVDI candidates whose conduct does not fit the egregious patterns of those who really need to come clean under the Program. Presumably, the Leumi Rejects will get to argue no penalties should apply under the Mitigation Rules. The same should result under a Noisy Disclosure outside the program which allows for a modified, simplified submission and hopefully the chance to meet with an agent who has the smarts and guts to say, “Wait a minute here.
One size does not fit all.”

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