Shomer Shekalim

Category Archives: banking

FATCA and US Financial Reporting

By Chaim Korn

The 2010 United States Foreign Account Tax Compliance Act, better known as FATCA, requires foreign financial institutions to report to the IRS the names of their U.S. account holders.  This will most probably begin in July 2014.

Banks and other financial institutions in most countries, including Israel, have indicated that they will comply with FATCA.

U.S. taxpayers worldwide have always been required to report their foreign accounts on their annual FBAR (FinCEN 114) report.  In addition, since 2011, similar information is reported on Form 8938 (attached to Form 1040) for higher account balances.

US Persons (US citizens and green card holders) who are required to submit an FBAR or 8938, but haven’t, can face severe fines and even criminal charges in extreme cases.

Who is required to report?

FBAR:  US Persons, who at any time during the year had more than $10,000 in all non-US financial institutions combined, must file the FBAR Report.  Financial institutions include banks, brokerage accounts, certain pension funds and “keren hishtalmut” funds.  Accounts include those owned jointly and even accounts owned by others for which you have signatory power over.  The FBAR is an annual report due June 30th with regard to accounts during the previous calendar year.  In contrast to tax returns, there are no extensions allowed for reporting the FBAR.  The FBAR must be filed electronically.

Form 8938:  US Persons living abroad who are required to file tax returns will have to add Form 8938 to their 1040 if the total account balance of all non-US financial institutions combined exceeds $200,000 at year end, or, more than  $300,000 at any time during the year..  These amounts are double for married couples filing a joint return.  Amounts are substantially lower for US residents.

Penalties:  Penalties for failure to file the FBAR or Form 8938 are severe and can, in extreme situations, even include criminal sanctions.

If the IRS considers the failure to file an FBAR as non-willful, the fine can reach as high as $10,000 for each year that the report was not filed.  The penalty for willful failure to file is the greater of $100,000 or 50% of the maximum amount held in all non-U.S. accounts during the year.  For example, if a taxpayer has $200,000 in foreign accounts for six years and does not file the FBAR form or report income earned by the account each year, the IRS could assess a $600,000 FBAR penalty.

The penalty for failure to file Form 8938 is generally $10,000 per year.

The good news, however, is that if you can show reasonable cause for failure to file the reports, then the penalties can often be abated.

What should you do if you haven’t reported in the past

There are several approaches one can take in dealing with their overdue obligation with the IRS:

  • Offshore Voluntary Disclosure Program
  • Streamline Procedure
  • Quiet Disclosure

The Offshore Voluntary Disclosure Program

Beginning in 2009, the IRS established a series of “Offshore Voluntary Disclosure Programs” to encourage taxpayers to come forward and disclose their non-U.S. accounts, pay reduced penalties, and avoid criminal prosecution. The current program requires taxpayers to file delinquent FBARs and amended income tax returns including income which was not previously declared (i.e., interest, dividend and capital profit), if any, and pay tax and penalties going back eight years. In order to be eligible for this program, a request for participation in the program must be filed before the IRS contacts the taxpayer regarding delinquent returns, and before a foreign financial institution reports to the IRS.

Taxpayers must also pay a single FBAR penalty equal to 27.5 percent of the highest aggregate balance held outside of the U.S. over the previous eight years. In addition, while the normal FBAR penalty applies only to non-U.S. financial accounts, the voluntary disclosure penalty applies to the value of any foreign assets that either produced undeclared income or were purchased with undeclared funds. For example, if the taxpayer has rental property overseas and did not declare the rental income, the value of the rental property will be included in the penalty calculation.

As the penalty under the voluntary disclosure program applies only once, rather than each year, it may significantly reduce the taxpayer’s potential FBAR penalties.

The Streamline Procedure

The Streamline process allows “low risk” taxpayers who have not lived in the US at any time since the beginning of 2009, to apply for a reduced reporting requirement which includes tax returns for the past three years and FBAR reports for the past six years. 

Low risk refers to most taxpayers who owe less than $1,500 of tax per year.  There are other criteria, as well, that must be checked before submitting reports using the Streamline procedure.

Quiet Disclosure

This method is simply filing all tax returns and FBARs that are delinquent.  The advantage to this is that for taxpayers who either owe no tax or small amounts of tax, it will probably not raise any red flags.  The downside of this approach is that it does not provide any protections that the formal voluntary disclosure program might provide, or any built-in compromise to reduced FBAR penalties.

Which Method is Best for You?

