Form 5329 — Personal Details and Income Source Declaration

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If you have received a demand to file Form 5329, "Declaration of Personal Details and Income Sources in Israel and Abroad" — beware. You are likely on the radar.

This Tax Authority return, requiring you to report personal details and income sources, is another tool used by the Authority to track tax evaders. The form is sent by mail by the Tax Authority's intelligence division to citizens who do not have files with the Authority and are suspected of concealing income due to information and suspicious indicators, such as: frequent trips abroad during the year, ownership of multiple residential apartments with no reporting of rental income, ownership of an undeclared bank account abroad or an Israeli bank account where untracked transactions were carried out, or information received about tax evasion.

On Form 5329 you are required to provide the Tax Authority with details about your and your spouse's income sources in Israel and abroad, including workplaces, shares in companies, ownership of real estate and vehicles, bank accounts, and more. Form 5329 is also used by the Tax Authority to request the opening of a self-employed or withholding file for salaried employees. The information submitted on the return is a central pillar in the decision whether to proceed with investigation proceedings.

Handling Form 5329

Recently, concerned citizens have approached our firm after receiving demands to file Form 5329 from the income tax intelligence division. The purpose of the demand, among other things, is to locate "black capital" of Israeli residents — that is, income produced or generated in or outside Israel that was not reported to the Tax Authority.

The demand was sent to citizens with active travel records in and out of the country who stay abroad more than 90 days a year, as well as to those whose tax-authority records show ownership of several real-estate assets and who may therefore be obligated to report and pay tax on rental income. It is also sent to taxpayers recognized by the Tax Authority as long-term returning residents or new immigrants; to people whose bank accounts show unusual deposits and withdrawals; and to those about whom information was received via the "tip line."

How to Handle the Tax Authority's Inquiry

The information submitted on Form 5329 will be examined by the Tax Authority and will be a central factor in the decision whether to continue inquiry and investigation, whether to take additional steps to verify the information (such as inviting the taxpayer to an interview), or alternatively whether to close the file against you if it is decided there is nothing to the information.

If the taxpayer does not respond to the letter and does not return Form 5329, or in cases where the nature of the information so requires, the Tax Authority may conduct an external audit of the taxpayer. The Tax Authority may already hold information about your undeclared income. Therefore, it is important to fill out the form carefully and accurately and to receive professional advice from CPAs who came from the Tax Authority and are knowledgeable in this area of tax law regarding the possible courses of action in handling the matter before the tax authorities.

Form 5329 — New Immigrant or Returning Resident

Notwithstanding the binding reporting requirements above, Amendment 168 to the Income Tax Ordinance provides that an individual who became a resident of Israel for the first time (new immigrant) or a "long-term returning resident," as defined in Section 14 of the Ordinance, shall not be obligated to file a return on capital and assets outside Israel for ten years from the date of becoming an Israeli resident.

Pursuant to Section 134B of the Income Tax Ordinance, there is an exemption from reporting for a new immigrant or long-term returning resident with respect to income produced or generated outside Israel or originating from assets outside Israel. Therefore, if you have received this form, it is recommended to consult on how to engage with the tax authorities.

Compromise Fine (Kofer)

A request for a compromise fine (kofer) is a taxpayer's request to convert the suspicions against them of tax evasion into a compromise-fine payment. The request is submitted to a Tax Authority committee that convenes every few months and rules on whether to approve such requests. The compromise fine acts as a kind of administrative penalty, replacing criminal proceedings for tax offenses. Because the recipient of a Form 5329 demand is in the initial inquiry stage, the compromise fine committee will not accept compromise-fine requests at this stage of the demand letter — but later in the process such a procedure may be recommended.

Preventive Action — Voluntary Disclosure

Proper preparation in advance may lead to settling the debt with the assessing officer. Early approach to the Tax Authority through a CPA is essential and prevents distress, even when undeclared amounts are small. One way to avoid criminal proceedings is through the civil procedure of voluntary disclosure. A voluntary-disclosure application allows anyone who has not reported income in Israel or abroad to confess and pay the tax debt and potentially receive criminal immunity (subject to procedural conditions).

Voluntary disclosure is a complex procedure whose purpose is to provide taxpayers with a renewed opportunity to pay the tax they lawfully owe while avoiding criminal proceedings. Moreover, the taxpayer public should understand that this is a worthwhile path.

In today's global era, with information exchange between tax authorities and a drastic reduction in banking confidentiality, the Tax Authority has the full means and ability to reach any bank account in Israel and abroad. Therefore, it is undoubtedly worthwhile for the taxpayer to settle their undeclared income within the voluntary disclosure framework. We recommend consulting a CPA expert now to be prepared for any move before the authorities.

In Summary: How to Handle Form 5329

Because receiving Form 5329 means there is a suspicion of tax offense and potential for a criminal investigation against you, it is highly recommended to contact Hager-Alperowitz & Co. CPA firm immediately upon receipt. Our firm has four offices across Israel (Ashkelon, Sderot, Petach Tikva, and Jerusalem), and our experienced CPAs will advise you how to file Form 5329 in the best way and represent you in discussions with the assessing officer, aiming to sign an assessment agreement quickly that settles all liabilities on the file.