New Developments

FBAR -- Frequently Asked Questions (FAQ's)  

FBAR

There has been much written regarding the US requirement that US citizens report detailed information about financial accounts outside the USA in which the citizen has a financial interest or signatory authority (even if not owned by that person). If the total value of all such accounts exceeded $10,000 at any time during the year the citizen is required to file Form TD F90-22.1 known as the FBAR (Foreign Bank Account Report) or else be subject to severe penalties.Those who have or have had foreign accounts and do nothing to resolve their unfiled foreign bank account reports, will have to continue to look over their shoulders (and their mail) for many years to come. No statute of limitations applies to unfiled returns and unfiled foreign bank account reports. It would be a far better thing for taxpayers to report their foreign financial account than worry about the IRS pursuing them. 

 FBAR fillings for 2011 will be due in June 2012 with no possibility of an extension of time to file. If this matter is of concern to you and we can be of assistance contact us early. 

Caveat Emptor  

 Paid preparers of U.S. tax returns not only need to sign the tax return they prepare, but they also need to apply to the IRS for a PTIN (Preparer Tax Identification Number) and indicate their PTIN on all U.S. tax returns that they are paid to prepare.

All preparers must renew their PTINs annually and pay the associated user fee. In addition, any tax return preparer who is not a U.S. Certified Public Accountant, attorney, or enrolled IRS agent has to satisfy competency testing and continuing education requirements in order to obtain a PTIN.

Unfortunately many Americans have fallen prey to tax return preparers who have prepared fraudulent or erroneous U.S. tax returns in order to generate US tax refunds, and then the taxpayer has suffered heavy penalties and expense to rectify those filings. In situations such as those we have found that the preparer did not have a PTIN and did not sign the U.S. tax return he prepared.  Furthermore, this has created a bad name at the IRS for Jews in Israel and has caused the IRS to come down very hard on many innocent Americans in Israel whose tax returns were actually prepared properly. 

  The Israeli Tax Authority ("ITA"), published its Revenue Notice on 15/11/2011 describing its new temporary Voluntary Disclosure Initiative ("VDI") procedure giving Israeli taxpayers an opportunity to report undeclared income in earlier years and only pay the appropriate tax without criminal or even civil penalties and without even paying interest on the under paid tax. This temporary VDI is an AMNESTY opportunity in the true meaning of the word (unlike the US Voluntary Disclosure Initiatives and those in other countries). 

 Israeli Amnesty & Voluntary Disclosure

This VDI relief will only be available to residents of Israel who request entry into that program before 30/06/2012 and are approved by the ITA. 

The new VDI amnesty will be available in the following cases (among others):

1.     Israeli residents who realized unreported taxable income from foreign assets where the assets were acquired with Israeli funds that had not been taxable in Israel upon receipt or the tax on the receipt of such funds was paid;

2.     Israeli residents who realized taxable income after 2002 from foreign assets owned legally before 2003 (such as Olim with foreign assets when coming to Israel) which became taxable effective 2003 by virtue of the change in law at that time or upon expiration of the Oleh Hadash tax holiday and that income has not been reported to the ITA since then;

3.     Israeli residents who realized unreported taxable income from foreign assets inherited or received as a gift from a foreign resident.

Conspicuously missing is any reference to Voluntary Disclosure of taxable income earned abroad other than from assets ownes by the Israeli resident.

The ITA recently increased its efforts to encourage Israeli residents to make this voluntary disclosure in the atmosphere of world-wide efforts by other countries – such as the USA – to uncover foreign bank accounts and foreign income of its nationals that should have been reported and taxed back home, but was not.

It should be noted that income covered by this VDI which was taxed abroad (e.g. in 2003 – 2006) may no longer be sheltered by the foreign taxes paid on that foreign income more than five years ago, under existing Israeli tax rules.

The Procedure

An application to enter this VDI program would have to be made to the ITA who will then check in their investigative branch to see whether a secret investigation of that taxpayer is already underway; if so, the VDI request would be denied. The Revenue Notice also suggests that if the application is denied, then the ITA will not use the information so volunteered to prosecute the individual for tax evasion, etc.

