Planning to Survive an IRS Audit in Israel

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.

You should prepare and gather the following information:

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.

**Authorized English Translation means you need an authorized translator (not yourself)  and it must be approved by a notary.   This may actually be cheaper in the US than in Israel because notary services in the US cost a fraction of notarization services in Israel (which are outrageous). Thanks to the CPAs and translators who have updated me that the translations do not need to be notarized. See the comment section for an authorized translator.

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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The IRS, FBAR and you.

Its only hours to go before the ides of March, yet the IRS decided it was fed up with one of those pesky US citizens who tried to cheat the system.

Arriving at Harv's Metro Car Wash in midtown [Sacramento] Wednesday afternoon were two dark-suited IRS agents demanding payment of delinquent taxes. "They were deadly serious, very aggressive, very condescending," says Harv's owner, Aaron Zeff.

The really odd part of this: The letter that was hand-delivered to Zeff's on-site manager showed the amount of money owed to the feds was ... 4 cents.

Inexplicably, penalties and taxes accruing on the debt – stemming from the 2006 tax year – were listed as $202.31, leaving Harv's with an obligation of $202.35. (Sacramento Bee)

The FBAR filing deadline for tax year 2009 is June 30, 2010. Most tax attorneys interpret this to mean that the FBAR must arrive at the Treasury by June 30th, not simply be postmarked by then.

And if you think the IRS doesn't care -- why would they bother going after someone for a three year old debt of 4 cents?

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The IRS Taxman Cometh

In addition to news about Israel, Srugim and waffles, The Muqata Blog has also been following the US Tax code and its implications to expatriate US citizens living in Israel. We discussed the FBAR and the IRS child tax credit option.

6 months ago we disclosed that 13 FBI agents (or perhaps Homeland Security?) had set up a special unit within the US Embassy in Tel Aviv. Now we report that many of those who have claimed (and received) the $1000 per child tax credit rebate, have started to receive audit notices from the IRS. (See image above -- its the real McCoy, with only the identifying details blacked out)

The IRS requests a boatload of documentation that must be provided within 30 days.

I read through this request...and thought, "Well, that's not SO bad. I could get all that data together in 30 days".

And then I did the wrong thing, by googling "IRS Audit"

Q: What are my chances of getting through an audit without owing additional taxes?

A: Fewer than 25% of audit victims make a clean getaway. The IRS audits half as many taxpayers today as five years ago, but the take per audit has increased. The IRS, thanks to its sophisticated computer selection process, audits only those returns in which adjustments are almost a certainty. Realize the odds are against you and focus on limiting the damage from an audit.

Limiting the damage? I filed using a professional CPA and tax preparer. He doesn't try to bend or break the rules.

Some outfits (some already allegedly under IRS and FBI investigation) sound like used car salesmen:

In 2009, the Stimulus Act of the Obama Administration meant that instead of having a reported income of more than $8000 a year, American citizens in Israel only needed $3000 a year in reported income in order to qualify for a tax credit of $1000 per child. This means that the American government is helping its citizens by distributing money, and a check can come to your mailbox with $1000 per child, if you act now. This is not a gimmick.

Mishpacha Magazine (page 1, page 2) has a whole write-up on the onslaught of IRS requests for audits, quoting CPAs that "We've entered a new era...we've been receiving requests from people who are being audited... something that's never happened before [in Israel]"


People are warned of the following illegal practices that the less reputable tax preparers use:

- Those who naturalize their children during a given tax year, cannot claim the tax credits retroactively for previous years.

- Use of Kollel stipends or parental gifts as income for claiming the tax credit

- Grandparents claiming their grandchildren as dependents since 2005

These are common practice among the less reputable tax preparers – some of whom don't even sign the tax return! When faced with an audit, the onus is on those who signed the form. Make sure you KNOW what you're signing when filing your 1040.

With a less than 25% chance of a clean getaway on an audit -- the IRS is not who you want to mess with; even in Israel.

If you want the name of a reputable CPA tax preparer, and not some fly-by-night scammer, drop me an email.

We're going to be following this story, as the audits start piling up...

