Voluntary Disclosure! Everything You Wanted to Know and Were Afraid to Ask

Voluntary disclosure is a track offered by the Israel Tax Authority to Israelis with undeclared capital or assets in Israel or abroad. Undeclared money is essentially "black money" that has not been reported to the Israeli tax authorities and therefore not taxed. The voluntary disclosure procedure, then, is a method by which the holder of the capital declares the capital, income, and gains, reports them to the tax authorities, and pays income tax. In return, the discloser may, subject to the Authority's approval and the procedure's conditions, receive immunity from criminal proceedings and can sleep easy.

The voluntary disclosure procedure of the Tax Authority began several years ago and has been a major success. People who had committed offenses, wished to turn over a new leaf and bring capital back to Israel, "whitened" their money — paying tax along the way. By some estimates, over 10,000 voluntary-disclosure applications were filed, exposing more than ILS 30 billion in black money. The total expected tax may reach ILS 4 billion.

Voluntary disclosure is the act of disclosing taxable income and paying tax on it. The procedure does not apply only to those holding significant assets abroad and wishing to bring them to Israel — it also applies to those who generated black money from domestic activity and can now declare it.

Alongside its disclosure guidelines, the Tax Authority has, in recent years, been catching many tax evaders, thereby increasing its deterrent power and the number of people turning to voluntary disclosure. Recently, the authority went deep into the world of apartment landlords. It turns out that thousands of landlords do not pay tax (even though the rate is low) — why? Because they can, and because they usually aren't caught. The Tax Authority required capital declarations from thousands of property-owning citizens and uncovered over ILS 1 billion in black money. These "operations" continue, each time targeting a different field (diamond merchants, contractors, landlords, etc.). The voluntary disclosure track was originally set to end in 2016, but due to the program's success and successive Tax Authority extension orders, it has been extended three times — to the end of 2017, the end of 2018, and a further extension to the end of 2019.

Voluntary disclosure is possible when it is not a way of evading inspection. Only where, at the time of application, no investigation or examination by the Tax Authority has been opened regarding the applicant — or their spouse, or companies they control. This is obvious; otherwise people would file as soon as an investigation began and abort it.

In recent years, as part of the global fight against money laundering, banking systems worldwide have become transparent to regulators and exchange information between themselves. Tens of thousands of Israelis maintaining secret accounts abroad do not wish to be criminals and prefer to sleep peacefully at night. Under voluntary disclosure they will not have to face the tax offenses committed. In other words, the Tax Authority is saying: "We forgive — just declare lawfully and we will collect the tax." This way you will not be charged with criminal offenses and you can settle your unreported income. Sounds like a good deal — and what does the Tax Authority get? A great deal of money. Billions of shekels flow into the state treasury.

Voluntary Disclosure — Pay Tax and Avoid Criminal Offense

Is voluntary disclosure a prize "for criminals"? Not really, because under this track they agree to pay tax of hundreds of thousands — sometimes millions — of shekels. True, perhaps not as much as they should originally have paid, and true, they enjoyed years of paying no tax at all. Yet the procedure still yields billions of shekels to the Tax Authority that would otherwise not be discovered for many more years, and the state would not see any of it.

Tax Authority: Disclose Voluntarily — or We'll Find You Ourselves!

Since launching the voluntary-disclosure procedure, and throughout recent years, the Tax Authority has been "waving" lists of Israelis with accounts in banks in Switzerland, England, the United States, and other countries. Alongside the international banking information exchange, the Tax Authority has obtained lists of wealthy Israelis — and as soon as those people realized there was a chance of being exposed, they rushed to the anonymous voluntary-disclosure track. At the same time as the procedure was launched, many Israelis were arrested due to substantial undeclared wealth in Swiss banks — particularly at UBS, whose client list was leaked online.

Voluntary Disclosure — The Anonymous Track — The Popular One

The anonymous track is the popular one — over 60% of applications come through this route. Under its terms, anonymous negotiations can be conducted with the Tax Authority through a power-of-attorney CPA. After the negotiations, the applicant can choose between two options: accept the agreement with the Tax Authority (declare the capital and income and pay the required tax) or decide not to be exposed — but then they run the risk of committing a criminal offense.

Voluntary Disclosure — The Short Track

Over 1,000 applications have been filed under this track. Here, capital does not exceed ILS 2 million, and taxable income does not exceed half a million shekels (across all reporting years). With such relatively small amounts, applicants can disclose income and gains (within the voluntary-disclosure framework) and receive criminal immunity through a quick procedure, without negotiating with the Tax Authority.

Voluntary Disclosure — Another Extension?

According to tax-affairs estimates, the Tax Authority is expected to extend the anonymous voluntary-disclosure procedure for another year, through the end of 2020. The reason: the pace of applications exceeds 2,500 per year, whereas before the anonymous program began there were barely 200 a year. The bottom line is significant revenue for the Tax Authority. Beyond that, the authority understands that developments in the tax world require time for the public to absorb and adapt. There is more inter-authority cooperation than ever, and penalties for tax offenses have widened in many countries. Likewise, the FATCA agreement with the US (information exchange between tax authorities) and similar agreements in Western countries make it harder to hide information, accounts, and money. People understand the noose is tightening — some just need more time, and the Tax Authority is giving them that time.

Voluntary Disclosure — Tax Authority Procedure

The voluntary-disclosure procedure was first published by the Tax Authority in 2014. Key points:

"The Tax Authority wishes to encourage taxpayers, dealers, individuals, and corporate officeholders who have committed offenses against the tax laws to correct their reporting and report true data. To that end, the Tax Authority, in coordination with the State Attorney's Office, is willing to commit not to initiate criminal proceedings against anyone who carries out a voluntary disclosure under the conditions detailed below — the disclosure shall be honest, full, and made in good faith.

At the time of the voluntary-disclosure application, no investigation or examination has been conducted regarding the applicant by the Tax Authority (including investigation or examination regarding the applicant's spouse or companies under their control); at the time of the voluntary-disclosure application, the Tax Authority does not hold information related to the voluntary disclosure, including with respect to the applicant's spouse, companies under their control, and partners' files. At the time of the voluntary-disclosure application, no examination or investigation has been conducted regarding the applicant, spouse, or companies under their control by the Israel Police in a matter related to the voluntary-disclosure application — including their business activity or any other revenue-generating activity.

Procedure — A voluntary-disclosure application shall be submitted only to the Senior Deputy Director for Investigations and Intelligence at the Tax Authority, and only they shall be authorized to approve it. If the application is submitted to another body within the Tax Authority, that body shall immediately forward the application to the authorized body. The disclosure shall be honest and shall include all information relevant to the application… All relevant documents shall be attached to the application.

If the authorized body finds that the application meets the terms of the procedure, it shall notify the applicant that the application is approved subject to payment of tax as determined by the civil body. Following approval, the authorized body shall refer the application to the relevant civil body (assessing officer, head of VAT station, real-estate-tax director, customs collector, etc.) which shall determine the tax amount to be paid.

Reservations on criminal-process immunity — a person is entitled to benefit from the voluntary-disclosure procedure only once. A further application will be accepted only under special circumstances, such as serious illness, advanced age, etc."