Almost every American living in Israel is aware of the legendary “additional child tax credit” (ACTC) “tax credit/refund” of $1000 per child.
Over the years I’ve written about it on the blog; The IRS Taxman cometh, The Apocalypse: Feds arrive in Israel, With Liberty and Passports for all, as well as the importance of filing the FBAR (Foreign Bank Account Report) — disclosure of all Financial Holdings and Bank accounts outside the United States that belong to American citizens that are in excess of $10,000.
Therefore, almost any American who has moved to Israel and has a pension fund or keren hishtalmut— is required to file the US FBAR.H
However….because there exists an entire underground “industry” of return preparers who have filed fraudulent returns, fabricating earned income in order for their clients to claim child credits, and have retroactively filed for tax credit refunds after children have been naturalized (not American by birth, but by being brought to the USA and made citizens there) — many tax practitioners in Israel have stated that the IRS has begun scrutinizing (read: AUDITING) all returns of Americans in Israel claiming the ACTC.Thankfully I have not (yet?) been audited, but with the IRS targeting everyone — I am putting together this list on how to proactively prepare for an audit.
Step 1: Take a deep breathe, count to ten, and don’t panic.
Assuming you used a reputable tax-preparer, didn’t count a kollel stipend as income, and you didn’t retroactively try to claim the refund after bringing your kids to the US for naturalization — you should be able to survive the audit unscathed.
Step 2: The key for surviving the audit is to prepare now, even if you aren’t being audited. Proactivity is the key.
You should prepare and gather the following information:
A letter from the comptroller of your company stating –
– Duration of your employment
– For the previous 3 years, your salary, income tax, health tax, and national insurance (ביטוח לאומי) payments
– The bank name, branch number, and acct. no. into which your salary was paid.
Your original form 106’s and authorized English translations** for the previous 3 years.
A letter from your family physician listing the names and date of births of all your kids, and a statement that s/he has been treating them for the previous how many years and that they reside with you and your spouse. The letter should be on Kupat Cholim stationary, preferably with an English letterhead.
A letter from each of the schools your kids attended during at least the previous 3 years indicating their names, date of births, the grade they’re currently studying in (if relevant), and a statement that you and your spouse are their primary care providers and that they reside with you. The letter should also indicate your address, that you paid their school fees, and that you attend parent-teacher meetings faithfully.
A copy of your marriage certificate. If married in the USA – your marriage license. If married in Israel, the registration form provided by the Minister of Religious Affairs when you got married, (not your Ketuba), and an authorized English translation.**
Copies of US passports for each member of the family.
Copies of IL passports for each member of the family.
Copies of Social Security cards for each child.
Copies of IL birth certificates for each child.
Copies of US Consular Report of Birth Abroad for each child.
**Authorized English Translation means you need an authorized translator (not yourself) and it must be approved by a notary. This may actually be cheaper in the US than in Israel because notary services in the US cost a fraction of notarization services in Israel (which are outrageous).
Step 3: Don’t try to deal with the audit by yourself. Pay a CPA in Israel — they have far more experience, and even if you get all the documentation above by yourself (which will save you much time and hassle), its still best to pay the CPA and let them be the interface to the IRS.