Tax Authority’s voluntary disclosure billions hit by red tape

In May, Israel Tax Authority Director Shai Aharonovitch announced that “within a few days” a new voluntary disclosure program would be published. The program will allow Israelis who have hidden their wealth from the state, and have not paid taxes accordingly, to report their assets and pay taxes without fear of criminal proceedings.

The state was already calculating the billions that would flow into its coffers from Israeli wealth that would be exposed around the world, but months have passed since then and the new procedures have yet to be published. What is delaying the program? The Tax Authority is apparently still working on the “final formula,” or at least that is what the Tax Authority and the Attorney General in the Justice Ministry claim.

Sources familiar with the matter told Globes that these “formulas” refer to only one clause that the Tax Authority requested to be included in the new procedures, which would allow it to take civil action against Israelis who fail to voluntarily disclose their taxes.

In previous programs, the state did not establish a protocol for civil proceedings in cases where voluntary disclosure was unsuccessful, and only promised that there would be no criminal proceedings. This prohibited the state from using information discovered as part of voluntary disclosure against applicants.

This time, the Tax Authority sought to include a clause stating that the state could open civil enforcement and collection proceedings against Israelis who disclosed their wealth but failed to complete the voluntary disclosure program. The Attorney General approved a draft of the new procedures two months ago that included this clause.

Pending new approval of the procedure

After the draft was approved, the Tax Authority expressed regret over the addition of the clause, and decided to waive the right to file civil lawsuits against Israelis who failed to comply with the voluntary disclosure procedures. The Tax Authority submitted a revised version to the Attorney General for approval, but the new version has not yet been approved.

“99% of voluntary disclosure procedures are completed and successful anyway, so there was no need for this provision in practice. The IRS understood this, and the IRS regretted it, but it had to re-approve the procedure through the Attorney General. There is no disagreement between the two parties over the wording or deletion of this provision. In practice, the procedure is only delayed due to the workload in the Attorney General’s office. The bottom line is that the procedure is technically stalled, only because it requires re-approval,” a senior Justice Ministry official said.

A spokesperson for the Tax Authority and a spokesperson for the Ministry of Justice said in response: “The procedure was approved by the relevant authorities, including the Attorney General, several months ago. A number of requests to amend the approved procedure are now being considered.”

Without an unknown path

The draft measure now awaiting approval is identical to the previous voluntary disclosure procedure, except for one important change. In the new procedure, there will be no “anonymous path”, where previously the applicant kept his identity secret when submitting the application and only revealed himself after it was approved by the tax authority.

The IRS and the Justice Department agreed that this time it would not be possible to conduct an anonymous review of the voluntary declaration, and that the person requesting disclosure would reveal his or her identity from the outset. The IRS was initially concerned that the absence of an anonymous process would lead to no one disclosing their hidden wealth for fear that if the procedure failed, the state would take action against them. But the Justice Department insisted and explained that since citizens had already had two opportunities to disclose their wealth in the past, including through the anonymous process, there was no need for an anonymous process this time. “The attorney general did not agree to approve an anonymous procedure, and he really insisted on it,” the Justice Department source explains.

Another condition set by the Attorney General when drafting the measure is that this would be the last voluntary disclosure to be published, and thus the last chance for Israelis with hidden wealth to report their wealth and obtain immunity from fines and protection from criminal proceedings.

The Tax Authority agreed to these two conditions set by the Attorney General, and they were approved in the previous draft, but as we mentioned, the new draft (from which the section on civil lawsuits was deleted) is now awaiting the Attorney General’s signature.

31 billion shekels were revealed and 6 billion shekels were paid in taxes

The new measure is of particular importance for people dealing in cryptocurrencies, who have so far had difficulty settling their profits in terms of reporting and taxes.

In previous voluntary disclosure programs launched in 2014 and 2017, 9,963 voluntary disclosure requests were submitted, revealing wealth owned by Israelis around the world totaling NIS 31 billion, and paying NIS 6 billion in taxes. The largest amount disclosed in the program was in 2018 by an applicant who declared NIS 104 million, of which NIS 17 million was paid in taxes.

In previous voluntary disclosure programs there were three tracks: the regular disclosure track, the shortened track, and the anonymous track. The anonymous track was always the most popular of these three tracks, with 87% of the tax ultimately paid from this track.

This article was published in Globes, Israeli Business News – en.globes.co.il – on August 29, 2024.

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