A scam to file falsified tax returns to get unwarranted child tax credits for American expats living in Israel that began in the haredi community allegedly spread throughout the American ex-pat community in Israel causing a crackdown by the US Internal Revenue Service (IRS) it dubbed the "Israel Project.”
Haredi-Founded, Israel-Based US Tax Scam Discovered By IRS
Shmarya Rosenberg • FailedMessiah.com
A scam to file falsified tax returns to get unwarranted child tax credits for American expats living in Israel that began in the haredi community allegedly spread throughout the American ex-pat community in Israel, Reuters reported, causing a crackdown by the US Internal Revenue Service (IRS) it dubbed the "Israel Project.”
The IRS estimates the scam cost the US Treasury (IRS) tens of millions of dollars.
In a separate investigation, US government financial regulators are investigating Israeli banks suspected of helping Americans evade US taxes, mostly through use of the Israeli banks’ Swiss subsidiaries.
About 200,000 American citizens live in Israel.
Because of the two scandals, many American expats in Israel have been audited by the IRS, which costs the expats money and time to comply with.
To get a child tax credit, taxpayers must be legitimately employed. Their children must also be US citizens.
American haredi men in Israel usually study full time in yeshivas or work off-the-books for cash, and therefore can’t legally claim the $1,000 per child tax credit. Their wives are often not American citizens or earn too little money to claim the tax credits.
Once word spread among haredim that Americans living in Israel could claim those tax credits, the fraud began. And then, as some haredim at first successfully got tax credits they were not legally entitled to, unscrupulous accountants and tax preparers working with the haredi and Orthodox communities appear to have spread the fraud outward.
“[Claiming the child tax credits] took off like a torpedo. Unfortunately, some unscrupulous tax preparers, many of whom were not CPAs but opened up shop to generate refunds, did a lot of less-than-kosher things,” Jeff Melamed, a U.S. certified public accountant (CPA) practicing in Israel, told Reuters, adding that even before the IRS had begun its investigation, he spoke to several rabbis in Orthodox communities to try to stop the fraud.
Another accountant, Philip Stein told Reuters that the IRS "took off its gloves" after pre-audit letters it sent to American expats in Israel were ignored and false income was reported anyway.
"I met an IRS official and she said: 'You are from the land of false tax returns,'" Stein said said.
The IRS denies there is a formal "Israel Project" and that US citizens in Israel are being singled out.
"The IRS bases its exam selection on analysis of the information reported on individual returns. Currently, audits of potential abuse in the child tax credit and other refundable credits are underway and ongoing in more than a dozen different countries,” the IRS said in statement emailed to Reuters.
The fraud allegedly worked this way:
In order to show earned income, which is necessary to get the tax credits, some haredim claimed yeshiva stipends, child allowances from the Israeli government, and even gifts from family and charities as earned income.
Some haredim also claimed children who were in the process of becoming US citizens (but who had not yet been naturalized) as full US citizens.
And other haredim appear to have claimed nonexistent children or children of Israeli friends and neighbors as their own.
No data is available on IRS tax audits of American citizens living in Israel. But several accountants interviewed by Reuters estimated that about half of their American clients have been audited over the past few years.
Less than 1% of US taxpayers living in the US reportedly were audited in 2013.
According to Reuters, similar tax credit scams among American expats have been reported by media in other countries.
Israeli banks have reportedly tightened their reporting compliance over the past several years as have other foreign banks that deal extensively with American citizens after the US government toughened enforcement of its tax laws regarding foreign financial holdings.