When does tax planning cross the line of legality and how to navigate out of it?
Declaration of income sources both domestically and abroad is an uncomfortable process. Everyone wants to pay as little tax as possible, and there are those who even prefer to conceal information in illegitimate ways to avoid payment. This has created a situation where tax planning, which is a very important aspect of individuals' and companies' operations, may cross legal boundaries, conceal information from authorities, report false incomes, and even tamper with evidence. It's crucial to understand that the same technological advancements and rapid flow of information that aid tax evaders in breaking the law also assist tax authorities in detecting illegal tax planning schemes and enforcing the law against them. To address this, tax authorities have launched voluntary disclosure campaigns aimed at encouraging reporting of previously undisclosed incomes, profits, and assets.
What is voluntary disclosure?
Tax authorities in many countries around the world collaborate to address illegal activities. Accordingly, numerous agreements have been signed between different countries for dual purposes:
- On one hand, they aim to benefit residents and prevent situations of double taxation.
- On the other hand, they also aim to prevent attempts to unlawfully evade tax payments.
In the same spirit, tax authorities worldwide now commonly engage in exchanging information, despite the confidentiality obligations established by domestic law. Thus, the OECD organization has published guidelines regarding information exchange among member countries, further solidifying the fight against tax evaders. While enforcement occurs at the state level, the information exchanged may also come from unexpected sources and from the confidentiality loopholes in banks in "discreet" countries like Switzerland.
A recent case serves as a good example of voluntary disclosure of a foreign bank account - a banker who worked at UBS bank in Switzerland sold information to the German government containing about 1,500 secret bank accounts of Germans that were not disclosed to the German government. In another case, another Swiss banker who worked at HSBC bank sold information to the French government about approximately 40,000 bank accounts belonging to foreign nationals. Following this trend, thousands of people worldwide have voluntarily disclosed their assets and incomes in Swiss banks, leading to a "voluntary disclosure procedure.
Voluntary Disclosure Procedure 2018
Recently, the tax authority has renewed the 'voluntary disclosure' process for an additional grace period, during which Israelis who have violated the law and failed to report as required are encouraged to come forward and report their assets and all their income, with the commitment that no criminal proceedings will be taken against them. The process is conditioned upon paying taxes, and contrary to the previous procedure, the tax authority has also expanded its authority this time to collect payment within the shortened process and requires an additional tax payment as a condition for criminal immunity.
The new procedure came into effect from January 2018 and is valid until December 31, 2019, only a year after the expiration of the previous procedure. The decision to renew the voluntary disclosure procedure comes after the success of the previous procedure, which brought tens of billions of shekels into the state's treasury.
How does the voluntary disclosure procedure benefit me?
The voluntary disclosure procedure provides individuals with the opportunity to rectify false reports while avoiding criminal proceedings. This option becomes more relevant as Israel is signatory to a broad network of tax treaties aimed at preventing tax evasion and avoidance. Additionally, Israel's membership in the OECD grants its tax authorities capabilities they didn't possess previously. Consequently, tax authorities today have the ability to obtain information regarding assets and incomes of individuals operating in various countries worldwide.
what are the conditions for the voluntary disclosure procedure to the tax authorities?
According to the voluntary disclosure procedure published by the Israeli Tax Authority in 2005, individuals who have previously submitted false reports and wish to correct their reporting are allowed to choose the procedure. The Tax Authority and the prosecution commit not to initiate criminal proceedings in the field of tax offenses against them. This option is subject to the following conditions:
- The disclosure is voluntary and not prompted by an investigation or examination by a government authority.
* There is no prior knowledge by a government authority about the voluntary disclosure process. - The tax authorities' offices have not initiated an examination of the files related to the voluntary disclosure process.
- The information has not been published through the media.
- The information is not included in a lawsuit or defense in a judicial proceeding.
- Individuals who choose this path are required to correct their defaults, submit a truthful declaration, and pay the required tax along with fines and surcharges.
Voluntary Disclosure in the Bitcoin Era
Today, a new economic and profitable field has emerged, in which the voluntary disclosure process integrates beautifully: profits from investing in cryptocurrencies. The problem so far has been that even tax authorities were unsure how to tax these profits, and the solution currently remains quite controversial. It is recommended to watch an interview in the "Globes" magazine, where Shmulik Hershfield explains how to use the voluntary disclosure process to pay taxes on these profits correctly and efficiently.
It's important to emphasize that the voluntary disclosure procedure is intended for cases of tax offenses only and not for cases where there is a legitimate civil dispute regarding tax liability. Nevertheless, in recent months, over one hundred thousand Israelis have received a request from the tax authority to complete a form titled "Personal Details and Declaration of Income Sources in Israel and Abroad" (Form 5329). If you are among those who received the form and believe that you underreported your taxes, our office recommends initiating the voluntary disclosure process as you still have the opportunity to correct past reports.
Please note that this is the last chance for voluntary disclosure. The process is time-limited, so we recommend taking advantage of the opportunity and dealing with the matter promptly without delay.
The expert team at Shtainmetz Aminoach and Co. CPA has extensive experience in voluntary disclosure procedures and dealings with the tax investigation department, ensuring that you will receive full support throughout the process. If you are interested in initiating the voluntary disclosure process, it is highly recommended to contact us as soon as possible to start the process and secure criminal immunity regarding tax matters. Don't miss out on this opportunity, as it is likely to not come again.
