Annual income tax return

The tax system in the USA is personal, requiring even citizens and Green Card holders not residing in the USA to pay taxes – first and foremost by filing an annual income tax return Form 1040 - Individual Income Tax Return. Form 1040, with its attached forms and schedules, is an individual report that must be filed with the Internal Revenue Service (IRS). A tax return must be filed even if no tax is due.

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Who must file a tax return?

Individuals:

• Income test

• Citizenship tests, residency, Green Card holder (even if expired and not physically returned)

• Test of foreigner with a business or asset in the U.S.

 

Companies:

• Domestic company

• Foreign company with operations, direct or indirect, in the U.S.

• Foreign company that invested in the U.S.

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Declaration of bank accounts and financial assets

U.S. citizens, residents, or Green Card holders, must report on accounts  located outside the U.S. to the U.S. Treasury Department on the Foreign Bank Account Report (FBAR). This reporting requirement applies to all U.S. persons having either ownership, even partial, or signatory rights, in foreign accounts whose aggregate balances exceeded $10,000 at any time during 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 still required to file an FBAR. The FBAR filing deadline is April 15 of the subsequent year, with an automatic extension until October 15. This FBAR filling requirement report is a separate form, in addition to the Form 1040 filing.

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Non-filing of FBAR could constitute a criminal act and result in significant IRS penalties.

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In 2010, the U.S. enacted the Foreign Account Compliance Act (FATCA), requiring financial institutions worldwide (including Israel) to submit information to the U.S. Treasury Department regarding U.S. citizens with specified foreign financial investments and assets in that country. With the help of this law, U.S. authorities are able to reach U.S. citizens attempting to evade taxes.  In addition to financial accounts, FATCA also applies to continuing education funds, pension funds, provident funds and additional financial assets.

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An additional reporting requirement imposed on U.S. citizens and others ("Specified Individuals") in the wake of FATCA is the filing of Form 8938, Statement of Specified Foreign Financial Assets (includes: bank accounts, securities, options and other financial instruments, holdings in foreign entities, provident and continuing education funds, etc.). Form 8938, if required, should be attached to Form 1040, due 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 U.S. tax authorities have focused on money laundering and tax evasion, particularly with respect to foreign income and accounts (i.e.: outside the U.S.), with heightened enforcement, supported by new laws and regulations.

 

Commencing in 2008, various voluntary disclosure mechanisms of retroactive reporting were instituted: 

• OVDI (Offshore Voluntary Disclosure Initiatives),

• OVDP (Offshore Voluntary Disclosure Program), and

• more recently SFDP (Streamlined Filing Domestic Procedures) and SFOP (Streamlined Foreign Offshore 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 a U.S. tax expert. 

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Our Firm specializes in U.S. tax issues, the various reporting regulations and representing taxpayers before the IRS.