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The new memorandum (SBSE-04-1811-070) is the latest development in a continued crackdown on the use of these subsidiaries to avoid taxes.

In the Aug. 9 document, released on the web Sept. 19, IRS told agents to check whether captive subsidiaries have engaged in closing agreements with the service and whether there is additional information relating to controlled industry cases.

The guidance outlined a detailed list of other issues agents must look for. It follows a series of other documents unveiled by IRS over the past year indicating the agency is not only looking closely at such subsidiaries, but may be auditing them individually.

Text of SBSE-04-1811-070 is available at http://op.bna.com/dt.nsf/r?Open=vmar-8lvtms.

The department disclosed the probes on a section of its website detailing the Tax Division’s Offshore Compliance Initiative. In 2009, prosecutors charged UBS AG, the largest Swiss bank, with aiding tax evasion by U.S. clients. UBS avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the U.S. Internal Revenue Service data on more than 250 accounts. It later turned over data on another 4,450 accounts.
Prosecutors opened 150 grand jury investigations of offshore-banking clients, charging 30 people, and indicting 13 other people who facilitated the hiding of assets offshore, according to the website.

The banks under scrutiny by the U.S. Justice Department's criminal tax division are Bank Hapoalim, Bank Leumi le-Israel BM and Mizrahi-Tefahot, the sources said.

The shift to Israel from Switzerland, for years the main focus of the Justice Department's campaign against offshore private banking secrecy, signals the broadening of a landmark probe by the agency that began in 2007 with UBS AG, Switzerland's largest bank.

The shift also opens up a potential sore spot in the historically close relationship between the United States and Israel, a key diplomatic and military ally in the Middle East that is the biggest recipient of U.S. aid -- $3.1 billion last year.

U.S.-Israeli relations have come under strain in the past year, after U.S. President Barack Obama's drive to relaunch direct peace talks between Israel and the Palestinians collapsed, although both sides say their decades-old alliance remains unshaken.

The scrutiny of the three Swiss branches of the Israeli banks is at an early stage and has not reached the level of that of Credit Suisse, which received a target letter from the Justice Department in July, or of HSBC Holdings, a major European bank, and Basler Kantonalbank, a Swiss cantonal bank, said the people briefed on the matter.