Annual income tax return
The tax system in the USA is personal, and requires even citizens and Green Card holder not residing in the USA to pay taxes – first and foremost by filing the annual tax return Form 1040. Form 1040, with its appendices, is an individual report that must be filed with the Internal Revenue Service (IRS). It must be filed even if the taxpayer is not liable for the payment of tax.
Who must file a tax return?
For an individual:
Citizenship tests, residency, Green Card holder (even if it expired and was not physically returned to the authority)
Test of foreigner with a business or asset in the USA
For a company:
Foreign company with operations, direct or indirect, in the USA
A company that invested in the USA
Declaration of bank accounts and financial assets
In 2010, the USA enacted the FATCA Law (Foreign Account Compliance Act), which requires every financial institution worldwide (including Israel) to submit information to the American Treasury Department about US citizens who own bank accounts in that country, as well as about foreign companies (non-American companies) in which US citizens have a significant shareholding stake. With the help of this law, American authorities are able to reach every US citizen attempting to evade the payment of tax. In addition to bank accounts, the FATCA Law also applies to continuing education funds, pension funds, provident funds and additional financial accounts.
A taxpayer holding a US passport, or a Green Card, must report on the accounts outside the US to the American tax authorities on the FBAR (Foreign Bank Account Report). This reporting requirement applies to all US citizens, residents, bodies and Green Card holders that have ownership, even partial, or signatory rights, in foreign accounts with balances exceeding $10,000 for one year (at least one day in the year). Even if you have resided in Israel for many years, and have not visited the USA for many years, be advised that you are required to file an FBAR. The filing deadline is April 15 of the subsequent year, with an automatic extension until October 15 (before 2016, the deadline was June 30, without the possibility of extension). This report is separate and in addition to the Form 1040 filing.
Non-filing of FBAR could constitute a criminal act and result in sanctions by the American authorities
An additional requirement imposed on a US citizen and others ("Specified Individual") in the wake of FATCA Law is the filing of Form 8938, Reporting on Financial Assets Outside the USA (includes: bank accounts, securities, options and other financial instruments, holdings in foreign bodies, provident and continuing education funds, etc.). This report is filed with the IRS together with Form 1040 by June 15 for a non-US resident (may be extended to October 15).
Voluntary Disclosure Procedure
Although the FBAR filing requirement has existed since the 1970's, there have been several changes in the manner of enforcement, including, among others, the imposition of penalties. In recent years, the American authorities have emphasized money laundering and tax evasion, particularly with respect to income and accounts outside the bounds of the USA, and there is heightened enforcement, supported by new laws and directives.
Commencing in 2008, voluntary disclosure mechanisms of various retroactive reporting were instituted:
OVDI (Offshore Voluntary Disclosure Initiatives)
OVDP (Offshore Voluntary Disclosure Program)
and recently Streamlined Filing Compliance Procedures.
These voluntary disclosure processes could prevent draconic penalties, criminal exposure and even incarceration.
How do you file?
Due to the serious sanctions for non-filing of the reports, we recommend reporting quickly and correctly with the guidance of an American tax expert.
Our Firm specializes in American tax issues, the various reporting regulations and the frequent changes occurring in this field. Until the end of 2016, our Firm served as one of a small number of firms in Israel that were IRS Acceptance Agents – representatives authorized by the IRS to begin the process of issuing the ITIN Number, required to file tax returns in the US. Commencing in 2017, the IRS cancelled the status of Acceptance Agent outside the US.