So his plan would be to evade taxes in Israel while still paying taxes in the US.

It is true, like you said, if you are paying taxes in Israel, you can use this as a credit against your US tax return. I did this, and since I pay 2.5 times as much tax in Israel than in the US, it wiped out all of the US tax that I owed. However, that is not what he is proposing. He wants “the company to pay me as a “foreign Israeli national” thereby being exempted of paying US taxes as well”. At the same time, he would “just being careful not to allow the Israeli tax authorities to notice the money”. In other words, he would evade taxes from both countries (US evasion because if you maintain your US citizenship, you have to declare it as a US citizen on your US tax return. Israel evasion should be obvious).

Even though U.S. citizens living in Israel are required to file a tax return for both the U.S. and Israel, U.S. citizens are entitled to a waiver of a significant portion of U.S. taxes of foreign income, earned via the foreign income exclusion if they are domiciled outside the U.S. for at least 330 days a year and. Currently it is a little more than $85,000 that is exempt.

Furthermore, the U.S.-Israeli tax treaty allows one to take credits on taxes paid in one country against the other. In other words, if you owe the U.S. $10,000 in taxes and Israel $15,000 in taxes and you paid Israel the $15,000, the U.S. will credit you as have paying them $15,000 in taxes, thus it is pretty hard to get double taxed (unless one fails to file an income tax return–rhen one usually forfeits the benefits if caught/audited.)

One other point few people know of is the requirement to file Foreign Bank and Financial Accounts (FBAR) report separate from your tax return every year if you are a U.S. citizen with an Israeli bank account with at least $10,000 in it at any point during a fiscal year.

See: http://www.irs.gov/businesses/small/article/0,,id=148845,00.html