On or around January 21 this year, the Israeli Tax Authority (ITA) saw fit to issue to many Israeli taxpayers demands to file “missing” online annual tax returns going back many years, typically 2008-2012.
This may be a nightmare scenario – being forced to find and report income and expense documentation going back 7 – 11 years.
Can they do it?
The ITA may not be smart, but are they right to go back so far to ancient times? The short answer is probably not in many cases. Most people who should have reported income have probably done so, either the usual way or by coming clean in a voluntary disclosure procedure, i.e. a tax amnesty.
What should a taxpayer do?
Anyone receiving such a demand (or any other) from the ITA should immediately contact their accountant or tax advisor. The ITA has a right to request a tax return from anyone. Ignoring a request is not really an option, it usually comes barcoded making it easy for the ITA to see who responded and who did not. But depending on the facts and circumstances, it may be possible to discuss with the ITA one or more of the following possibilities. In all cases, you should at least reply to the ITA so they know what is your situation.
First, were you a foreign resident, based on your center of living, with no Israeli source income in the year concerned? If so, you may be exempt from reporting foreign source income and gains.
Second, were you an Oleh, i.e. new resident or senior returning resident (who lived abroad 5 – 10 years) in the year(s) concerned and would the tax return requested only contain exempt foreign source income derived in your ten year Israeli tax holiday? If so, you may be exempt from having to report such income. It is unclear whether you should file a blank tax return or no tax return.
Third, were you a student or retiree who derived no income in the year(s) concerned? Did you live off family capital or gifts from parents?
Fourth, if you already filed a tax return for the year(s) concerned, the ITA has four years from the end of the year of the filing to check the return (ITO Section 145(a)(2)). The ITA may challenge the return or issue a tax assessment in their “best judgment” if the ITA has reasonable grounds to suppose the return is incorrect. Thereafter, there are detailed appeal procedures. The ITA Director has an extra year to re-open tax returns after they are filed or after an assessment was appealed (ITO Section 147).
Fifth, if no tax return was filed, the ITA can issue a best judgment assessment if the taxpayer appears to owe tax (ITO Section 145(b)). But if the taxpayer committed no tax fraud, the ITA may be time barred from embarking on a criminal case six years after the tax offense (e.g. non-reporting) was allegedly committed (ITO Section 225). The ITA Director may also be time barred from re-opening a best-judgment assessment after 6 years.
To sum up, the ITA may have a problem requesting a tax return after 6 – 7 years, but the rules in this area are complex, so competent advice should be obtained.
What about non-filing of an online tax return on the internet? A paper return may be sufficient for people over retirement age (men 67, women 62) and those whose income was below NIS 80,510 (in 2017) alone and below NIS 161,030 for a couple. But free-lancers and 10%-or-more shareholders must always file online returns.
How all this ancient reporting helps the election chances of the Finance Minister is anyone’s guess….. The OECD (Organization of Economic Development) has just published a study on “Tax Morale”. In it, the OECD advises member countries’ tax authorities to avoid an “overly controlling approach” to help motivate people to pay their taxes. Israel is a member of the OECD but this must have fallen on deaf ears at the ITA.
Rumor indicates that last November the ITA had to refund billions of shekels of excessive tax installments it previously demanded from taxpayers (businesses and investors) and is now trying to plug the resulting budget hole…..
As always, consult experienced tax advisors in each country at an early stage in specific cases.