If the ITA is satisfied that the criteria for this VDI are met and a tax investigation is not under way, then the request will be approved and that taxpayer will be given an opportunity to make full disclosure of unreported taxable income from abroad and pay the tax that should have been paid. (This does not apply to unreported but taxable Israeli source income.)

If all unreported foreign income is reported and the tax is paid within the time period required, then the ITA will grant the taxpayer immunity from criminal penalties and civil penalties otherwise prescribed by the tax laws for such under reporting of income. It is even likely that interest (and possibly linkage too) will not be charged on the tax for the period since it was originally due and not paid.

This is a real opportunity for taxpayers to turn over a new leaf and pay the tax they should have paid and then continue to report properly in future years.

Here is the link for the original Hebrew article.

Israeli tax rates are to go up at yearend!

A Bill has been proposed to increase taxes effective January 1, 2012 in order to cover the cost of proposed Trajtenberg committee social benefits recommendations. 

Among those changes are the cancellation of rate reductions that were to go into effect next year and instead increase taxes as follow on both Israeli source income and on foreign source income:

1)      To raise the top tax rate on ordinary annual income over 483,000NIS (about $134,000) from 44% to 48%;

2)      To raise the flat tax rate on interest, dividend and capital gains from 20% to 25%;

3)      To raise the flat tax rate on dividends from a company that is owned 10% or more by the taxpayer from 25% to 30%;

4)      To impose a 2% surtax on the taxable income of individuals from both earned income (such as business, partnership and salary income) and investment income (such as interest, dividend and capital gains). The surtax is to be imposed on income over 1,000,000NIS for the year ($275,000 +/-) or about $23,000 per month on average. The surtax would be imposed on the combined taxable income of a married couple in excess of 1million NIS.

5)      To raise the flat income tax rate on companies from 24% to 25%;

6)      The employer portion of Bituach Leumi tax on salaries was proposed to rise from 5.9% to 7.5% of gross salaries. However that increase was omitted from the Bill. On the other hand, the ceiling on salaries and self-employed income subject to Bituach Leumi tax is to revert effective January 1, 2012 to its former ceiling of 5 times the average Israeli income or about 45,000NIS monthly from the current ceiling of about 73,000NIS monthly.

7)      An ESTATE and GIFT TAX had been proposed by the Trajtenberg committee, and by several MK's, but it was omitted form the proposed tax Bill.

What to do?   In most cases there is nothing much that one can do before yearend. While you might consider action such those listed below, we caution individuals, especial those taxable by the United States (or another country) as well as Israel to consider the impact of such action on an international tax level and not with just the Israeli tax in mind.

1)        Individuals owning substantial interest in a closely held company should weigh paying additional dividends of accumulated earnings before yearend vs. additional salary next year.

2)        If you can, accelerate receipt of interest income, rental income or other income from next year to this year.

3)        Realize capital gains before yearend even if you buy back those investments shortly after their sale? The Bill proposes a linear allocation of the gain on real estate over the entire holding period, and a "virtual" sale at yearend of marketable securities in order not to tax older gains at new higher rates.

Note that the above is not yet law; details of the new law may differ from the Bill.

Let us know if we may be of assistance in developing yearend strategies.

US Tax Credit for college tuition and related Expenses

The American Opportunity Tax Credit can be claimed for tuition and certain fees paid for higher education in years 2009 - 2012. It may be claimed for expenses for the first four years of post-secondary education.  It is a tax credit of up to $2,500 of the cost of qualified tuition and related expenses paid during those tax years.The term "qualified tuition and related expenses" includes expenditures for "course materials. For this purpose, the term "course materials" means books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Click here for more on the subject or contact our office for help claiming those benefits.

Private Israeli Companies May be Subject to Sanctions if Not Complying

Government notices have recently been mailed to Israeli companies that are in arrears with paying annual Companies Registrar charges or have not filed annual Registrar Form #5 with the Company's most recent financial statements attached.

 The sanctions can be levied by the Rasham and Directors of companies may be held personally responsible for any unpaid fees and fines levied against the Non-compliant Company.

For more information about this issue and how to rectify such situation or comply with the requirements click here. For the Annual Report click here.