The Tzfat Magistrates Court has just ruled that a lien (bank freeze) slapped on an unsuspecting taxpayer by the Israeli Tax Authority (ITA) was against the law and defamatory. The ITA was given 30 days to pay damages and costs!! (Case 2692-08-18 issued February 16, 2020).

This case will be of great interest to many Israeli taxpayers with a tax file due to business or rental activities or taxable foreign investment income.

Background:

The ITA’s routine use of bank freezes is one of the most unsavory aspects of the Israeli tax system.

The ITA procedure is to send two warnings to the taxpayer by regular post, then freeze the account if there isn’t a fast reply. Unfortunately, the Israeli postal system isn’t so fast in many parts of Israel.

Such a bank freeze can only be done in extreme cases in the US or UK.

Fact of this case:

A hi-tech employee discovered one day in 2017 that his bank accounts at Bank Leumi and Bank Beinleumi (First International Bank) had been frozen, checks had bounced and standing orders were not honored. The supposed reason was that in 2011 he had incorporated his own company to develop a new product, but it never worked out and the company did not register for Israeli income tax or VAT purposes. After a few years, the ITA sent a demand by post to file tax returns followed by fines for non-compliance – but they never arrived. Then the ITA imposed the bank freeze. The individual paid two visits to his tax office before getting the bank freeze lifted after 20 days without money!  It turned out he had a common name and the ITA didn’t state his PO box on the envelop even though it was part of his address at the Interior Ministry.

What the Tax Collection Law says:

The ITA tend to go by what the Tax Ordinance (Collection). Section 4 says: if a monetary amount is legally imposed on a person in connection with any tax, and the person does not pay it within 15 days after the due date and after a demand was sent in writing to pay it, the collector may demand immediate payment of the amount due from the debtor failing which his assets may be seized and sold. Assets at third parties, such as banks, may also be seized.

The Court Ruling:

The Court did not accept the ITA’s justification for the bank freeze – that the tax return demand sent by post should have reached the taxpayer even, without the PO box number on the envelop.

Instead the Court noted that Section 238 of the Income Tax Ordinance deals with the delivery of notices. Section 238 says: a notice may be delivered to a person either by hand or by registered post, at the business address or the home address as last known; if it was sent by registered post, it is considered to be delivered on the sixth day after it was sent, if sent to individuals in Israel (or the day after the notice arrives the regular way if sent to individuals abroad). Needless to say, the ITA did not use hand delivery or registered post in this case (nor does it normally do so).

The Court went on to consider whether the ITA’s action was defamatory. Section 1 of the Defamation Law, 1965, defines defamation as:

• to humiliate a person in the eyes of people or make him a target of hatred, contempt or ridicule;
• to despise a person for acts, behavior or characteristics attributed to him;
• harm a person in his office, whether in public office or in any other capacity, in his business, vocation or profession;

The Court found that the ITA order imposing the lien on the bank accounts of the taxpayer reached the bank clerks concerned, harmed his good name and was defamatory. For damages not exceeding NIS 50,000, it is not necessary to prove actual harm. The Court ordered the ITA to pay the taxpayer damages of NIS 6,000, court costs of NIS 5,000, court fees of NIS 1253 and legal costs of NIS 1800, all within 30 days.

Comment:

This case is a useful Purim present for taxpayers generally, and more defamation actions seem likely. It remains to be seen whether the ITA will appeal and/or modify its harsh bank freeze habit. The ITA might learn from the National Insurance Institute which sends text warnings to a person’s phone – at least they arrive, usually…..

As always, consult experienced tax advisors in each country at an early stage in specific cases.

[email protected]m

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd

(c) 10.3.20