Taxpayers Should Act Quickly to Evaluate which Approach Best Suites Their Needs

FATCA will force most non-U.S. financial institutions worldwide to disclose account information on their account holders who are US citizens beginning in this summer.  These U.S. taxpayers, many of whom may not even be aware of their obligation to disclose the accounts, may be running out of time to take appropriate action before the IRS takes its own.  Remember, once your bank reports to the IRS, it will be too late to use the Voluntary Disclosure or Streamline reporting options.  The quiet approach, as well, will likely be more risky.

Time is running out.  If you haven’t been compliant in your reporting to the US, the best course of action in order to avoid potentially heavy fines from the IRS is to begin reporting immediately. Your tax professional can help you decide the best approach to take, but the most important piece of advice is to NOT procrastinate.

Chaim Korn is a Certified Public Accountant from New York with over 30 years experience.  His offices are located in Ra’anana and Ginot Shomron and can be contacted at: chaim@tax-usa.co.il   www.tax-usa.co.il

Israeli Investing 101

I’ll be blunt.  When it comes to investing, most people have no idea what the hell they’re doing.  But it doesn’t have to be that way.  Israel’s financial system has a fantastic system in place in order to help people invest safely and wisely.  And the best part is that quality, objective financial advice is usually free.

Before you need to invest, you need to know why you are investing.  Investing in order to save for a down payment on a mortgage is not the same as investing in order to preserve the value of money, nor is it the same as investing for retirement. Each of theses goals has a specific rationale behind it that impacts the risk one is willing to take, the amount of investment and the oversight required.

Once you know why you are investing and how much you are looking to invest, the next step is to find someone to help guide your investments.  In Israel, the person to look for is a yoetz hashkaot, a certified investment advisor.  This is not the same as a meshavek hashkaot­, someone licensed to sell investments.  Only a yoetz hashkaot is entirely objective, a term with significant legal ramifications.  Buying investments from a meshavek hashkaot is like buying a second hand car and relying on the car salesman for a fair assessment.  I am not saying that the meshavek hashkaot is lying, but his goal is to sell you the best financial option that he has to offer, not necessarily the best financial option from among all the options available.

Finding a yoetz hashkaot is easier than you think; just go to your bank and ask for one.  Speaking with your yoetz hashkaot at the bank and receiving his advice an analysis is free, although the bank does take a commission of 0.4% – 0.7% on buying and maintaining some investments.  Some banks do not offer investment counseling unless you have a lot of money.  If you have a bank like this, I suggest speaking with the manager or telling your banker to #&@% off; many banks offer free advice, regardless of how much money is being invested.  I bank at Mercantile, and I received free investment counseling even though I began with only NIS 7,000 (I am not sure if the policy of offering and limiting investment counseling depends on the bank or the specific branch.)

Alternatively, you can look for a private yoetz hashkaot who will take a different commission (or maybe just a fee for his advice and analysis) and will do the buying and selling of investments for you or show you how to do it yourself.  If your Hebrew isn’t that great and your bank doesn’t have someone who can speak English, it may be worthwhile to find a yoetz hashkaot who speaks English.  Also, if you’re not comfortable with your bank’s yoetz, you should find a private one.  Just make sure that the person you find is a yoetz hashkaot, not a meshavek hashkaot.

Once you know why you’re investing and you have a yoetz hashkaot, you’re almost ready to go.  The yoetz will begin by explaining his liability to you and then give you some simulations to test how you feel about risk.  In most cases, your yoetz will take a few minutes to talk you out of investing in the currency market and begin to direct you to mutual funds (as a Dave Ramsey fan, I appreciate this).  Depending on your adversity to risk, the yoetz will find a few funds that match your preference.  Finally, you’ll compare funds by discussing the risk, the sharpe, and fees.

A good yoetz hashkaot is not just someone who can give you good advice, but is also someone who holds your hand and explains everything to you clearly so that you can make a decision.   Let me say that again – so that you can make a decision, not him.  Don’t invest anything if your not 100% comfortable with the decision.

What has your experience been investing in Israel?  Is there a bank or yoetz hashkaot that you recommend?

some of the benefits of the Israeli financial system

I realized by a response to my last post that while explaining how to choose a bank in Israel, I came off very critical of the Israeli banking system.  My intent was to explain that when looking for a bank in Israel one should consider (1) the workings and time of the individual branch more than the bank (2) consider the advantages and disadvantages of a personal banker, (3) pay attention to a different credit card system, (4) get the most out of online services, (5) avoid bank fees and (6) make sure you can bank in your mother tongue.