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FBAR: The Final Lap

So why have I hardly blogged lately? Sukkot, Family, Work...but the biggest vacuum of free time known to mankind...the FBAR.

I'm in the process of finishing to my FBAR reports for 2003-2007 so I can mail them in before the October 15th absolutely final deadline.

That's right, postmarked by the 15th isn't good enough. Frankly, the FBAR people might even throw away all FBAR's received by the due date, and then decide to process/prosecute those that arrive late ($10K per received late form)...who knows? Nobody knows. The FBAR reports have never been a big deal till now, so the uncertainty is the killer.

OK, leaving the blog so I can finish my reports tonight. Wish me luck. Once these are done I'll reclaim the blog from JoeSettler.

Jameel.


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IRS & FBAR: Time to panic [yet?]

Good News for US Citizens living in Israel -- the IRS has extended the FBAR Voluntary Disclosure Amnesty Program from September 23 to October 15, 2009.

Of course you filed the FBAR form for the past 7 years, right? And you declared Earned Israeli Interest on your bank account and keren hishtalmut, right? Or perhaps that savings plan where you squirreled away a few shekel a month hoping you'll have something to pay for your kids' weddings...you declared that as well, right? It may have been pennies worth of interest, but you had to declare it on your 1040.

For a scary article on the subject, the JPost calls in a US Tax Attorney, who paints a rather bleak (perhaps alarmist?) picture.

Applicants to the [voluntary disclosure] program need to hire a tax attorney, as they are in effect taking part in a criminal proceeding, admitting to breaking US law.

Wolf said American-Israelis shouldn't think they're okay simply because they have filed their US tax returns.

"It's irrelevant," he told the Post. "You need to file the American tax return form and report the worldwide taxable income, in addition to filling out the FBAR form in which you declare your accounts around the world," he said, referring to the US Treasury Department's Form 90-22.1, "Report of Foreign Bank and Financial Accounts."

"You have to get your name into the program before the deadline," stressed Wolf. "It might be all legitimate - but you need a US tax attorney to register you and your activities for the past six years with the voluntary disclosure program. It's serious, and it's a criminal offense, period."

Is this more than a Tax Attorney trying to drum up business?


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The Apocalypse: Feds arrive in Israel

This particular issue has the potential to put the recent money laundering arrests in NJ in its back pocket.

The Mishpacha Hebrew edition reports today -- US Federal Agents arrive in Israel to investigate possible fraudulent US/IRS tax rebates and citizenship/naturalization claims.

The article is all in Hebrew, but here are some salient points: (click images on the right to see them full-sized)

• US federal government is in pursuit of those who "provide incorrect information and receive from the US IRS income tax rebates."
• 13 IRS investigators from the US have arrived in Israel to verify the authenticity of existing documentation
• Department heads familiar with the subject: The investigation will go on for a long time, and whoever submitted incorrect information will find themselves sued to return the money [and face criminal prosecution]
• "The public does not understand the enormity of the problems involved," said one of the company owners that are experts in advancing US citizenship to individuals and families.

"The rumors flew about. The long arm of the US federal government had reached Israel to investigate Israelis with US citizenship who claim IRS tax rebates when they are not entitled to them for various reasons."

In a simplistic nutshell, any dual citizen of the US and Israel who earns annually in excess of certain amounts [$11,750 for '07 and $8,500 for '08] is entitled to a 15% IRS rebate of the excess, up to $1000 per child under the age of 17.

Experts told Mishpacha magazine that while its' legal to (a) get US citizenship for children and (b) request retroactive IRS refunds for up to 3 years -- one may not request a refund for a child retroactively if the child only received citizenship now. Apparently, less than scrupulous accountants and tax preparers have filed claims of this type.

Additionally, in order to receive the "maximum" tax rebate of $1000 per child, the familiy's income must reach a certain level/threshold. The IRS will be investigating whether the reported income filed with the IRS matches what has been reported to Israel's tax agency (mas hachnasa).

