The Tax Duel for Dual Citizens

By Advocate James S. Cohen, of Cohen, Decker, Pex & Brosh Law Office.

When yihiye beseder just won’t cut it: IRS, FATCA, FBAR and more.

US financial authorities are clamping down on US persons who neglect to report their annual income or assets abroad. Advocate James Cohen explains how and why you should file your report and avoid hefty fines. Israelis who have never had to deal with the US tax system are generally baffled by its complexity. In Israel (as in most western countries) most people aren’t required to file their own taxes.

Payroll workers have their taxes calculated and submitted by the accounting department of their employer. While employers in the US generally withhold income taxes from employee salaries, this does not absolve
the majority of the income-earning adult population from filing their own tax returns.

American citizens and permanent residents who reside in or immigrate to Israel might assume that one of the benefits of living here means no longer having to deal with the IRS. After all, most western citizens don’t have to pay taxes in their home country if they live and earn an income abroad. Since the United States harnessed its financial clout to increase report compliance on behalf of financial institutions
and individuals, any US person (citizen or permanent resident) who has even relatively minimal assets or income abroad, is required to file an annual financial report to US tax authorities.
This obligation extends to dual citizens who reside abroad, and even those who have never set foot in the United States. But many US citizens in Israel neglect filing their reports, despite increasingly serious penalties introduced over the last few years.

Enacted in 2010, and signed by Israel in 2014, FATCA (the Foreign Accounts Tax Compliance Act) ensures that if any US person neglects to report their income or assets abroad when filing tax returns, foreign financial institutions will be required to do so autonomously on their behalf. Banks, pension funds, insurance companies and most other financial institutions, are obligated to identify and report directly to the US treasury any client who is a US person doing private or public business outside of the US and
ensure that they, their spouse or anyone with whom they share a bank account files an annual FBAR report.

If these financial institutions fail to conduct due diligence, they could face harsh monetary penalties, to the value of 30% of their transactions in the US. Individuals who neglect to report their income or assets could be fined between tens of thousands of dollars to 50% of their assets in total. Companies and
organizations who fail to disclose the role of a US business partner or account signatory could
face even heavier costs.

The term US person refers to any person who has immigrated and acquired official Israeli citizenship, or is temporarily residing in Israel, or is a US citizen by virtue of their parents who are US citizens. Law requires such persons to file US tax returns, even if they earn no income in the United States. Earnings of less than approximately $100,000 a year will likely not incur any US taxes, but do require the filing of returns. This exemption does not apply to investment or rental income, in which case income tax returns are more complex.

More onerous than standard income tax is the obligation to file an annual FBAR (Foreign Bank and Financial Accounts) report. The obligation to file a FBAR report is decades old, but FATCA has authorized the US Government to levy fines against any foreign bank, giving banks the incentive to enforce the report requirements. Any US citizen in Israel, or their spouse or shared account holder, who maintains a bank account, pension fund or investment in excess of $10,000, is required to file this report, including
their bank and account details, and actual funds. A late or erroneous filing may result in significant fines which are harsh enough to make Israeli banks wary of opening or maintaining accounts for US persons. Banks are now highly motivated to make sure that reports are accurate and filed in a timely manner, regardless of the expense and hassle involved.

Part of living in Israel is our adoption of Israeli culture, including the popular saying “Yihiyeh
beseder.” Many US persons avoid reporting their income on that very basis, assuming that if over the years they’ve never been contacted or fined, “Yihiyeh beseder” and there’s no chance they’ll get into tax trouble.
Given the intensified vigilance on the part of US tax authorities, and committed cooperation of institutions in Israel’s financial sector, it’s time to change long-standing habits. Ignoring obligations to report assets or income in Israel will likely increase the chances of being slapped with severe fines. But there is a silver lining. The authorities have made available a number of ways to voluntarily report your income, plead honest confusion, and avoid financial repercussions. However, this courtesy will not be extended forever and should be taken advantage of sooner rather than later.
Consult an attorney if you’re a US citizen or resident living in Israel. Find out which reports are relevant to your income status and means of employment, and let them handle the filing of reports on your behalf. You’ll be able to have your dual citizenship and enjoy it too.

James S. Cohen, Esq., is a member of the Maryland and District of Columbia Bars in the United States, the American Immigration Lawyers Association and is licensed as a foreign lawyer in Israel. He is a Senior Partner at Cohen, Decker, Pex & Brosh Law Office, and is head of Immigration to
the United States Department.

Since its establishment in 2012, Cohen, Decker, Pex & Brosh Law Office has grown exponentially in reputation, staff and clientele. They practice in all civil law areas, including litigation, commercial law, contracts, labor law and legal consultation, with a specialization in Israeli real estate and immigration law. They can be reached at 02-990-3180 or through their website


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