Almost every American living in Israel is aware of the legendary "additional child tax credit" (ACTC) "tax credit/refund" of $1000 per child. Over the years I've written about it on the blog; The IRS Taxman cometh, The Apocalypse: Feds arrive in Israel, With Liberty and Passports for all, as well as the importance of filing the FBAR (Foreign Bank Account Report) -- disclosure of all Financial Holdings and Bank accounts outside the United States that belong to American citizens that are in excess of $10,000. Therefore, almost any American who has moved to Israel and has a pension fund or keren hishtalmut -- is required to file the US FBAR.However....because there exists an entire underground "industry" of return preparers who have filed fraudulent returns, fabricating earned income in order for their clients to claim child credits, and have retroactively filed for tax credit refunds after children have been naturalized (not American by birth, but by being brought to the USA and made citizens there) -- many tax practitioners in Israel have stated that the IRS has begun scrutinizing (read: AUDITING) all returns of Americans in Israel claiming the ACTC.
Thankfully I have not (yet?) been audited, but with the IRS targeting everyone -- I am putting together this list on how to proactively prepare for an audit.
Step 1: Take a deep breathe, count to ten, and don't panic. Assuming you used a reputable tax-preparer, didn't count a kollel stipend as income, and you didn't retroactively try to claim the refund after bringing your kids to the US for naturalization -- you should be able to survive the audit unscathed.
Step 2: The key for surviving the audit is to prepare now, even if you aren't being audited. Proactivity is the key.
A letter from the comptroller of your company stating -
- Duration of your employment
- For the previous 3 years, your salary, income tax, health tax, and national insurance (ביטוח לאומי) payments
- The bank name, branch number, and acct. no. into which your salary was paid.
Your original form 106’s and authorized English translations** for the previous 3 years.
A letter from your family physician listing the names and date of births of all your kids, and a statement that s/he has been treating them for the previous how many years and that they reside with you and your spouse. The letter should be on Kupat Cholim stationary, preferably with an English letterhead.
A letter from each of the schools your kids attended during at least the previous 3 years indicating their names, date of births, the grade they’re currently studying in (if relevant), and a statement that you and your spouse are their primary care providers and that they reside with you. The letter should also indicate your address, that you paid their school fees, and that you attend parent-teacher meetings faithfully.
A copy of your marriage certificate. If married in the USA - your marriage license. If married in Israel, the registration form provided by the Minister of Religious Affairs when you got married, (not your Ketuba), and an authorized English translation.**
Copies of US passports for each member of the family.
Copies of IL passports for each member of the family.
Copies of Social Security cards for each child.
Copies of IL birth certificates for each child.
Copies of US Consular Report of Birth Abroad for each child.
Step 3: Don't try to deal with the audit by yourself. Pay a CPA in Israel -- they have far more experience, and even if you get all the documentation above by yourself (which will save you much time and hassle), its still best to pay the CPA and let them be the interface to the IRS.For more information on the IRS targeting American tax filers in Israel, see this article, "Americans in Israel Under IRS Scrutiny for Child Credit Claims" by Eric Kroh.
Yihiyeh Biseder!
PS: Kudos to the underground "industry" of return preparer and services who caused this massive Chilul Hashem. You know who you are, and you will be audited a thousand times over in hell.
If you need the name of reputable CPAs in Israel, you can contact me by email.
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Wherever I am, my blog turns towards Eretz Yisrael טובה הארץ מאד מאד
7 comments:
The translations need not be notarized at all, and the translator need not be "certified". Here is the relevant language from the IRS code:
(c) Standards for acceptability of submissions of documents in a language other than English and certified English translations of laws in a language other than English. The taxpayer must submit with the request an accurate and complete certified English translation of the relevant parts of all contracts, wills, deeds, agreements, instruments, trust documents, proposed disclaimers, and other documents pertinent to the transaction that are in a language other than English. If the taxpayer chooses to submit certified English translations of foreign laws, those translations must be based on an official publication of the foreign government or another widely available and generally accepted publication. In either case, the translation must be that of a qualified translator and must be attested to by the translator. The attestation must contain: (i) a statement that the translation submitted is a true and accurate translation of the foreign language document or law; (ii) a statement as to the attestant’s qualifications as a translator and as to that attestant’s qualifications and knowledge regarding tax matters or foreign law if the law is not a tax law; and (iii) the attestant’s name and address.
This is something I've done for several clients, and there have been no problems with the translations.
Contact me - fischer.tirgum at gmail - if you need a translator.
Elli - Thanks for the clarification. I have updated the post, and you are hereby nominated for the Muqata's official recommendation for translation services!
My son was recently audited. He had prepared his returns himself but had tried to stay within the rules: he really has a steady job, he only claimed his children for the tax credit for the years after they became naturalized citizens and not for the one who is not yet a citizen, and he sent all the documents in an organized multitabbed binder. The audit was conducted remotely from Texas and the auditor worked with him to fix some mistakes he had made in understanding the law. I think it worked out OK because he responded promptly, organized and showed that he was working in good faith.
Any blog post that writes "yiyeh b'seder" is ok by me.
We have been suffering audits for the past 3 years. We successfully had two years closed, despite egregious errors on the part of the IRS and depsite no illegal activities on our side (no kollel income, all children born in the US, no retroactive amendments). We also use a reputable tax firm. We have been petitioning to have our refunds released (they are frozen during the audits), and we have been notified that they will be auditing two additional years of returns.
The point? Don't expect to survive unscathed. Thousands of shekels, lost work time, untold stress and aggravation is what we have earned from the ACTC.
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The practice of random selection has been a source of controversy for many years, and was even suspended for a short time in the early 2000s amid criticism that the audits were too burdensome and intrusive. The IRS revived the practice in the fall of 2006.
Remember, in addition to any ‘findings’ by the auditor of unpaid taxes, you will also be assessed interest and penalties.
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