Americans in Israel Targeted by IRS for Tax Audits

Suspected Child Credit Fraud of Hasidim Prompts Scrutiny


By Nathan Guttman

Published March 03, 2014, issue of March 07, 2014.
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This upcoming tax season entails some unpleasant surprises for United States citizens who either live in Israel or who hold bank accounts there.

Filing requirements for these Americans have become more rigorous and the odds of being audited by the Internal Revenue Service are higher than they’ve ever been. In fact, tax accountants working in Israel estimate that almost every American expatriate living in Israel and filing for a child tax credit in their annual return can expect an audit.

“I’ve seen more audits in the past year or two than I’ve seen in the previous 30 years combined,” said Philip Stein, an American CPA working in Israel. “It created a difficult atmosphere both for honest tax preparers and for honest families filing their returns.”

As the IRS cracks down on offshore accounts and on suspected fraud from overseas, Israel faces extra scrutiny. Part of it has to do with the federal government’s new campaign to uproot the practice of secret overseas bank accounts, some of which are in Israel. But part of the heightened scrutiny is a result of specific fraudulent activity carried out by Americans living in Israel that has effectively made the entire community a target of suspicion.

“Because of a few unscrupulous tax preparers, the IRS is discriminating against all taxpayers living in Israel,” said Jo Anne Adlerstein, a former Assistant U. S. Attorney in charge of tax prosecutions who now has a practice in Israel. “I truly believe these audits are overzealous.”

American tax filings from Israel came up on the IRS’s radar screens shortly after the passage of the 2009 stimulus package, which included a $1,000 child tax credit for each child. The law enabled families who do not owe taxes to receive the cash value of the tax credit under certain conditions. Overseas U.S. citizens who pay taxes in their country of residence can qualify for the cash credit if they can demonstrate the taxes that they are paying overseas meets the threshold the IRS requires for tax filers living in America

The prospect of receiving a handsome yearly check from Uncle Sam prompted many of the estimated 250,000 United States citizens living in Israel to add a tax credit request for their children to their annual tax return. But alongside these legitimate claims, several self-proclaimed tax preparers in Israel offered American citizens who did not qualify for the credit a chance to claim it. Through ads in community newspapers — many of them Orthodox — and via word of mouth, they promised families that they could qualify even if they did not make enough earned income to qualify for the benefit.

For these families, some with eight or 10 children under the age of 17 and with very little income from work, the preparers helped submit fraudulent returns, stating false income from work in Israel. In other cases, they requested credit for children who were not recognized as United States citizens.

While there is no clear indication regarding the identity of the false tax filers, the tax preparers’ use of Orthodox community newspapers to advertise their services suggests that this was their target audience. The profile of large American families with low earned income living in Israel also fits that of members of the Haredi, or ultra-Orthodox, community. According to Israeli government data, Haredi families in Israel have 6.7 children on average. A 2010 study conducted by Israel’s Ministry of Trade, Commerce and Labor found that the income of an average Haredi household is roughly half that of the Israeli general population.


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