Previous Voluntary Disclosure Procedures
Israel Tax Authorities launched a scheme in 2005 to detect undisclosed income. The authority pledged that those who voluntarily report their undisclosed incomes would not face criminal prosecution for tax evasion and that their reputations would not be harmed as a result of their actions. However, because this was an initial method for both the Tax Authority and the general public, many people were dubious and hesitant to accept the offer. Accordingly, Israel Tax Authority updated the Voluntary Disclosure Procedure.
In 2014, Israel Tax Authority added an anonymous voluntary disclosure in addition to the current one. Individuals were able to safely declare previously unreported income without revealing their identities as to this new procedure. The change was successful, and the Tax Authority was overwhelmed with applications from residents eager to clear their tax liabilities without facing criminal charges. Although Voluntary Disclosure Procedure was periodically extended, it was no longer renewed after 2019 (On the last day of the year 2019, our office got last-minute queries from individuals looking to take the final opportunity).
The voluntary disclosure procedure has generated billions of shekels for Israel state budget.
What is included in the Voluntary Disclosure Procedure in Israel, and what are the terms?
The voluntary disclosure request must include a variety of precise facts, such as the tax years in dispute, sources of income, the amount of unreported income, and estimated tax payments. Documents relevant to the application should also be submitted. Applicants must specify the capital generating the concealed income as well as the taxes due on that capital, which typically varies from 10% to 15%. The motivation for taxing the capital fund is to recover unreported income from previous years.
The applicants must meet certain conditions in order to be eligible for a request for voluntary disclosure. First and foremost, completely disclose any unreported amounts. They should verify that no ongoing inquiry or application has been initiated by the tax authority over the sums that should have been reported. Failure to achieve these conditions may prevent you from being eligible for voluntary disclosure.
Renewal of the Voluntary Disclosure Procedure
The Israel Tax Authority is considering reviving the voluntary disclosure procedure. While the core requirements (such as requiring full, honest, and good-faith disclosures) are expected to remain the same, the criteria islikely to be stricter than before. For example, in the updated Voluntary Disclosure, applicants, will be required to pay a “ransom” in addition to paying the full amount of the resulting tax upon application. The revised procedure will provide criminal protection as well as the previous procedure.
The manner of settling income in 2023
There is no formal, current procedure for voluntary disclosure in Israel in 2023. However, it is still possible to approach the Tax Authority to regulate income and pay outstanding taxes. A settlement reached in this manner may provide the same benefits of criminal immunity as a formal voluntary disclosure. It’s best to settle taxation matters right in order to avoid paying tax on the fund in addition to the income and before the updated disclosure applies with tougher conditions, such as the payment of a ransom.
Our firm has an extensive experience with voluntary disclosure. We focus on tax optimization measures customized to your individual circumstances during the first step of regulating your tax liability. For example, if you are a long-term returning resident, we will prepare allocation of income in such a way that your taxable income in Israel is minimized. If you have rental income, we will assist you in selecting the most advantageous tax track. (For additional information on voluntary disclosures relating to rent, visit here; for more information about different taxation tracks for rental income, check here). Following that, we analyze the best manner to declare your income: should we submit backdated reports? Should we submit a cover letter, or should we first schedule an assessment with the Tax Authority’s representative? The process chosen is determined by a variety of considerations, including the level of confidence you require against the desire to avoid dealing with some topics where we may take a more activist stance. Other factors to consider include previous experiences or impressions of individual Tax Authority supervisors.
For various reasons, taking an early action to settle tax matters is critical. Firstly, it serves as an important precaution against criminal prosecution (for more information on voluntary disclosure as a defense against criminal exposure, see here). Secondly, taking an early action should minimize interest and civil penalties associated with failure to disclose income (see here more information regarding canceling such fines). Finally, the procedure sets the way for the safe money transferring from bank abroad to Israel. Before Bank allows money transfer, they frequently need a certified approval from an accountant confirming that all applicable tax responsibilities have been completed in all the relevant territories. (For more information on voluntary disclosure connected to bank accounts, go here).
Misunderstandings or a lack of awareness regarding taxation does not absolve criminal or civil liability .For example, many people assume that a sale of cryptocurrencies and virtual currencies is not taxed; however, these transactions usually result in taxable capital gains (for more information on this topic, go here) and others assume that income derive from abroad should be taxed only abroad which is not correct al all.
Given these considerations, it is strongly recommended to consult with a tax advisor and settle any tax liabilities in advance.
It is therefore recommended to consult a tax expert and to settle the tax liability in advance and before any tax investigation and also before money transfer to Israel, and it is especially recommended to be provided with the optimize tax planning and the right manner to apply for a tax settlement, in a similar way to the voluntary disclosure procedure despite the lack of a formal procedure in 2023.