As a whole, the Israeli banking system is actually pretty good .  In fact, the service I personally receive from Bank Mercantile on Herzl St. in Petah Tikvah ranks right up there with my beloved WAMU zt”l.

Israeli banking, like banking anywhere, has its ups and downs, and I believe that some of the benefits of the Israeli system should applauded:

(1) ahead of our credit, not behind: 

In the US, a person takes a credit card and then, when payment is due, runs to decide from where he or she will repay it.  In Israel, we have a system where the consumer decides from where he or she will pay BEFORE he or she uses a credit card.  By hooking up a credit card up to a checking account, Israelis are one month ahead of their credit card bills, not one month behind, where penalties upwards of 35% await most Americans.

(2) credit card limits based on cash flow:

In Israel, we have a system whereby the limit one spends on a credit card is established based on one’s regular income.  This logical safeguard guards against excessive spending, and can help people stay within a subjectively normal limit.  Yes, one can always go to his bank, take out all his money and then charge more, but the fact that one has to go through all these steps distinguishes those who innocently wander into debt from those who are fanatically driven to it; not everyone can be helped, and it wonderful that we help those we can.

(3) credit for loans based on income, not debt:

Perhaps the stupidest measure of credit is the FICO score, the one currently used in the United States.  The FICO score rewards a constant reliance on credit and utilization of debt, whereas a logical system would look at one’s ability to repay a debt.  Israel, thankfully, has such a system.  When one takes out a loan in Israel, he or she should expect to bring tlushim and prove that he or she actually has the ability to repay the debt, not turn it into a second, third, or as many Americans do, sixteenth mortgage.

(4) the mandatory pension law:

While most countries preach against Keynesian economics, few actually resist the temptation of demand driven economics and actively encourage savings.  Israel is light years ahead of the United States not only in the understanding that the paradox of thrift is completely untrue (savings is investment, not a removal of money from the economy as Keynes saw it), but in mandating a pension system that demands that workers save their earnings to take care of themselves in the long run.  Sorry Mr. Keynes, but in the long run, we still want to retire with dignity before “we’re all dead.”

(5) Real oversight for our most important investments

While our mandatory pension system may seem limiting (although more options are on the way), the options that we have are overseen by a responsible government organization.  If you check out pensianet on a regular basis, you’ll notice that any time one of the funds has a statistic that looks out of whack, it will be highlighted in red and noted for correction.  Israel understands the importance of diversification and knows that if it allows its citizens to take the risks taken in the US, then it also faces the risk of suffering the same financial crisis.

choosing a bank in Israel

When I made aliyah a few years ago, I was surprised at how different the banking system in Israel is from the system I was used to in the States.  Not knowing what to expect, I blindly followed my aliyah shaliah’s advice and ended up at a horrible bank from which I transferred after 2 years. 

But it’s not all bad.  My first banking experience in Israel could have been worse, and before it was, it taught me to consider a number of items when choosing a bank:

(1)  Think local

In Israel, unlike in the US, your account is tied to a local branch, so if you need to do any major transactions, you will have to go to your branch.  When I moved from Jerusalem to Petah Tikvah, I had to switch to a local branch that was not open on Fridays, forcing me to miss work any time I wanted to do any serious banking.  I later switched to a bank that was open Fridays, but closed Sundays, a much better trade-off to match my working schedule.

Also, pay attention to how busy the local branch is.  At my last bank I had to wait two hours for a single transaction because I went on a busy day. Obviously banks have busier times than others, but two hours is insane.  Next time you shop for a bank, go into the bank a few times at your convenience and see if the bank is not overly packed (or understaffed, as the case may be.)

(2)  It can get personal

Some Israeli banks insist on tying every customer to a particular banker.  While this does allow for a more personal banking experience where your personal banker knows what you need, it is also annoying to have to try to wait if your particular banker is busy or on vacation.  Personally, I hate the idea of being tied to a banker; I want to be in contact with the first available banker and get the information I need (what can I say, banking really brings out the yekke in me).

At the same time, make sure that you get the direct number for the local branch where you do your banking.  At my last bank, I had an issue where money was taken from me by mistake, and the bank even admitted it, but kept telling me to be in contact with them via the call center.  The call center was horrible; everyone kept passing me to someone else and promising to call me back with an answer.  After calling dozens of times over the course of six weeks and not getting anywhere, I closed my account and moved to a different bank.

I know what you’re saying now: “so go to a bank where you are tied to a banker!”  Well, I ended up going to a bank with the best of both worlds.  On one hand I am not tied to a banker; on the other hand, I can directly contact the manager of the bank if anything goes awry.

