In Israel, on a given day, the acronym “IRS” is entered thousands of times into various search engines. The extensive amount of these searches indicates that the IRS is one of the most significant (and somewhat intimidating) authorities, for American citizens and some Israeli citizens who invest in the United States or conduct any business activity within its territory.

The importance of the U.S. Tax Authority stems from its relevance to almost every area of an individual’s life, from the day of birth until the day of death, and sometimes even after death. In the article before you, we will briefly discuss the various aspects of the IRS in an attempt to clarify this baffling matter.


The U.S. Tax Authority – The IRS

The U.S. Tax Authority is called the Internal Revenue Service and is usually referred to as the IRS. This authority is responsible for the enforcement of the tax legislation issued by the US Federal Government.

The IRS is subordinate to the U.S. Treasury Department and is responsible for most of the revenue needed to fund the federal government. In 2018 alone, the authority collected taxes of about $ 3.3 trillion.


Tax Laws

The TAX CODE is a collective name for all the sections of the federal tax provisions. The IRS is in charge of enacting regulations based on these provisions, in publishing procedures, guidelines, and position letters that are intended to assist the taxpayers (and often their representatives) in understanding their duties and rights under this legislation.

There are several key rules that apply to most taxpayers, and these will be detailed, later in this article.


Duty of reporting versus tax liability

The U.S. tax legislation outlines two main obligations: tax reporting duty and tax payment obligation. These are two separate and independent obligations based on the self-assessment of the taxpayer, an assessment that is of course reviewed by the IRS.


Annual income reporting obligation to the IRS

A duty that applies to many. Thus, every U.S. citizen, permanent resident of the United States, and a local corporation must submit an annual tax reporting all of their income in the same tax year.

This obligation also applies to foreign citizens or foreign companies with income originating in the United States, but the latter are required to report only their local income.

There are certain exceptions in which reporting the annual income is not mandatory.

This is in the case that the taxpayer is an individual employee (taxpayers who are not a local or foreign corporation) and their annual income does not exceed a certain threshold that is set once a year. If the individual is self-employed any income over $ 400 will be required to file a tax return.

Employees thresholds, However, range from an annual income of $5 to $26,000, all in accordance with the personal status of the applicant (single, married, widowed, etc.).


Tax liability to the IRS

This duty needs to be met regardless of the obligation to report the annual income. It is important to remember that not every applicant who is obligated to file an income report will owe tax (the tax liability may amount to $0, and it is also possible that the applicant will not only pay no tax but receive refunds).

The tax liability is based on the data regarding income, profits, losses, deductions, and credits provided by the applicant on his tax reporting form.  The taxation system states that tax will be paid in advance based on the previous tax year and adjustments, if necessary, will be made in the following tax year.


Annual Income Tax Reporting Forms for IRS

As noted above, the duty of reporting and tax liability is based on the self-assessment of the applicant. This assessment is reflected in the reporting forms provided by the IRS. Each form is designated to a different purpose and nature of the taxpayer.

Thus, for example, the annual tax return of an individual who is a U.S. citizen will be made using Form 1040, the annual tax return of a C-CORP will be made through Form 1020, and the annual tax return of a partnership through Form 1065.

These reports will be filled out and submitted to the tax authority online on the authority’s website or through the postal service.

Besides the annual reporting forms, there are many other forms designated for specific purposes (extension requests, reporting certain money transfers, and so on). For details of the forms, see the article “Form Types“.


Tax rates

The tax rates are specified in the taxation provisions and are unique to any type of activity. Individuals will generally have a marginal tax rate derived from their income level, and local and foreign corporations will have a 21% corporate tax rate.

Notwithstanding the aforementioned, there are unique tax rates derived from the activity type and the kind of the taxpayer. For example, capital gains tax, self-employment tax burdens, GILTI tax, estate tax, and tax rates applicable to foreigners under the FIRPTA Act.


IRS reporting obligation on financial assets held outside the United States

As part of the annual tax report on American citizens, permanent residents and local companies report using Form 8938, which accompanies the primary tax return form on financial assets held by them outside the United States.

This is an independent and additional obligation to the citizens of the country to submit to the U.S. Treasury Department an FBAR form and it also lists their holdings in financial assets around the world.

For more information about Form 8938, see article -“Form 8938“.


IRS Income Tax Audit

Any applicant that files a tax report may be the subject of a tax audit, whether due to irregularities in the information provided or due to a random check. An audit of the IRS will most likely begin with a warning letter.

The applicant may then be required to produce specific documents or be subject to questioning. Another option is a surprise inspection at the place of business.

Based on the audit findings – partial reporting, lack of reporting, deception, or proper report, it will be decided to continue handling the procedure. Depending on the results it will be decided whether to impose fines on the applicant, update the amount owedפ or perhaps transfer the matter to the IRS’s criminal division.


Sanctions for lack of reporting to the IRS

In order to ensure the full enforcement of taxation provisions, the sanctions set forth due to non-compliance with tax obligations are very strict.  Late reporting may result in a penalty of up to 25% of the tax liability and failure to report may result in a penalty of 20% of the tax liability.

Failure to comply with the tax advance payments may result in a penalty of 0.5% of the tax liability for each month of delay.

In addition, the tax liability accrues an annual interest rate of about 6%. Furthermore, it should be remembered that failure to comply with the tax liability may amount to a criminal offense and even result in the revocation of the U.S. passport.


IRS Voluntary Disclosure Program

In an attempt to encourage U.S. citizens who have not filed annual tax reports so far, the U.S. Tax Authority has developed a voluntary disclosure plan.

The program allows, under certain conditions, to retroactively submit previous year’s reports while ensuring that the charges are protected from fines and other sanctions. For further reading, see the article “The Voluntary Disclosure Plan”.


To summarize

Taxation provisions, and certainly U.S. taxation provisions, often engage citizens and investors. The instructions are complex and require a lot of professional knowledge. The article here was just the tip of the iceberg in some of the topics that may be relevant to readers.

Much additional information is provided in the articles dealing with individual issues. Above all, however, it is critical to receive professional advice and strategic tax planning from experts in the field. MasAmerica’s professional and experienced staff are at your disposal for any matter.

The aforesaid should not be regarded as legal advice. It is advisable to consult with the MasAmarika team before any action. The service is provided by a professional team, fluent in English and Hebrew, and includes attorneys and accountants with American licenses.

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