Voluntary Disclosure – All that is Relevant for 2024

Previous Voluntary Disclosure Procedures

In 2005, the Voluntary Disclosure Procedure was first introduced.

The initial format of the procedure allowed taxpayers who had not reported their incomes to settle their reporting and tax liabilities, in exchange for criminal immunity. Over time, between the years 2011-2019, the Tax Authority issued three additional temporary orders allowing for the voluntary disclosure of undeclared income. Experience and practice show a gradual tightening of the conditions for voluntary disclosure from one procedure to the next.

For example, in the initial procedures, the primary goal of the Tax Authority was to “catch in the tax net” taxpayers who had not reported their incomes over the years and, through a relatively simple and expedited process, to settle their tax liabilities on their incomes from the ten years preceding the tax year. However, in the latest procedures, the Tax Authority has taken a step up.

Although criminal immunity is granted under each iteration of the Voluntary Disclosure Procedure, it is noticeable that in the latest procedures, the Tax Authority is not only satisfied with catching the taxpayer and bringing them into the tax net but also examines aspects of money laundering. This follows Amendment No. 14 to the Prohibition of Money Laundering Law, which took effect on October 7, 2016, and established that tax evasion offenses would constitute predicate offenses for the purposes of this law.

In practice, this is reflected in the Tax Authority’s requirement for documentation regarding the source of the funds that generated the income. In cases where the Tax Authority is not satisfied that the source of the funds is “legitimate and legal,” a tax (in addition to the tax on the ongoing income from the ten-year period) is imposed at a rate of 10%/15%, and in exceptional cases, even 50% on the principal amount of the funds.

Renewal of the Voluntary Disclosure Procedure 2024 – Expected Changes

In May 2024, the Attorney General approved the publication of a new Voluntary Disclosure Procedure.

The procedure is expected to be released to the public at the beginning of June 2024. It will provide an opportunity for taxpayers who have not reported their incomes over the years to settle their reporting and tax liabilities (with the addition of interest and linkage differentials from the end of each year they did not report until the tax payment date) and receive criminal immunity.

While in previous procedures, the unreported incomes were typically rental income from apartments in Israel or abroad, passive income (interest, dividends, and capital gains) from foreign banks, this year a new player has entered the scene – the crypto market.

At the beginning of 2024, a “Temporary Provision Procedure for Receiving Tax Money Due to Profit from the Realization of Decentralized Means” was issued, aimed at easing the tax payment process for crypto investors in light of the difficulties posed by banks in accepting these funds. It seems that the Tax Authority has prepared the ground for the 2024 Voluntary Disclosure Procedure, which includes settling tax liabilities and reporting crypto income.

Key Points of the 2024 Voluntary Disclosure Procedure Renewal:

1. Stricter Conditions: Reviewing the history of voluntary disclosures and their development, the 2024 procedure is expected to be stricter. Inspections of the principal amount of funds and the applicable tax rates are likely to be higher, especially for virtual currency income (e.g., Bitcoin and Ethereum).
2. Carrot and Stick Approach: The Tax Authority usually operates with a “carrot and stick” approach. Previous voluntary disclosure procedures provided a time-limited opportunity to settle unreported income before enforcement actions were taken. For example, the 2014 procedure came about a year and a half before a well-publicized announcement that the Tax Authority had received information about countless Israelis holding bank accounts in Switzerland. The path to criminal proceedings for non-reporting taxpayers was then very short. It is likely that the Tax Authority has data -as we know the Tax Authority has been receiving data from crypto exchanges about holders of cryptocurrencies- that it will use after the expiration of the 2024 Voluntary Disclosure Procedure (currently expected to be valid until the end of 2025).
3. While in the past, it was possible to start the voluntary disclosure procedure anonymously without revealing the taxpayer’s details before reaching a tax settlement with the authorities, the new procedure will require disclosing the taxpayer’s name at the beginning of the process.
4. One of the conditions set by the Attorney General for approving the publication of the 2024 Voluntary Disclosure Procedure is that it will be the last such procedure. The Director of the Tax Authority stated that they are determined to adhere to this directive, and it is expected that legislation will be enacted after the expiration of the 2024 procedure, which will include clear rules regarding the tax framework and fines for those who wish to disclose their income late (in such a case, they will not have criminal immunity).

It should be noted that it is also possible to settle unreported profits and income, and particularly crypto profits, without a voluntary disclosure procedure through tax assessment discussions with the Tax Authority and signing a tax assessment agreement at the end of the process.

Our office includes former senior officials of the Tax Authority, lawyers, CPAs, tax advisors, and economists with extensive experience in the field of crypto, voluntary disclosures, and settling tax liabilities for unreported income.