(3)  Credit and debit cards are not the same and it makes a difference

While the American credit card system is a travesty, the American debit card system is a model to which I hope Israel will aspire.  Back in the US, I could use my debit card to take out up to as much money as I had in my account and everything was posted instantly.  (And don’t let the rumors fool you; most debit cards have the exact same protection as credit cards.)

Israel has a different system that is kind of a cross between a debit and credit card system.  Using an Israeli credit card, you are only to spend up to a particular limit and instead of the money coming out of your account as each transaction occurs, the amount you charged each month is removed in a lump sum.  This became an issue two years ago when I had to pay for a private surgery and had to come up with a large amount of money.  The money was in my account, but the surgeon would not accept a check.  I had to choose between using a bunch of different credit cards (including my US one, which charges a large fee for international use) or taking out the money from my branch and carrying around thousands of shekels in cash, like a drug dealer.  Long story short, make sure you have a system in place with your bank to deal with this kind of issue.

(4)  Online services have a lot of potential

Most banks will allow you to monitor your account and perform simple transactions online, but some will even let you do complicated transactions as well.  This week, my wife contacted her banker via e-mail with a difficult transaction request and then he called her within a day to confirm the transaction and send over the necessary paperwork.

(5)  Banks will try to nickel and dime you

I already killed this subject in a couple of posts here and here.  My views are clear:  you should be paying minimal or no fees and you have to fight for it.  Make sure, before signing onto a new account, that you know the entire fee structure.  Also, don’t believe a banker who promises you a discount; get everything in writing.

(6)  Language matters

I was actually surprised to hear from a number of people that their bankers would not communicate with them in English, or even get another banker who could.  Most banks I have dealt with go out of their way to find bankers who speak a number of languages (in Petah Tikvah, Russian and Amharic are the main languages in demand).  Nonetheless, if a banker will not speak to you in your language, request another banker or don’t sign up for that bank; it’s not worth messing up your finances over a language issue.  (“I dind’t close ten thousand dollars in a CD, I asked you what time you’re open on Tuesdays!”)

What do you look for in a bank?  What challenges have you faced?

Mortgage Brokers in Israel: Paying More to Save More

The following is a guest post by Shuey Fogel, a nonprofit professional turned banking specialist. He is currently Director of Nonprofit Services for an Israeli bank. Shuey shares relevant conversations, articles, and experiences on his blog, nonprofitbanker.com.

I bought a house this past September.  After speaking to a few friends, I decided to use a broker to help me secure a mortgage instead of dealing with the banks directly.

This is one time when I felt that paying a service commission (mortgage brokers aren’t free), saved me money in the future (as well as, time and lots of headache right now).

The following are the benefits I experienced from using a mortgage broker:

1) Person I Could Trust 

Banks are banks; what you see is what you get. And most of the time, you don’t have a choice.  No so with brokers. I shopped around until I found a broker I could trust and with whom I could work (not always the same thing).  I called for references to check on his track record.  Right from the start, I knew I could count on the person that was going to be handling the brunt of the work connected to the mortgage; a much more comfortable alternative to dealing with an anonymous bank clerk.

2) No Language Barrier

I’m a banker.  I have also been working in Israel for almost seven years.  With this said, I can confidently say that I don’t fully understand the process for securing a mortgage in Israel nor all of the Hebrew phrases used in connection to mortgages.  Variable interest vs. Fixed Interest vs. Cost of Living Index? Insurance through the bank or privately?  Ishur al chovot ba’alei zechut?  Biniyat Atzmit? Questions and phrases that I didn’t know but my broker did.  

The broker is a native English speaker (though his company also employs Hebrew and French speakers) and, moreover, the broker’s application form was in English.  And when I was signing forms at the bank he was right there next to me, answering any questions I had.

3) Time Saving

I am very busy during the day. My wife is very busy during the day. Heck, we’re both pretty busy even at night.  Mortgages are a time consuming ordeal.  First, there is the shopping at the different banks to get the best rate. Then there are the multiple trips to the bank to sign various forms. Not to mention the various other documents necessary to secure the mortgage from other parties, such as: lawyers (power of attorney); appraisers (approved written appraisal of the property); permit offices (heter biniyah) etc. 

The mortgage broker did the shopping for me. He arranged a time for me and my wife (we went separately) to come to the bank when he was going to be there – no long waits for available clerks.  He was in touch with the bank about any missing or outstanding forms. We worked with each other by fax, email and, when necessary, messenger. He would then take with him on his weekly trips to the bank, my forms and questions.  I only had to go to the bank twice!  He even laid out money when we had to order an appraisal of my house.  

