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.



Follow the Muqata on Twitter.

Wherever I am, my blog turns towards Eretz Yisrael טובה הארץ מאד מאד

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...

Going to Israel?
Now get 2 phones for the price of 1 (and free calls too) with Talk'n'Save.

Wherever I am, my blog turns towards Eretz Yisrael טובה הארץ מאד מאד

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...

Wherever I am, my blog turns towards Eretz Yisrael טובה הארץ מאד מאד