Tax litigation and arrangements with tax authorities in various tax areas, obtaining advance tax rulings, commonly known as 'rollings'
Tax litigation with the tax authority
Our office has vast expertise in engaging in valuation negotiations with the tax authority, specifically concerning income tax issues. Our team includes former senior officials of the Tax Authority who have held management positions as various assessors, unit coordinators, supervisors, and area managers. This firsthand experience enables us to conduct valuation discussions with an insider’s perspective and to understand the various considerations of the officials in the income tax department.
We provide valuable assistance to taxpayers and accountants by offering our expert opinion on litigation agreements as they take shape, and we help to develop effective strategies for managing tax litigation procedures and negotiating with the income tax department.
As Benjamin Franklin once said, “When you fail to prepare, you prepare to fail.” This statement holds particularly true in the context of appraisal procedures.
The following article was written as a follow-up to the lecture delivered by Nimrod Yaron at the request of the Council of Tax Consultants conference.
The Ten Commandments – the way to succeed in tax litigation
- The small details are important – all the relevant facts of the case must be thoroughly understood. A competent representative knows how to ask the client all the right questions to be fully prepared and knowledgeable about the facts. Tax inspectors have access to data from various sources. During my time at the Tax Authority, I recall several discussions where I posed a question to a representative, they answered, and then I countered with evidence about facts they were not familiar with. Such discussions often result in a quick compromise in favor of the tax authority.
- Understanding the language of the law is crucial, even if it sounds trivial. Rabbi David Leibel’s recent article stated that yeshiva students primarily focus on studying the commentaries to the Gemara, rather than the Gemara itself. Similarly, in the world of taxes, it is important to be familiar with the rulings and publications of the Tax Authority, but it is crucial to start with the language of the law. According to Honorable Judge Barak (BA 152/82 – Kibbutz Hatzur v. P.S. Rehovot), a thorough familiarity with the language of the law (sections of the ordinance and regulations) is critical. Sometimes, an unclear wording of the law can be used to the benefit of the client. In addition, it is essential to understand the intention that stood before its enactment. This information can be learned from the explanatory notes to the law and the discussions in the Knesset committees.
- knowledge is power – The amount of legal knowledge in this field is constantly expanding, and it is important to stay up to date with all relevant professional material before each discussion. This includes rulings, executive orders, income tax circulars, and taxation decisions. Legal knowledge is critical in appraisal discussions because they are legal procedures, and the inspector’s authority is equivalent to that of a justice of the peace. Any appeals against orders issued by the tax authority are heard in district court, and many cases have been won or lost on civil law issues. Therefore, it is highly desirable for a representative to have an education in both accounting and law.
- Assessing additional risks requires a thorough review of all the material submitted to the tax authority, even if it is not directly related to the issue under discussion. Inspectors of the tax authority have the authority to ask any question related to income, so it is important for a professional representative to thoroughly interrogate the client before the hearing to ensure the accuracy of all submitted material. If there are any issues that have not been disclosed to the tax authority, such as additional unreported income or taking a certain position, the representative should be aware of them before the discussion.
- Know who you are facing – Who is the inspector? Who is the coordinator? Who is the Deputy Assessor? Who is the Assessor? What is their stance on the issue? How much are they opposing me? How many cases do they take to court, etc.? Answers to these questions will aid in formulating the strategy for the case, even before the hearing.
- Limits of authority – even though the Income Tax Ordinance has been with us since 1941, a period when the implementation of the Ordinance was in the hands of the military governor and the powers were almost unlimited – the inspector’s powers also have limits. It is important to know them. For example, the inspector may not summon the taxpayer to a hearing unless the assessor has signed the order. There are limits to an inspector’s investigative authority and to the way in which he can obtain evidence.
- Check preliminary claims – Is it possible to resolve the matter in the case through preliminary claims? Many cases are closed due to technical errors by the income tax in relation to statute of limitations, incorrect document requirements, audits timed too close to the end of the tax year, etc.
- Business is done with people – try to make the inspector empathize with the taxpayer. It is much easier for the inspector to ease the tax litigation when they feel like they are helping a cooperative and genuine taxpayer. The tax authorities possess significant discretion in determining the assessment. Engaging in a confrontational discussion typically does not serve the best interest of the taxpayer.
- When drafting the litigation agreement at the end of discussions, it’s important to consider additional goals that can be achieved through the agreement. For example, the agreement should include provisions for the cancellation of fines, a statement clarifying that the agreement is for the purpose of compromise only and the taxpayer does not admit to the claims, a reduction in interest and linkage differences, prevention of additional tax litigation by insurance Leumi or VAT following the agreement, allowing offsets in the future, qualifying capital for withdrawal, and other relevant considerations.
