John Bullis: IRS cracking down on child tax credits

The Internal Revenue Service has discovered false claims for child tax credits for returns filed by U.S. citizens that live in Israel. It may involve tens of millions of dollars.

The child tax credit can be $1,000 for each child who is not age 17 at the end of the year. The child must be either a U.S. citizen, national or resident of the U.S. The credit begins to phase out when the taxpayers (parents) modified adjusted gross income in 2013 reaches $110,000 for joint returns and $75,000 for single taxpayers.

IRS discovered certain taxpayers in Israel and other foreign countries may not have reported their income properly. It seems some unscrupulous advisers gave improper (wrong) advice. So, IRS started auditing thousands of taxpayers in Israel, maybe 50 percent of U.S. citizens living in Israel. In the U.S., less than one percent of taxpayers were audited in 2013.

Some IRS audits were very detailed.

One person said, “They asked for birth certificates, my marriage certificate and a voucher from the kids’ doctors and teachers to prove they existed and were part of my family. A mother of six children said her audit took three years. Of course some audits were resolved in the taxpayers favor in Israel, but not before they spend thousands of dollars on accountants, certified translators for documents in Hebrew and tax lawyers.”

Ultra-Orthodox families in Israel are typically large, but men usually have no formal employment. The men devote their lives to religious study and may receive small Israeli state stipends. Fathers are therefore ineligible for the child tax credit. In many cases the mothers are either not U.S. citizens or they earn too little to make a claim.

To qualify for the U.S. child tax credit, one must have “taxable earned income” (wages, net profits from business, etc.). It seems some people based their claims on religious studies allocations, child allowances from the Israeli government and even gifts.

One accountant said the ultra-Orthodox Jews (also known in Hebrew as Haredim) were not the only people involved in making false claims.

IRS initially called the work the “Israel Project” and later denied there is an “Israel Project” or that it was singling out U.S. citizens in the country for special scrutiny.

Scams involving the child tax credit by persons in other countries have been reported by the media. The IRS audits are another step in the efforts to increase compliance with U.S. tax law and to crack down on evaders generally.

IRS is also collecting big penalties from some banks for helping Americans dodge taxes. It seems U.S. customers have withdrawn $4 billion from Israeli banks in the last few years because of tightened compliance requirements on foreign bank accounts.

Did you hear? “The truth only hurts if you weren’t telling the truth to begin with.”

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.