Absolving Big-time Tax Evader and Bashing the Small Fry

The Tax Authority’s campaign to encourage tax evaders to own up has triggered the declaration of 6.1 billion shekels ($1.6 billion) in assets. In the campaign launched in September, this translates into 1,687 filings by taxpayers, at an average of about $1 million per case.

In reporting such income — from Swiss bank accounts, for example — Israelis pay the tax and sometimes a fine. By doing so, they avoid criminal prosecution.

Still, the way the plan has been implemented poses a problem. While tax dodgers on heavy income have been able to fess up and win immunity, many minor scofflaws are not eligible.

As a result, tax lawyers say, the Tax Authority’s approach contradicts the goal of getting undeclared income disclosed. The program suffers from discrimination.

One innovation in the plan, which replaced an earlier program from 2012, is a fast track designed for cases in which the sum of undeclared assets does not exceed 2 million shekels, with the income subject to tax not exceeding 500,000 shekels during the reporting years involved.

Theoretically, such taxpayers can make voluntary disclosures and win immunity from prosecution quickly, without any negotiations with the Tax Authority. In the event, about a fifth of filers in the program have used this fast track.

But the Tax Authority has rejected many other requests on the grounds that the track only applies to cases that generate big tax payments. We can assume that this condition was inserted for efficiency reasons — the Tax Authority wanted to focus on major tax liabilities. Also, cases involving smaller sums were less likely to prompt criminal prosecution.

Trapped into criminal prosecution

But this approach may be problematic for a number of reasons. First, the message is that the small-fry evader faces criminal prosecution, while the big guy gets off scot-free.

Anat Shavit, a lawyer who heads the tax department at the law firm Fischer Behar Chen Well Orion & Co., says this approach is also flawed because it fails to let the Tax Authority exercise its enforcement authority on an equal basis.

Also, she says many foreign banks now require account holders to confirm that they have voluntarily disclosed the asset, which may trap them into a situation in which they are forced to disclose but are still subject to criminal prosecution.

Another problem involves the fact that the program provides immunity in cases involving substantial tax payments, but “substantial” has not been defined. Only recently, nine months after the program went into force, did Tax Authority official Roni Hacham tell an Israel Bar Association meeting that a substantial tax payment involved at least 50,000 shekels (including interest and adjustments for inflation).

The Tax Authority, for its part, has said this is the commonly accepted threshold, but it is subject to other factors examined on a case-by-case basis. Also, the Tax Authority has not provided information on how many disclosure requests have been rejected because the tax liability was not high enough.

“There have been such instances, but there is no breakdown on the grounds for rejection,” the Tax Authority has said. Also, the agency has not provided taxpayers with reasons for the rejection of a filing; it says doing so would “disclose the information that we have before us.”