- The relationship with the client – make sure to keep the client updated, even if there is nothing new to report. A taxpayer who is under investigation or assessment discussions is under enormous mental pressure. Share the range of risks with them, and if the case is delayed because the IRS postponed a discussion, make sure to inform the client and be attentive to their needs. They will appreciate the attitude no less than the professionalism.
From the presentation of the lecture – “Administrative procedures before the income tax” given by CPA Nimrod Yaron at the Tax Consultants Council conference in June 2017.
Arrangements with the tax authorities
Our office is experienced in making arrangements with the tax authorities on a variety of issues such as the law to encourage capital investments, income and tax classification, and international taxation. These arrangements are typically conducted through a rolling procedure that involves receiving a preliminary taxation decision from the Tax Authority’s management. Our office has achieved numerous successes in this area, even in challenging and unconventional cases, as well as cases that involve multiple departments of the Tax Authority.
Tax litigation – Income tax penalties
Assessment hearings often involve significant fines imposed by law. In many cases, these fines can be waived, and it is one of the topics that arise in almost every assessment discussion.
Most of the fines in the Income Tax Ordinance are civil fines imposed under sections 188-191c of the Ordinance. These fines include various types of penalties:
- Fine for not submitting a report (NIS 500 for each month* of late submission) – an automatic fine imposed by the computer.
- Fine for not reporting an action that requires reporting (NIS 500 for each month of late reporting) – this fine can be imposed by the assessor.
- Fine for failure to submit a report on tax withheld from the taxpayer on time (NIS 200 for each month of delay) – the assessor may impose the fine.
- Fine for not submitting a deductions report on time (NIS 200 for each month late) – an automatic fine imposed by the computer.
- Fine for not providing a report to a person from whom tax was deducted at source – the assessor may impose a fine of up to NIS 100 on any person who did not receive the form.
- Fine for late submission of a capital statement is 200 NIS per month, and the fine is doubled if the taxpayer received the statement and still submitted it late.
- Penalty for late payment of an advance – if there is a delay of more than seven days, the taxpayer will be subject to a fine in the amount of the linkage differences and interest, in addition to the original interest and linkage differences.
- Fine for offsetting withholding from advances without written approval – a fine in the amount of three times the amount of the unlawfully offset deduction.
- Deficiency penalty – if the taxpayer underreports their taxable income or claims excessive deductions, resulting in a tax liability that is 50% or more than the tax initially declared, a deficiency penalty will be imposed at a rate of 15%-30% of the amount of the underreported tax liability.
- Fine for rejecting books – a fine of 10%-20% of the income may be imposed by the tax authorities.
- Fine for not identifying a buyer who paid in cash – 5% or NIS 500 whichever is higher.
* Please note that under the income tax order, a month is defined to include a part of a month. This means that, for the purpose of calculating fines, a day is treated like a month. However, some sections of the fines specify that a full month should be used. It’s important to keep this in mind.
Assessments are typically made several years after the submission of the report. This means that there can be a delay of up to four years in reporting a certain event. In some cases, this delay can result in fines of over 25,000 NIS, which are calculated at 500 NIS per month (plus interest and linkage differences).
Cancellation of the income tax penalty
According to Section 192 of the Income Tax Ordinance, the assessor and their assistants (such as an income tax inspector or a coordinator at the Tax Authority) have the authority to reduce or cancel fines that they believe are not the result of an act or omission by the taxpayer. In practice, the discretion regarding the cancellation of fines is quite broad, and our office has typically been successful in canceling all imposed fines as part of the assessment procedures.
Errors in the calculation of the fine
A recent story claimed that the Tax Authority was unable to explain to the taxpayer (Har Shemesh Individual Farms) the calculation of a fine imposed on them and claimed that the fine was calculated by computer software and therefore valid. Surprisingly, the district court sided with the Tax Authority instead of recognizing that the calculation was based on a formula established by law and easily verifiable. The case is now pending before the Supreme Court.
A similar case involved a class action lawsuit by Ayad Mahajana, who discovered that the Tax Authority attached VAT assessments to the index when it increased, but failed to reduce the amount when the index decreased. The court ruled in favor of the taxpayer and ordered the Tax Authority to correct the calculation.
These cases highlight the importance of seeking professional advice to verify the accuracy of any fines or assessments imposed by the Tax Authority.
Failure to report income or pay taxes is usually a criminal offense. Our office handles cases where a client has arrived after a criminal investigation has already been opened against them or they have been notified of a hearing. Our firm has experience representing clients in criminal tax investigations while minimizing criminal exposure.
In addition, our firm has represented dozens of voluntary disclosure cases, including complex disclosures conducted simultaneously with the Israel Tax Authority and the IRS in the USA. Our team has expertise in managing voluntary disclosure processes for the purpose of resolving assets worth hundreds of millions of shekels.