As a result of the investigation, tens of thousands of families may find themselves under IRS scrutiny, and those that illegally received US citizenship, illegally filed for tax rebates, or supplied incorrect information will find themselves forced to return the money, with penalties and interests in the best of cases, and in the worst case, find themselves imprisoned with large fines as well.

I did warn you to file the FBAR...

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Life Keeper Patch Connected to Money Laundering?

Its obvious to me that someone at SafeSky didn't fill out their FBAR report.

Haaretz:

"I can't rule out a development in the cardiac patch affair that will connect it to money-laundering, but it's too early to tell whether there was a money-laundering trick here. In the meantime, the media reports are much ado about nothing."

That was a senior Justice Ministry official's response this weekend to reports that the ministry's Israel Money Laundering Prohibition Authority (IMPA) was investigating the SafeSky affair. The police are not involved at this stage.

(Technical Schematic hat-tip: Lurker)

Investigators believe the deal announced last week, that Amos Bouchnik and Aharon (Arik) Klein's company SafeSky would receive $370 million from Micro-Star International of Taiwan, was intended to cover an illegal cash transfer from shadowy foreign sources to Israeli banks, including Poalei Agudat Israel Bank, of the First International Group.

Micro-Star has vigorously denied any such deal, or even knowledge of the company.

"Many money-laundering schemes throughout the world involve connections between well-connected individuals and top lawyers. When you go to the bank and you want to do something that's not quite kosher, you take trustworthy people with you," the Justice Ministry official said.

Even if the money-laundering theory proves to be correct, it's still not clear why the heads of SafeSky rushed to report their spectacular exit to the media, exposing themselves to scrutiny and subsequent disclosure. The alternative was to present the contract with MSI to their bank and to deposit the money, while benefiting from banking confidentiality.

Dumbest Quote of the Week:

In a Channel 2 news report this weekend SafeSky officers said, "Hagai told us that if every soldier had a Life Keeper patch, we'd know where Gilad Shalit is."


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US Citizens in Israel; Have you filed the FBAR?

Tomorrow, June 30th is the deadline for filing the 2008 "FBAR" (Report of Foreign Bank and Financial Accounts) to the US Treasury.

Honestly, I'd never heard of this before -- I have been filing IRS taxes for years, though as an Israeli citizen paying taxes here, the US/Israel dual taxation treaty meant I rarely had to actually pay the IRS anything.

Yet while the FBAR is nothing new...it was rarely filed by people and the IRS never went after you for not filing it.

So what's new?

1. Congress recently linked the requirement to file the FBAR to the U.S. Patriot Act, making the failure to file a criminal offense in addition to a civil offense. This is a serious change.

2. President Barack Obama is making good on one of his campaign pledges by promoting the more strict enforcement of tax laws. Starting with the 2008 FBAR, the IRS is enforcing policy of going after those who don't file.

Section 5321(a)(5) of the American Jobs Creation Act of 2004 imposes penalties of up to $10,000 for nonwillful failure to file the report or disclose foreign accounts. Whereas this sanction has not new for 2008, the IRS has announced that it intends to enforce penalties for FBAR noncompliance.

"Nonwillful failure" means that simply not knowing about this form is still reason enough to get in big trouble.

3. The mailing deadline for 2008 FBAR forms is JUNE 30, 2009 – and unlike regular IRS tax forms, no extensions are granted.

So remember, if you're an American citizen living in Israel, and have over $10K in an Israeli bank account, savings account, even a keren hishtalmut, you need to file this report by tomorrow...to avoid the "Patriot Act" knocking on your door (or it could be the next time you happen to visit the USA and the friendly Passport stamper doesn't smile at you....)

Unless you want to spend some quality time in Guantanamo and a hefty fine of 10 thousand dollars, I seriously suggest you discuss this with your CPA and file the report in the next 24 hours, if you haven't already.

Your CPA should be able to give you some basic direction...but plan to spend some time on this (I spent well over 8 hours.)

As Treppenwitz always says -- "don't thank me...I'm a giver"

Background Reading;

Jpost: Your Taxes: US and Israeli tax amnesties
Ha'aretz: As U.S. turns up heat on tax laws, Americans in Israel start to sweat

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