Americans filing their tax returns from Israel are being audited by the U.S. Internal Revenue Service with a frequency that industry professionals have never seen before, according to several certified public accountants.
While some of the accountants who spoke with Haaretz are not convinced Americans living in Israel are being singled out for audits more than other Americans living abroad, some maintain that the IRS has given indications it will pay more attention to Israel, Hong Kong and Singapore.
All are cautioning filers to take note of a new "vigilance" among U.S. tax authorities less than two months before the June 15 filing deadline for taxpayers living outside the United States.
"Most of my colleagues would agree that the audit rate is up significantly," maintains Alan R. Deutsch, a certified public accountant with offices throughout Israel. "The IRS is conducting large-scale audits to a degree I have not seen in the nearly 20 years I have been practicing in Israel. Those are the plain facts."
The accountants who spoke with Haaretz generally agreed that over the last two or three years, the U.S. administration has been steadily "tightening the screws" - as one accountant put it - as it cracks down on offshore tax evasion by U.S. citizens in an effort to bolster revenues and compliance. "Americans here should be concerned," says Don Shrensky, whose Jerusalem-based firm specializes in both U.S. and Israeli tax planning and compliance. "With the new reporting requirements by Israeli banks under FATCA - the Foreign Account Tax Compliance Act - it is going to be more difficult for Americans living in Israel to avoid dealing with U.S. income tax returns in the future."
Starting in 2014, Israeli banks will identify and report to the IRS for calendar year 2013 each account held by a U.S. person, including account balances. In 2016, for calendar year 2015, banks will be required to start reporting the account income. Under recently issued temporary regulations, Israeli banks are exempt from identifying pre-existing accounts with balances of less than $50,000 for individuals and $250,000 for entity (companies, trusts, etc. ) accounts. "But will the Israeli banks make that distinction?" Shrensky asks.
Earlier this month, Haaretz reported that Bank of Israel Governor Stanley Fischer was considering asking the cabinet to reach a tax agreement with the United States to help allay Israeli banks' fears regarding strict new U.S. tax regulations for Americans living abroad. The report revealed that Bank Leumi is already requiring its U.S. customers to sign a document by the end of the month, in which they declare that they have complied with the U.S. tax authorities' reporting requirements. If they do not do so, they risk having their accounts frozen. Bank Hapoalim also reportedly made a similar request of its customers.
Meanwhile, the Israeli web site NRG reported on Monday that Americans have withdrawn more than a billion dollars from Israeli banks over the last several months.
The accountants who spoke with Haaretz did not have nationwide statistics for the number of audited U.S. tax returns submitted from Israel; each based their conclusions on the number of audits of their own clients and some of their clients' colleagues. "I know of one colleague who received 22 requests [audits] in one week," one veteran accountant told Haaretz on the condition his name not be revealed.
"In my perception, the audit numbers will only increase," says Doron Sadan, COO and tax partner of PwC Israel. "The U.S. tax authorities will be very strict and have much more information through the banks and financial institutions as they become aware of individuals who do not file a tax return."
Several accountants speculated about other "red flags" that may have caught the eye of IRS regulators, from trends pointing to a spike in the number of Americans abroad registering their children as American citizens; the U.S. government's "Amnesty" (Overseas Voluntary Disclosure Initiative ) program in 2009 and 2011; and the frequent use by large American families of the decade-old provision allowing middle-income Americans to take a $1,000 credit against tax for each child under the age of 17.
"If a U.S. person living in Israel has an Israeli salary and the combined salary of both spouses is less than $110,000, the Israeli tax paid on the salary is credited against the U.S. tax due," explains Shrensky. "Assuming no other income, usually the Israeli tax credit will eliminate the U.S. tax due. The taxpayer then gets a refund check from Uncle Sam."
The credit was originally intended to relieve families' tax burden, Shrensky says. Yet Deutsch posits that there seems to have been some "abuse" in the claiming of the credit. "The IRS may be realizing that people, for the most part, applied for citizenship for their children in order to possibly claim a child credit on their tax returns," he says. "So with the increase in applications for citizenship, there has been an increase in the number of federal audits to make sure that children claimed on the tax returns are being done correctly." Deutsch says the IRS is "primarily, though not exclusively," focusing on the child credits.
Another accountant, who asked not to be identified, said an "unscrupulous firm in Israel was preparing fraudulent tax returns to boost the refund amount," though he did not name the firm in question. "The IRS got wind of this and has audited all of their clients, plus they have started to audit returns prepared by other Israeli firms or by the taxpayers themselves."
It is estimated that there are some 200,000 Americans living in Israel, according to officials at the Association of Americans and Canadians in Israel. Those whose returns are being audited must obtain a long list of documents. Depending on the specific case, those documents may include a certified translation of the Israeli Form 106 - for Israeli wages earned, salary slips and the Israeli tax return. In cases where families are being asked to authenticate the number of their children, birth certificate and naturalization documents must be provided. It must also be proven that the children live with the taxpayer, who in turn supports them. Even if the IRS accepts the taxpayer's explanation, the process of furnishing documentation with certified translations, and employing the services of certified accountants, will cost taxpayers plenty of time and money, industry observers note.
Shrensky takes the IRS to task for mishandling what he sees as its two main goals: identifying tax cheats and encouraging non-complying taxpayers to come back into the system.
"In my opinion these are two different goals requiring two different approaches," says Shrensky. "Unfortunately, the IRS has been applying the same tactics against both the cheats and non-compliers. They have also put into the same box both the U.S. taxpayers who live in a foreign country and those who live in the U.S. They are not the same."
The Internal Revenue Service did not respond to a request for comment on this article.
Though the U.S. Department of Internal Revenue Service does not maintain an office in Israel, Americans here may contact the web site of the Paris branch for international inquiries: http://france.usembassy.gov/irs.html Americans may also turn to the Association of Americans and Canadians in Israel, which publishes an online, regional list of certified accountants with whom the organization is "familiar," according to the group's director of absorption services, Josie Arbel. The list may be viewed on the AACI website at www.aaci.org.il. AACI also holds a number of tax preparation and financial planning seminars both for members and the public throughout the year, according to Arbel. In the coming months, the AACI is planning additional tax seminars in Jerusalem and Tel Aviv ahead of the June 15 filing deadline.
Help with tax returns
Americans seeking guidance and assistance with the preparation of their income tax returns may turn to a variety of sources throughout Israel.
The Association of Americans and Canadians in Israel (AACI) publishes an online, regional list of certified accountants with whom the organization is "familiar," says the group's director of absorptions services, Josie Arbel. The list may be viewed at: http://www.aaci.org.il/articlenav.php?id=30.
"Callers are usually referred to a minimum of three accountants on the list," says Arbel, whose counselors urge immigrants to compare the various services and prices. AACI holds a number of tax preparation and financial planning seminars both for members and the public throughout the year, according to Arbel.
In the coming months, the AACI is planning additional tax seminars in Jerusalem and in Tel Aviv ahead of the June 15th filing deadline. "We certainly can't offer financial solutions but we try to give our members the tools so that they'll be in a better position to make educated decisions," says Arbel.
The April-May edition of Esra Magazine – the official publication of English Speaking Residents Association – features two articles on the subject that are available online: "U.S. Income Tax Update for 2012," by CPA Alan R. Deutsch , and "The Death of Bank Secrecy" by attorney Frank Elliot Kahn.
Though the U.S. Department of Internal Revenue, or I.R.S., does not maintain an office in Israel, Americans, here, may contact the web site of the Paris, France, branch for international inquiries.
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