The police fraud squad is expected to carry out more arrests in the Tax Authority corruption scandal that broke this week, police sources said yesterday.

The sources predicted that businesspeople who obtained tax breaks through the power and influence of prime suspects Kobi Ben-Gur and Yoram Karashi will be interrogated, and that additional Tax Authority staffers will be interrogated for suspected involvement in the system that facilitated granting such tax breaks. But the police have not yet decided when to conduct the next round of arrests, as this will depend on developments in the investigation over the next few days.

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Attorney General Menachem Mazuz and Civil Service Commissioner Shmuel Hollander will consider suspending the prime minister's bureau chief, Shula Zaken, and Tax Authority director Jacky Matza, as well as several other tax officials. A decision will be made after the suspects are released from detention or other restrictions imposed by the Tel Aviv Magistrate's Court.

Police sources claim that Matza lied in his interrogation regarding two affairs that he was asked to explain. At a bail hearing on Tuesday, the police presented two examples of contradictions between Matza's testimony and the findings uncovered in the prior undercover investigation. Altogether, they said, Matza's 33-page testimony is fraught with inaccuracies or claims that contradict evidence collected.

At that hearing, the judge ruled that Zaken would remain under complete house arrest for 10 days, after which she would be prohibited from going o her office or contacting Prime Minister Ehud Olmert for another 14 days. Matza and other senior tax officials were remanded for a few days each, but even after they are released, they will presumably not be allowed to return to their jobs before the investigation ends.

The Justice Ministry and the Civil Service Commission released a joint statement yesterday saying that "at this point, in keeping with the needs of the investigation, the suspects have been distanced from their places of work by the penal code and the detention proceedings. At a later stage, further administrative measures will be considered, including suspension under the civil service code."

The Tax Authority functioned yesterday without three senior officials - the director general and two deputies, Shmuel Bobarov and Gidi Ben Zakai. Flouting the advice of senior treasury officials, Finance Minister Abraham Hirchson failed to appoint a temporary replacement for Matza yesterday. Hirchson will meet with Tax Authority staffers today at the authority's Jerusalem offices.

The preferred candidate to replace Matza is apparently Finance Ministry director general Joseph Bachar, an accountant by trade who will be completing his term on Sunday and has the complete confidence of the finance minister, senior treasury officials and Tax Authority staffers. Bachar was pressured yesterday to accept the position temporarily, but apparently rejected the request for personal reasons.

Yesterday morning, Hirchson met with Prime Minister Ehud Olmert for a private discussion of the crisis at the Tax Authority. Both sides declined to reveal the content of their meeting.

Hirchson also convened his staff to discuss the crisis yesterday. At a tense meeting, senior treasury officials said that if even only some of the allegations are proven, the affair is earthshaking.

More than 100 police officers took part in Tuesday's arrests and searches of the suspects' homes.

Yesterday, all the suspects were isolated in separate interrogation rooms, where they were shown the evidence against them for the first time and asked to respond. It consisted mainly of thousands of hours of taped phone conversations among the main suspects. The police say that these conversations are incriminating and prove that many Tax Authority staffers helped in doing the bidding of Ben-Gur, Karashi, Zaken and their associates.

In several instances, the suspects were asked to explain substantial discrepancies between the stories they told on Tuesday and the concealed evidence collected over the past 10 months.

"For us, the fact that several suspects gave false testimony immediately upon their arrest is good," one police source said. "They allegedly cooperated and denied the allegations, essentially hog-tying themselves. Today, they had to face the facts we have collected. Cracks were certainly created in some of their stories."

Detectives will try in the coming days to resolve one of the main puzzles in the investigation: The extent of the financial payoffs that Karashi, Ben-Gur and maybe tax officials received from the businesspeople who approached them is still unclear. Detectives are also trying to determine exactly who exploited the allegedly criminal mechanism at the authority in order to receive tax breaks on their business dealings.