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7 Essential IRS Reporting Obligations for Israelis: A Comprehensive Guide to FBAR, FATCA, and Form 8938
American citizens and residents living in Israel are required to comply with complex IRS reporting obligations. The three main obligations include FBAR reporting, FATCA reporting, and Form 8938. Understanding these requirements is essential to avoid heavy penalties and ensure full compliance with U.S. law.
IRS reporting is a complicated subject that requires a deep understanding of the various requirements. Many Israelis with American citizenship are unaware of their obligations or confuse the different requirements. This article provides a comprehensive guide for all relevant requirements for 2025.
What is FBAR Reporting and When Is It Required
FBAR (Foreign Bank Account Report) reporting is a requirement imposed on Americans with foreign bank accounts. The report is submitted via FinCEN Form 114, which is sent directly to the U.S. Financial Crimes Enforcement Network. The obligation applies to any American who has control over or signature authority on a foreign bank account.
The reporting threshold for FBAR is an aggregate of $10,000 at any time during the year. It is important to understand that this is a combined threshold of all accounts together, not a single account. If at any time during the tax year you had more than $10,000 total in all foreign accounts combined, a report is required.
The report includes full details of each bank account: bank name, account number, bank address, and the maximum balance during the year. For the 2024 tax year, the report must be filed by April 15, 2025, with an automatic extension available until October 15, 2025.
Understanding FATCA and Form 8938 Requirements
FATCA (Foreign Account Tax Compliance Act) is a U.S. law that requires reporting of foreign assets through Form 8938. The requirement applies to U.S. citizens living abroad with foreign assets exceeding certain reporting thresholds. The form is filed together with the annual tax return to the IRS.
The thresholds for Form 8938 differ from FBAR and depend on marital status and residency. For Americans living in Israel, the threshold is $200,000 on the last day of the tax year or $300,000 at any time during the year for single filers. For married couples filing jointly, the thresholds are $400,000 and $600,000 respectively.
Form 8938 requires more comprehensive details than FBAR, including the type of asset, its name, identification number, name of the financial institution, and balances or values at the start and end of the year. The form also includes information about income generated from the assets.
Who Must File IRS Reports from Israel
Every U.S. citizen or permanent resident (green card holder) is required to file regardless of where they live. This includes those born in the U.S., who acquired citizenship during their lifetime, or hold a green card. Even if you have not filed a tax return for years, the obligation still exists.
Grandchildren and great-grandchildren of Americans who inherited citizenship may be required to report even if they have never lived in the United States. The reporting obligation applies also to individuals unaware of their American citizenship or who never obtained a U.S. passport.
Minor children with U.S. citizenship may be required to file FBAR if they have bank accounts in their name. American parents are responsible for filing for their minor children. This is a complex matter requiring consultation with a qualified tax advisor.
Schedules and Penalties for Non-Reporting
Filing deadlines differ for each form. FBAR reporting to the IRS must be done by April 15, 2025, for the 2024 tax year, with an automatic extension to October 15, 2025. It is important to remember that the extension is automatic and does not require a separate request.
Form 8938 is filed together with the annual tax return (Form 1040) by April 15, 2025, with an extension available until October 15, 2025. If you live abroad, you are eligible for an automatic two-month extension, making the final deadline June 15, 2025.
Penalties for failure to report can be devastating. For FBAR, the penalty can be up to $12,921 per account per year for non-willful non-reporting. If the IRS determines the non-reporting was willful, penalties can reach $129,210 or 50% of the maximum account balance, whichever is greater.
Penalties for Form 8938 start at $10,000 per year, with additional penalties of $10,000 for every 30 days of continued non-compliance, up to a maximum of $60,000 per year. These penalties can accumulate rapidly and pose a heavy financial burden.
How to Report Correctly and Efficiently
Preparing IRS reports from Israel requires meticulous organization of all documents and information. Start by compiling a list of all your bank accounts, investment accounts, and financial assets. For each account, gather basic information: institution name, account number, address, and balances during the year.
For FBAR reporting, you will need the maximum balance in each account during the tax year. Many Israeli banks can provide confirmation of maximum balances upon request. It is important to convert all amounts to U.S. dollars using the official exchange rate as of December 31.
For filing Form 8938, you will need more detailed information including asset type, purpose, and income generated from it. If you have investments in mutual funds or life insurance policies, you may also need to report them on additional forms such as Form 3520 or Form 8865.
Many choose to consult a qualified tax advisor specializing in U.S. tax law. This is especially recommended for those with complex financial structures, businesses, or extensive investments. A tax advisor can ensure all reports are submitted accurately and timely.
Common Mistakes and How to Avoid Them
One of the most common mistakes is misunderstanding the reporting obligation. Many believe that if they have no income in the U.S., they are exempt from reporting. This is a serious misunderstanding — the reporting obligation applies to every U.S. citizen regardless of income source or residence.
