IRS warns US Jews living in Israel

Thousands of Israelis hold an American passport, yet some of them do not realize that, according to US law, they are required to report annual income to the US tax authority, the IRS. This is the case even if they don't work in the US or do not have a bank account in the US.

At the beginning of June this year, the IRS began a voluntary disclosure program, which will end in August 2011. During this time period, American passport holders are being offered the opportunity to file tax returns disclosing their income from their country of residence without enforcement measures being taken against them, and to pay a reduced fine.

Israelis who are US citizens should take advantage of this program, since after this time period, the IRS will begin taking significant and aggressive steps.

Following the recent economic crisis, the IRS decided to increase revenue by enforcing the law requiring every American citizen, even if he/she does not live in the US, to submit a detailed report of his/her income during the year.

Up until now, since the law was not enforced around the world, and since American banks were not required to report deposits by American citizens, many Americans were able to avoid their duty of disclosure and reporting.

Moreover, many citizens were not even aware that they were required to file tax returns even if they did not owe any taxes to the US government.

A series of steps that the IRS will implement in the next few months is likely to make failing to file a tax return become difficult and not worthwhile for American citizens living outside of the US.

One of the most significant steps that has already been taken is the IRS's success in forcing Swiss banks, especially UBS, which are known for their strict adherence to banking secrecy, to transfer to them the names of all American citizens who have deposited money with them.

The US even signed a series of treaties that regulate the receipt of information from countries that are known tax havens, among them Gibraltar, Liechtenstein, and Aruba.

The most significant step for Israelis who are American citizens will soon come into force. The IRS succeeded in instituting new rules whereby, from 2013 banks that conduct any activity in the US, in other words all Israeli banks and most banks around the world, will be required to report to the IRS all American citizens' bank accounts, as well as new accounts opened by American citizens.

These rules will enable the US to receive information about and access to American citizens' financial information throughout the world.

Who needs to file tax returns in the US?

All American residents and citizens and everyone who has an American green card, even if he/she lives in Israel and has no income in the US.

Who do recommend should file tax returns as part of the IRS's special arrangement?

All American citizens and/or green card holders who, up until now, have not filed a tax return with the IRS, and would like to take advantage of the reduced fine currently being offered.

I have not filed a tax return in the last twenty years. Why should I start now?

The rules of the game have changed. From 2013, all banks around the world, including in Israel, will begin reporting to the IRS all American citizens who have bank accounts, including those who will not be willing to declare that they do not have American citizenship.

Who is eligible to report income within the framework of the voluntary disclosure program?

Anyone who has not yet filed tax returns in the US, as long as he or she is not being investigated in the US.

How long does the voluntary disclosure procedure take?

From a few months up until one year.

What is the voluntary disclosure program's reduced fine rate, and how is it calculated?

In principle, under the arrangement, a fine of 25% of the total amount of a citizen's bank account, in addition to assets purchased with funds from this account. However, with respect to American citizens who have income in the US of less than $10,000 a year, the special arrangement offers a reduced fine of 5%, which is calculated only from the bank account amount, without including other assets.

Isn't it preferable to continue doing nothing and to wait and see if they approach me?

If the IRS approaches an American citizen who did not file tax returns, that citizen could be guilty of a felony. Moreover, the "regular" fines for failure to file are extremely high, and they are usually $10,000 for every bank account for each year. In some situations, the fine can reach 50% of bank account amounts.

Is a citizen who pays taxes in Israel on income earned in Israel or who pays taxes in another country on income earned in that country, exempted from paying tax to the IRS?

No! All American citizens are required to file tax returns with the IRS in the US and to report bank accounts outside of the US. This is true even if he/she does not owe any taxes in the US (for example, a salaried worker in Israel who has never been in the US, but holds an American passport). An American citizen needs to pay taxes on all income around the world, including Israel. However, he/she is entitled to offset all the taxes paid in Israel.

Therefore, in reality, almost no tax will need to be paid in the US if he/she has no income in the US.

How do you file an IRS tax return? Whom do you contact in order to take advantage of the voluntary disclosure program?

You can file the tax return on your own, but it is advisable to receive assistance from a law or accounting firm in Israel that employs lawyers or accountants with US certification, and who are knowledgeable in the field.

The authors are tax specialists at Goldfarb-Zeligman Law Offices. Adv. Tal Atzmon heads the tax department and Adv. Yael Shoshana has many years of experience dealing with American tax issues, and has processed hundreds of voluntary disclosure cases for American residents and citizens.