Why Most Americans in Israel Fail to Pay IRS Tax Debts
In 2023, the IRS collected $4.7 billion in penalties and late fees from American citizens living abroad. The primary reason? Misunderstanding of available payment methods and special payment plans for expatriates. I see this mistake repeatedly among my Israeli clients—they assume paying IRS tax debts works like paying income tax in Israel, but the reality is far more complex.
The obligation to pay American tax has existed since 1913, with the enactment of the 16th Amendment to the U.S. Constitution. However, special rules for expatriates developed primarily starting in the 1970s, when the IRS recognized that American citizens abroad needed additional flexibility in paying their tax obligations.
What Happens When You Do Not Pay on Time
The penalty for failing to pay tax debts stands at 0.5% of the amount owed for each month or part of a month, up to a maximum of 25% of the total debt under Section 6651(a)(2) of the IRC. For example, if you owe $10,000 and do not pay for an entire year, the penalty will reach an additional $600. But that is only the beginning—additional interest of 8% annually (as of 2026) is added to the amount owed.
The more serious problem is that the IRS can place liens on assets, including bank accounts in Israel through information-sharing agreements between the countries. Starting in 2014, with the implementation of FATCA, Israeli banks report directly to the IRS about accounts held by American citizens. This means the IRS can locate and seize assets in Israel much more easily than in the past.
Available Payment Methods for Israel Residents
The IRS offers several ways to pay taxes, but not all are available or practical for Israel residents. The most common method is direct bank transfer through the EFTPS (Electronic Federal Tax Payment System), which allows direct payment from a U.S. bank account. The problem? Most Israelis do not maintain an active U.S. bank account.
The second alternative is payment by credit card through authorized service providers such as Pay1040.com or PayUSAtax.com. They charge a fee of 1.87%-1.99% of the payment amount, but this is still cheaper than IRS penalties and interest. Classic tax planning strategies no longer work in the new digital reality.
The third method, and the most complicated, is sending a check by regular mail to the IRS address. This requires a check in U.S. dollars from a U.S. bank, which means you need to open a U.S. bank account or use expensive currency conversion services. Additionally, international mail can take 2-3 weeks, which increases the risk of late payments.
Payment Plans: The Neglected Solution
One of the biggest mistakes I see is that people do not know about the IRS payment plans. If you owe less than $50,000 (including tax, penalties, and interest), you are entitled to an automatic payment agreement through Form 9465. The plan allows you to spread the debt over up to 72 months, with a setup fee of $31 for automatic payment or $149 for manual payment.
Interest on a payment plan stands at 8% annually (as of the first quarter of 2026), plus a penalty of 0.25% monthly—half the regular penalty for non-payment. This means if you owe $20,000 and choose a 36-month plan, the monthly payment will be around $625, and the total cost will reach approximately $22,500.
There is also a special plan for debts over $50,000 called the “Fresh Start Initiative.” This plan requires detailed financial information through Form 433-F, but can offer more favorable terms, including suspension of penalties and interest in certain cases. Foreign tax credit losses can worsen your debt situation.
The Israeli Trap: Exchange Rate Issues
One of the unique problems for Israel residents is the fluctuation of the shekel-to-dollar exchange rate. If you filed your return on time (by April 15, 2026 for tax year 2025), but did not pay the tax owed, the debt is fixed in dollars. If the shekel weakens against the dollar, your actual debt increases in shekels, even if you did nothing.
For example, a debt of $5,000 set in March 2026 when the dollar was at 3.20 shekels equals 16,000 shekels. If by December 2026 the dollar rises to 3.50 shekels, that same debt rises to 17,500 shekels—an increase of 1,500 shekels with no relation to IRS penalties or interest. This is another reason to address American tax debts as quickly as possible.
The professional solution is to establish an exchange rate hedging strategy, or alternatively to open a dollar account in Israel and transfer the necessary amount immediately after the debt is established. Online businesses should be especially aware of this issue.
