Since 2001, US citizens living abroad have been able to file for the legendary “additional child tax credit” (ACTC) of up to $1,000 for each child under the age of 17. If aUS citizen living in Israel has an Israeli salary and the combined salary of both spouses is less than $110,000, the Israeli tax paid on the salary is credited against the US tax due. Assuming no other income, the Israeli tax credit will usually eliminate the US tax due. The taxpayer will then be entitled to a refund check from the US Government.
The ACTC is not a distinct credit, but is rather the refundable portion of the section 24 child tax credit. It stemmed from the expansion by the Economic Growth and Tax Relief Reconciliation Act of 2001 of the refundable portion of the credit to allow more lower-income taxpayers to qualify. The ACTC is thus available to those taxpayers who cannot receive the full amount of the tax credit because it exceeds their income tax liability.
Over recent years, a growing number of American Israelis have been audited by the American Inland Revenue Service (IRS), which has the responsibility of ensuring accurate and honest tax reporting by taxpayers. It has been suggested that the exponential increase in audits is the result of Israel’s having one of the highest concentrations of expatriate Americans in the world (some 250,000 citizens with US citizenship live in Israel).
Many US citizens in Israel had filed income tax reports since living in Israel and began requesting the tax credits when the law went into effect. However, there were some who didn’t file taxes, but began to unscrupulously inflate their earned income to claim more child credits. Still other return preparers retroactively filed for tax credit refunds after children became naturalized (not American by birth, but by being brought to the USA and made citizens there).
In the words of Philip Stein, an American-trained tax accountant, the falsified filings of a few enraged the IRS and they then “threw off the gloves and went to war, assuming that everyone inIsrael is a liar, and that’s the environment we’re living in today… The IRS doesn’t believe anybody now. They’re throwing everything out the window, starting the audits without even asking people to confirm their information. They don’t believe anything, just assume that you made the money and send a bill and then make you go through this very painful process to make you show that you have kids – to show tuition bills, medical receipts – and law-abiding citizens are having to spend thousands of shekels on these audits.”
Usually, alarm bells start ringing, when you wonder why the IRS has not sent you a check for your tax credits this year, when it did so just a few weeks after filing your tax refund for last year’s refund. A check on the IRS website indicates that they have received your tax return and it is “under review.” This is usually a precursor to an audit. Audit means that the IRS will want proof of everything written in the tax forms.
Those whose returns are audited must obtain a long list of documents. Depending on the specific case, those documents may include a certified translation of the Israeli Tofes 106 form – for Israeli wages earned, salary slips and the Israeli tax return. In cases where families are being asked to authenticate the number of their children, birth certificate and naturalization documents must be provided. It must also be proved that the children live with the taxpayer, who in turn supports them. That said, some auditors may request only the Tofes 106 form and birth certificates – everything depends on the items requested by the IRS audit letter.
You can proactively prepare for an IRS audit, by obtaining, or at least inquiring about obtaining, the following documents:
1) A letter from the comptroller of your company stating the duration of your employment; for the previous 3 years, your salary, income tax, health tax and national insurance; the bank name, branch number and account number into which your salary was paid; your original Form 106’s (Tofes 106) for the previous 3 years.
2) A letter from your family physician listing the names and date of births of all your children, and a statement that s/he has been treating them for the previous ___ years and that they reside with you and your spouse. The letter should be on Kupat Cholim stationary, preferably with an English letterhead.
3) A letter from each of the schools your children attended during at least the previous 3 years indicating their names, date of births, the grade in which they are currently studying (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.
4) 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 (Teudat Nisuin, not your Ketuba).
5) Copies of US passports for each member of the family.
6) Copies of Israeli passports for each member of the family.
7) Copies of Social Security cards for each child.
8) Copies of Israeli birth certificates for each child.
9) Copies of US Consular Report of Birth Abroad for each child.
“Certified English translations” of all the above documents will be required (where they are not already in the English language). Technically speaking, in Israel, the only recognized translation certification is a notarizedtranslation. A notary who declares that he is “well acquainted” with both the source and target languages, and who prepares a translation from one to the other, may certify such a translation as a true and correct translation, without the need for any further certification. Notaries may also certify translations prepared by others. Such translations are accepted by the authorities in Israel and abroad for all purposes.
Notwithstanding the foregoing, in practice, the IRS defines a certified translation as that of a “qualified translator, accompanied by the translator’s attestation.” This enables people audited by the IRS to avoid the expense and additional formality of going through the process of obtaining a notarial translation. According to the IRS, the translator’s attestation must contain allof the following information:
- The translator’s name and address.
- A statement as to the translator’s qualifications, including English-language website addresses showing professional association affiliations.
- As statement that the translation submitted is a true and accurate translation of the foreign language document.
Generally, according to the IRS guidelines, the following principles should be followed when choosing a translator:
- Your translator should perform translation services as a profession.
- Your translator must be business-literate in both the source language and the English language.
- Your translator’s credentials should be independently verifiable through an English language Internet search, professional affiliations, or by other means.
Failure to provide complete, accurate and substantive translations will result in the item being disallowed. Moreover, partially translated documents will generally not be accepted.
Last but not least, documents translated by you, your representative, attorney, family member, or other close associate, will be considered self-serving and will generally not therefore be accepted by the IRS. This applies even if you are a professional translator.
In summary, assuming you used a reputable tax-preparer, didn’t increase earned income and/or truncate portions of taxable income, and you didn’t retroactively try to claim the refund after bringing your children to the US for naturalization – you should be able to survive the audit unscathed. Moreover, all receipts for expenses paid to professionals (CPA, certified translator) in connection with an audit should be retained, as they may be an allowable expense against US taxes payable, in particular in the case of higher net worth people and/or those who own homes in the USA.
For further information in translating documents for an IRS audit or potential audit, feel free to contact Simon at: 0737-40-60-40 / 0545-742-374 / [email protected].