4) Better Loan Terms

A broker is handling multiple loans each month and, as such, has more bargaining power than a private individual.  Moreover, as he has amassed quite a lot of experience, banks will find it very hard to pull the wool over his eyes. 

My broker showed my loan to three different banks to see who would give him the best price. But still he wasn’t done. He then pushed so that could get the terms I needed, both in terms of length of the repayment and one-year grace (I’m renting while I’m building).

N.B. This is not to say that it is impossible for a private individual to procure similar rates and terms as a mortgage broker. I’m just saying I haven’t heard of someone that has.

5) Hand Holding

My broker knew exactly the kind of time constraints I was under and actively worked with me to make sure the application was moving along.  He would email me reminders or just call to see if I had any questions.  

6) Accessibility

It was a pleasure having my messages, texts, faxes, and emails answered promptly.  

Conclusion

A mortgage broker knows that he doesn’t get paid until the bank releases his client’s mortgage. It is to his benefit to move the process along as expediently as possible – a situation that benefits everyone involved.

Again, this service is not free.  Mortgage brokers charge a percentage (varies) of the amount borrowed from the bank (not the purchase price).  However, my broker’s service saved me huge amounts of time and hassle (which is also worth money) and was able to procure me a longer term loan that made the monthly payment more feasible.  Other friends of mine who did more intensive research, told me that according to their calculations, the lower interest rate obtained by the mortgage broker paid for itself after a year to three years (different friends has different rates) – the remaining years were pure savings!

In short: In addition to cheaper monthly mortgage payments, I still have my sanity and my marriage intact.  In my opinion, hiring a mortgage broker is definitely something to consider when buying a home in Israel.

Behatzlachah,

Shuey

Shuey Fogel is a nonprofit professional turned banking specialist. He is currently Director of Nonprofit Services for an Israeli bank. Shuey shares relevant conversations, articles, and experiences on his blog, nonprofitbanker.com.

avoiding bank fees

I remember the first time I went over the fees on my bank statement in Israel.  When I made Aliyah I did not even know the word amalah (bank fee), but from learning Bava Kama, I knew the word knas (fine).  The conversation went like this:

Me:  What is the bank charging me ₪ 30 as a knas?

Banker:  You’re not paying any knas, these fees are being paid as an amalah.

Me:  What’s the difference?

Banker:  Well, an amalah is a bank fee and a knas is a fine.  This isn’t a knas because you didn’t do anything wrong.

Me:  Then why are you taking ₪ 30 from me?

Bank fees are out of control.  And don’t think this phenomenon is limited to Israel.  My bank in the US used to be Washington Mutual, a bank who prided itself with the slogan “we don’t nickel and dime you.”  Of course after the recent crash, it was taken over by Chase, who, to say the least, nickel and dimes like no tomorrow.

In fact, in the wake of the recent economic meltdown, most US banks have increased their bank fees.  Basically, not enough money is being made on loans and the CEO’s salary (and bonus) has to be paid, so it’s up to the little guy to make the difference.

Israeli banks have also increased their bank fees in the recent years.  Some fees are supposedly meant for users to try other mediums (₪ 6 shekels for using a teller, but only ₪ 3 if you use an ATM) and some are just a slap in the face (20 shekels PER MONTH for just having the ability to use a credit card.)

The real reason this happens is for two reasons, (1) collusion and (2) price discrimination.

Collusion:  The market basically dictates how high or low bank fees can go.  But when several banks decide to act together in order to dictate policy, our oligopoly turns into a cartel and banks can pretty much get whatever they want out of whomever they want.

Price discrimination:  As mentioned above, many banks raised the bank fees for people who use the teller, supposedly in order to encourage ATM usage.  I suppose they think that the incredibly long line at the bank is just so inviting that I would love to spend 45 minutes on line instead of using an ATM.  So who still uses the teller inside for simple transactions?  People who cannot use the ATM.  In many cases, this includes immigrants and the elderly.  These people will probably not put up much of a fight over a hike in bank fees, mostly because they lack the ability.  Banks are using a simple economic tool of price discrimination in order to extract the greatest amount of money from each individual market segment

So if this is true, who pays the least bank fees?  The answer is obvious – whoever makes the biggest stink over bank fees will pay the least.

The deals are there, you just have to look for them and be aggressive when setting up your account, and if need be, move to another bank.