Offer in Compromise: When There Is No Other Choice
In extreme cases, when the debt exceeds your financial ability, the IRS offers a program called “Offer in Compromise” (OIC). This is essentially a settlement offer—you propose to pay a lower amount than the full debt, and the IRS considers accepting the offer if it is convinced this is the maximum you can pay.
The process is complex and requires proof of financial hardship through Form 656 and comprehensive financial documentation. The application fee is $205, plus an initial payment of 20% of the offer amount. The success rate is relatively low—only about 25% of applications are accepted, but for large debts this may be the only solution.
The problem with OIC for Israel residents is that the IRS examines all assets and income, including those in Israel. If you own an apartment in Israel worth one million shekels, the IRS will count it as an available asset for sale, even if it is your only residence. This is another reason to consult with an expert before submitting an OIC application.
The Most Common Mistakes in Paying Tax Debts
The first and most serious mistake is ignoring the debt in hopes it will disappear. The IRS does not forget and does not forgive—the debt only grows over time. The second mistake is attempting to pay in shekels or through a regular bank transfer to an Israeli account. The IRS accepts payments only in U.S. dollars and through its authorized channels.
Another mistake is failing to maintain payment records. Every payment to the IRS must be documented with a confirmation number, date, and payment method. I see cases where clients paid thousands of dollars but could not prove it because they did not keep the appropriate receipts. The IRS will not recognize a payment without proper documentation.
The fourth mistake is misunderstanding the timeline. The filing season for tax year 2025 begins on January 27, 2026, but the tax payment deadline remains April 15, 2026. If you need an extension to file your return, that does not mean an extension to pay the tax—interest and penalties begin running from April 15 in any case.
The Professional Strategy for Managing Tax Debts
The professional approach to managing tax debts begins with planning ahead. If you know you will have a tax liability, make sure to set aside money during the year. Open a separate dollar account in Israel and transfer small amounts each month, rather than trying to find $10,000 or $20,000 all at once in April.
If you already have an existing debt, the first step is to determine the exact amount through the IRS website or by calling the service line. Then examine the different options: full immediate payment (the cheapest in the long run), a short payment plan (12-24 months), or a long payment plan (up to 72 months).
Do not forget to check if you qualify for relief. If the debt was created due to special circumstances (illness, job loss, natural disaster), the IRS can cancel or reduce penalties through the “First Time Penalty Abatement” or “Reasonable Cause Relief” program. These programs can save thousands of dollars, but you need to know how to request them properly.
When to Consult an Expert
If your debt exceeds $25,000, if you have debts from multiple tax years, or if the IRS has already begun collection proceedings—that is the time to consult an expert. Employee stock option taxation can create complex tax liabilities that require professional handling.
A qualified professional can negotiate with the IRS on your behalf, submit requests for relief, and build a payment strategy tailored to your financial situation. The cost of professional consultation is typically a small fraction of the potential savings in penalties and interest.
Remember that the IRS prefers to receive partial payment over no payment at all. If you maintain active contact and offer realistic solutions, the chances of receiving favorable treatment increase significantly. Ignoring the problem is your greatest enemy in dealing with the IRS.
Bottom Line: Paying Tax Debts Is About More Than Just Money
Paying tax debts to the IRS is much more than simply transferring money. It is about maintaining your legal status as an American citizen, avoiding liens on assets in Israel, and preserving the ability to return to the United States in the future without legal problems. The debt will not disappear on its own, and it only grows over time.
The most important message I want to convey is that there is always a solution. The IRS wants to receive its money, not to destroy people financially. If you approach them in a timely manner, present the situation honestly, and offer a realistic payment plan—the chances are good that you will find a solution that works for everyone.
Do not wait until the situation deteriorates into forced collection proceedings. Take action now, check your debts, and build an action plan. The money you save on penalties and interest can be substantial, and the peace of mind you gain is invaluable. The IRS payments website contains all current information about available payment methods.