Wednesday, May 29, 2013

IRS: OBAMA'S GESTAPO: Did the IRS target Americans in Israel?

by Carl in Jerusalem
May 29, 2013 - Wednesday
Did the IRS target Americans in Israel?
Americans in Israel constituted one of the largest groups to oppose President Obama's election both in 2008 and in 2012.

On Purim day in 2011, a US citizen in my neighborhood, who has been living here since he was a child, came up to me and asked whether I could help him with something to do with the IRS. It seems that the IRS had audited him because he had claimed the Additional Child Tax Credit (ACTC), and had come back with a bill that was likely more money than he made in those years. The IRS decided that it had discovered fraud (with Americans in Israel reporting undocumented income in order to qualify for the credit) in claiming the child care credit. While that claim has some basis, the IRS has spent the last two years auditing the returns of - literally - every American in Israel who has ever claimed the credit. 

In light of what has come to light over the past couple of weeks about the IRS targeting pro-Israel organizations and groups that do not support Obama, could it be that the IRS's widely targeted audits of American Israelis was more Obama vindictiveness?

To give you some idea of how Americans in Israel can claim this credit and the scope of the problem:
Americans living abroad are allowed to claim the ACTC, a refundable credit of up to $1,000 per child that is available to taxpayers who can't receive the full amount of the child tax credit because it exceeds their income tax liability. But because some return preparers have filed fraudulent returns fabricating earned income in order for their clients to claim the child credits, the IRS has begun scrutinizing all returns of Americans in Israel claiming the ACTC, practitioners said.

Philip Stein, a CPA who practices in Israel, said that in the last year, his firm hasmhandled more audits of Americans living in Israel than in the previous 30 years combined. He said the audits focus on one group: U.S. citizens living in Israel who claimed the refundable child tax credit. He added that the ACTC seems to be the sole area of expertise of the auditors involved.

The ACTC was "talked about a lot, particularly in the Orthodox community in Israel who have large families where salaries aren't very high," Smith said. "A lot of these Orthodox are people whose parents moved from the U.S. to Israel. Accountants and lawyers said to these people, 'You know, you don't make that much money. You're a U.S. citizen at birth. Your kids are not U.S. citizens. Make them U.S. citizens and you might be able to get checks from the U.S. government for the ACTC,'" he said.
Let's stop there for a minute. Orthodox Jews in Israel are a demographic that votes overwhelmingly against Obama. Could it be that they were targeted by the IRS because of that? Well, it's not so simple....
Because taxpayers must have earned income to be eligible f or the ACTC, and because most U.S . taxpayers living abroad do not have their wages reported to the IRS, the credit is susceptible to fraud. In Israel, some unscrupulous tax return preparers have fabricated earned income for clients in order to get a cut of the refunds, practitioners said. "They saw this as an opportunity to file returns, create large refunds, and their billing was a percentage of a refund," Stein said.

However, most of the ACTC claims by Americans in Israel are legitimate, and the IRS audits are straining the firms handling the cases, practitioners said. There are many legitimate preparers "in Israel with clients who have been compliant for a decade," Stein said. Unfortunately, the IRS doesn't have a way to distinguish between "preparers who have been working the field for many decades and those who set up shop for this purpose," he said.

The IRS audits have created tension between U.S. taxpayers in Israel and the IRS . The agency has raised the bar for what documentation it will accept as proof of earned income, according to practitioners. It now wants to see an Israeli Form 106, the equivalent of a U.S. Form 1040, to verify earned income, along with a certified translation of the form, they said [Actually, the 106 is the equivalent of a W-2 in the US. Israelis who are not self-employed are generally not required to file Israeli tax returns, so most Israelis don't file anything like a 1040. CiJ]. Stein said that to meet the IRS standards , taxpayers must translate a notarized document [It's the translation that has to be notarized or certified by an attorney, so you have to hire a professional translator or an attorney to translate. CiJ] and hire an accountant to represent them in the audit. "Besides the time and aggravation factor, they spend half of what they were supposed to get in the refund" on the audit, he said.
Plus many of them have to take their children to the US to register them as US citizens in the first place (that is the case where there is only one parent who is a US citizen). That's an expensive trip, the costs of which might be offset by the ACTC.

Admittedly, a minority of returns filed by Americans residing in Israel were fraudulent. In most cases involving fraudulent returns that I have heard about, the income wasn't fabricated but it was paid 'off the books' in Israel, which means that they are evading taxes in Israel, but telling the US how much they really earned. Surely, in those cases, one cannot argue that they're not legally liable to report that income in both countries. It's not the IRS's job to do tax enforcement for another country.

The other - less common - form of 'fraud' is declaring an educational stipend as earned income and being told by the IRS that it doesn't qualify. But many of the people who do that are actually being paid to teach and not just an educational stipend. Teaching is a legitimate occupation and that income happens to be earned. The IRS response, according to people I've talked to in that situation, is 'we don't believe you.'

What's unsaid here - and what would be most telling - is how many US citizens in other countries who claim the credit are audited by the IRS. For example, how many US citizens in the 'Palestinian territories' - where almost nothing is paid 'on the books' - are audited? How many US citizens in Greece - where tax liability is determined via a negotiation with the tax authorities - are audited? I'm going to bet that the numbers in those two countries are close to zero, as was the case in Israel until just 2-3 years ago. And I'm going to bet that almost no US citizens with income under $1 million who reside in any other foreign country get audited. Keep in mind that the IRS is unlikely to recover more than a few thousand dollars from each of these people, and would have a difficult time recovering from anyone who does not still maintain assets in the US.

So is the IRS targeting US citizens in Israel because we don't support Obama? I leave it to all of you to decide.
posted by Carl in Jerusalem @ 9:22 AM