Responsibilities of clients for American reporting obligations

An American taxpayer can be at two different levels. The more stringent level of reporting is an American citizen or a permanent resident or green card holder. You stay a permanent resident if you ever had a green card, even if you don’t live in America. However, in some cases you can relinquish your permanent residency status in America if it works better for you. The more lenient level of American reporting is a part time resident or person who spends time in America but never had a green card or permanent residency visa. In that case you are are non-resident alien and file Form 1040-NR if you must file. In order to do this, you must have an ITIN (individual tax identification number) or social security number.

American citizens and permanent resident – green card holders

Someone who is an American taxpayer may own a business here in Israel. Then, if the Israeli business is not a corporation, the person is required to file a Form 8858 and report on their business here in Israel to America even if they never visit there. That person must be protected from American authorities by learning quickly what to file, when, and how must it costs. Staying compliant is always easier than waiting for a large bill of unpaid taxes that may or may not come. Complying with American tax law through a competent CPA gives one peace of mind, a secure feeling knowing everything is taken care of and that the firm will stand behind you whatever comes your way.

When an American taxpayer owns an Israeli corporation, the corporation is called by American law a CFC (“controlled ‘foreign’ corporation”) and has American reporting requirements. That client who is an Israeli shareholder has to report on Form 926  to America the amount of contributions of cash or property he has put into the Israeli corporation even though the corporation is here and not in America. Knowing your responsibilities is paramount to meeting them, because one can always set aside money in advance to pay taxes. However, being hit with an unexpected penalty or tax bill is something no one likes. So a good CPA will protect the client by making him aware in advance and helping him plan for future taxes and reporting requirements.

Spouses and close relatives are grouped together so someone may become a CFC shareholder even if he doesn’t own shares. For example, if one spouse is not an American taxpayer and he owns an Israeli corporation while the other spouse is an American taxpayer, the American taxpayer spouse will now be required to report on his American tax report as a shareholder in that corporation because of his spouse. The Israeli corporation is now a CFC. Knowing your responsibilities is protection because a competent CPA will report properly and carefully so that you meet your obligations in the best way you can. This is protection against unexpected debts.

When our client is a CFC shareholder, we have to go further by reporting the Israeli corporation’s income to America and also calculating if the corporation has “Subpart F’ ” income, which can be things like corporate passive income or income where there is a related party involved. These amounts get special tax treatment and are reported by the shareholder because he owns a CFC. It is best to look at different choices one has with reporting to America to stay shielded from having too high taxes. With a CFC we also calculate to see if there is any income that is higher than the value of the company’s fixed assets and report that excess as a “ ‘GILTI’ inclusion” as taxable income to the client on his American income tax return. These taxes can be minimized or avoided with careful planning by coming to see a competent CPA in advance of reporting dates and talking things out.

Additional to these aspects of CFC shareholder obligations, the American IRC code section 956 requires any CFC to report in the cases where that Israeli corporation makes a loan to the American taxpayer – shareholder, or the corporation invests in American assets, or the shareholder puts this Israeli corporation up as collateral on a loan that he takes out to benefit him. When any one of these three different inclusions arises for the taxpayer, we make an extra effort to take special care by making sure the report is classified properly. This is ordinary income. Also in the case of one of these inclusions the foreign tax credit does not apply so careful planning is warranted to set aside enough tax money to avoid unpleasantly large tax bills.

The main theme is it is crucial to plan your taxes if you do business in any way with America or if you are a citizen or resident of America, because being responsive to problems is not a great strategy. Some problems cannot be solved if they hit because tax planning and looking ahead is essential to your success. We should sit down for an hour and go over all your business and personal financial assets and hear about your business activities to make the best of things. One great planning technique we make available to you is to choose to report your Israeli corporation to America not as a corporation but as a different type of business for American reporting. There is a special form that allows you to change the way your business is reported to America. This is a good strategy under the watch of a very careful and diligent CPA.

As an example of this is if the American taxpayer owns an Israeli business that reports to America as a partnership for American reporting purposes, then that person must report on Form 8865 and submit the financial reporting forms (FinCen FBAR and Form 8938) if they apply. This is different than the way the Israeli business might have been reported to America and may give rise to better results for you.

Also, if you are an American taxpayer living in Eretz Yisrael and you then invest money here in Israeli stocks or Israeli corporations – even if you buy small amounts of stock or are a minority shareholder – whenever those corporations pay dividends or other passive income (like rents, capital gains, interest or royalties) then you are now required to report as a shareholder of a PFIC (“passive ‘foreign’ investment company”). Even mutual funds and dividend producing stocks are included in this reporting requirement, so be careful. These need special attention because these are not always easily noticed. When you are a PFIC shareholder, you must file Form 926 and Form 8621 to be compliant and stay shielded from penalties, interest and fees.

Finally, financial reporting is a very important aspect for American taxpayers who live in Eretz Yisrael. One such way is the FINCEN FBAR filing program that requires American taxpayers to report to America whatever bank and financial account balances you hold that total more than 10,000 dollars in Eretz Yisrael (or in any other country that is outside America). Your FBAR report must also include accounts that you hold at an Israeli branch of an American bank like Bank of America. And for you who are very wealthy clients, your American tax return requires you to report on Form 8938 with the greatest bank and other financial account balances you have outside America. Also, American companies, trusts, and partnerships that hold assets here in Eretz Yisrael also have to report on the FBAR and some may also have to report on the Form 8938. For example, the Form 8938 is required reporting for American companies who hold over 50,000 dollars here in Eretz Yisrael while for individuals, the Form 8938 reporting threshold is much higher.

For more articles