Another mistake is confusing the different reporting requirements. FBAR and Form 8938 are separate reports with different thresholds and requirements. You may need to file only one or both, depending on your circumstances. It is important to understand the differences and ensure compliance with all applicable requirements.
Many ignore small accounts or assume that an account with a low balance does not require reporting. This is a dangerous calculation. For FBAR, the $10,000 threshold refers to the total aggregate of all accounts combined. Even an account with a $100 balance can trigger reporting if you have other accounts.
Another error is improper currency conversion. Use the official exchange rate according to IRS instructions, not the rate you received from a bank or local currency exchange. Using an incorrect exchange rate can lead to inaccurate reporting and IRS issues.
Voluntary Disclosure Programs and Compliance Arrangements
Those who discover they have not reported as required can participate in IRS voluntary disclosure programs. The most common program is the Streamlined Foreign Offshore Procedures, designed for taxpayers living abroad whose non-compliance was not willful.
Under this program, you can file amended tax returns for the last three years and FBAR reports for the last six years. In exchange, you receive exemption from penalties related to non-reporting, provided you prove the non-compliance was not willful.
Another program was the OVDP (Offshore Voluntary Disclosure Program), which closed in 2018. For those who did not participate, there is still the option to make a “quiet disclosure” — filing amended returns without joining an official program. This is a complex topic requiring consultation with a qualified tax advisor.
Taxpayers who voluntarily disclose before the IRS begins an investigation generally receive more lenient treatment regarding penalties. U.S. law encourages voluntary disclosure and usually grants relief to those who come forward on their own initiative.
Impact of the Israel-U.S. Tax Treaty
The tax treaty between Israel and the United States can provide certain tax reliefs but does not exempt reporting obligations. The treaty allows taking a credit for taxes paid in Israel to avoid double taxation, but the obligation to file reports remains fully in place.
The treaty includes an information exchange clause allowing tax authorities in both countries to exchange taxpayer information. This means the IRS can receive information about your Israeli accounts through Israeli banks under FATCA agreements.
Major Israeli banks are already implementing FATCA requirements and reporting to the Israeli Tax Authority about accounts held by Americans. This information is forwarded to the IRS, making information privacy increasingly difficult.
Handling Investment and Pension Accounts
Investment accounts require special attention in IRS reporting. Foreign mutual funds are considered PFICs (Passive Foreign Investment Companies) and must be reported separately on Form 8621. This reporting is very complex and may involve heavy taxation on gains.
Israeli pension accounts such as advanced study funds, provident funds, or occupational pensions may require reporting on additional forms. Some pension accounts may receive favorable treatment under the treaty, but this requires detailed examination of each case.
Life insurance policies with a savings component require separate reporting and may be considered foreign grantor trusts. This requires filing Form 3520 and Form 3520-A, complex forms demanding deep professional knowledge.
Reporting Real Estate Assets in Israel
Holding real estate in Israel does not require reporting on FBAR or Form 8938 unless it is held through a foreign legal entity. However, rental income or capital gains from property sales must be reported on the U.S. tax return.
If the real estate is held through an Israeli company, additional forms such as Form 5471 may be required to report the foreign corporation. This is a complex matter requiring consultation with a tax advisor specializing in international issues.
Real estate sales in Israel may be subject to capital gains tax both in Israel and the U.S. The treaty allows credits for taxes paid in Israel, but understanding proper calculation to avoid double taxation is essential.
Frequently Asked Questions About IRS Reporting from Israel
The most common question is whether the reporting obligation applies to those who do not earn money in the U.S. The answer is unequivocal — yes. The reporting obligation does not depend on income source but on U.S. citizenship or residency status.
Another question concerns reporting deadlines. FBAR is submitted separately from the annual tax return and can be filed until October 15, 2025, without an extension request. Form 8938 is filed with the tax return and requires an extension request if filing after April 15, 2025.
Many ask if they need to report a joint account with a non-American spouse. The answer depends on the type of account and degree of control. Usually, a joint account with signature authority requires reporting even if only part of the money belongs to the American.
Another frequent question concerns minors. A minor child with U.S. citizenship may be required to file FBAR if they have a bank account in their name. The American parent is responsible for filing on behalf of the minor.
The last question involves renouncing U.S. citizenship. This is a complex and costly process requiring compliance with all tax obligations before renunciation. Even after renouncing, additional tax obligations may arise under the Exit Tax law.
IRS reporting from Israel is a complex issue requiring deep understanding of U.S. law. I recommend consulting a qualified tax advisor specializing in international matters to ensure full compliance with all requirements and avoid heavy penalties. Investing in professional advice can save significant costs in the long term.