New US International Tax Policy

New US International Tax Policy


New US International Tax Policy  
מאת:  Ehud Kisch CPA   עודכן בתאריך:  11/06/2010  


New US international tax policy directly affects US citizens living in Israel

In recent years we have been witnessing a new US tax policy that includes aggressive enforcement of US tax law on US taxpayers that have investments and businesses outside the US. This category of US taxpayers includes of course Israeli citizens holders of US passports that naturally own investments and businesses in Israel – their country of residence.
 
Making good on one of his main campaign pledges President Obama has come up with a comprehensive US international tax plan. On May 11, 2009 the Treasury Department released General Explanations of the Administration’s Revenue Proposals that includes major changes affecting all US taxpayers with international operations. President Barak Obama plans to raise $210 billion over the next decade by amending the US international tax law and by strictly enforcing US international tax requirements on US companies and US citizens doing business and / or investing abroad.

The new policy of aggressively enforcing compliance with US international tax law already started some time before the Obama Administration came into office. Today It looks like it has now become a strategic goal of the US Government.  Some of the measures that were taken in order to achieve this goal are:
Imposing more strictly high civil penalties for non reporting by US citizens and US companies. Even in cases where the non reporting was committed without intent to avoid paying taxes. (See notes below regarding certain penalties for non reporting income or assets).
Criminal proceedings with very high fines for intentional non reporting of income or hiding of assets from the US government.
Increased and improved cooperation and exchange of information with treaty countries regarding tax returns filed by US citizens with foreign tax authorities, and other relevant information.
Increased cooperation and exchange of information with international financial institutions regarding bank accounts held by US citizens.
Legal charges filed by the Justice department against international banks and their managers and officers for conspiring with their US clients to defraud the United States Government out of US taxes (Such as in the case of UBS Bank).
Voluntary disclosure programs and amnesty from criminal proceedings for US citizens that wish to amend past wrongdoings and fully report their past and current worldwide income.
Improving the IRS ability to audit and review tax returns of US citizens doing business and investing abroad. During 2009 the IRS recruited a large number of additional employees to work in the IRS international tax division in Philadelphia.
The “HIRE ACT”, which was enacted on March 18, 2010 includes additional disclosure requirements regarding financial assets held abroad. US individuals will be required to attach additional information to their tax return regarding their financial assets held abroad with value of $50,000 or more. The HIRE ACT also includes a  new withholding regime (effective from 2013), forcing foreign financial institutions that wish to do business with the US to disclose information on their US account holders. In general, the HIRE ACT includes a raft of provisions intended to effectively end foreign bank secrecy. In fact this has already began – Foreign banks (including some Israeli banks) are now starting to urge their US clients to sign a declaration and waiver of secrecy or take their business elsewhere.
Some of the US tax requirements that directly affect you as a US Citizen Living in Israel

US citizens who are residents of Israel and own Israeli companies:
One of the less known US tax requirements is the special reporting obligation of US citizens owners of foreign companies. If you are a US citizen living in Israel and you own an Israeli company, you are subject to special US CFC (Controlled Foreign Corporations) tax rules. Under this requirement all the activity of your Israeli company has to be reported in detail to the IRS. This is done on form 5471 and supporting schedules. There is a penalty of $10,000 for non reporting. In very general terms the CFC rules enable you to defer US taxation on certain business income of your Israeli company until you actually take dividends from the company. An exception to this deferral is subpart F income that is taxed to you as having received that income from the company. It includes certain passive and other types of income of the Israeli company. Credit against the US tax liability for Israeli tax paid or deemed paid on dividends taken and on subpart F income is available.


The Foreign Bank Account Report (FBAR):
The FBAR has become a concern of many US citizens living in Israel who have bank accounts and / or financial assets with value of over $10,000 in Israel or in other locations outside the US.  Until recently, it was a standard form (Form TDF 90-22.1) sent to the US Treasury in Detroit, MI every year by 30 June for the reporting of the previous year.  The change came about when the US Treasury decided to step up the campaign against those not reporting off-shore income or assets.  The IRS was delegated authority to handle and enforce the FBAR reporting. The IRS has started to engaged in a large scale initiative to seek out taxpayers with undisclosed accounts overseas. As part of this effort, the FBAR form was changed to be more comprehensive with more detailed information to report. Also civil and criminal penalties for non-compliance with the FBAR filing requirements are severe. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.
 
Self employment tax:
If you are a US citizen living in Israel and operating an unincorporated business (“Atzmaee”). You are subject to US self employment tax on your business income as well as the Israeli Bituach Leumi. Although there is a tax treaty between Israel and the US that eliminates double taxation – there is no similar agreement between the two countries regarding social security payments. On the other hand if you are a US citizen employed by an Israeli employer (“Sachir”) – you are exempt from US social security payments.  

General requirement of annual tax return filing:
US citizens no matter where they live are required to file annual tax returns and report their worldwide income. In fact the US is one of the only countries in the world that also requires all of it’s citizens that reside abroad to file tax returns. Therefore if you are a US citizen living in Israel you a required to file annual tax returns just as any US citizen living in the US. This applies even if you were born in Israel and never in your life set foot on US soil .

Tax benefits:
As a US citizen living in Israel you can also enjoy some US tax benefits such as child tax credits, and under certain conditions accumulation of US social security benefits on your work in Israel.


Solutions


It certainly looks like the policy of strict enforcement of US international tax law will continue in the future coupled with even stronger measures. Utilizing correctly the US - Israeli tax treaty along with good tax planning will enable US citizens living in Israel (in most cases) not to pay additional taxes to the US Government over and above what they already paid to the Israeli tax authorities. However in order to avoid the risk of high penalties and / or criminal charges it is very important to make all the required US tax reporting, be aware of the upcoming changes in US tax law, and be in compliance with US tax requirements.

Kisch & Co. CPAs is an Israeli – American CPA firm specializing in US and Israeli tax planning and tax return preparation services. For a consultation on how you as a US citizen living and doing business in Israel can amend prior years non reporting, be in compliance with the different US tax requirements, and avoid penalties - please contact us, we will be happy to assist you.

 

This article contains highly abbreviated information and can not be a substitute for specific professional advice.

 
 
 
Ehud Kisch, CPA (USA, Israel)

Kisch & Co. Certified Public Accountants