Israeli pays tax on NIS 4.5m cash hidden at home

Eran Yaacov / Photo: Jonathan Bloom , Globes
Eran Yaacov / Photo: Jonathan Bloom , Globes

"Globes" tells about the voluntary disclosure procedure in which a man paid NIS 1.4 million cash to the Israel Tax Authority but then found the banks refusing to accept the rest.

Some time ago, an old man carrying a suitcase visited the offices of the Israel Tax Authority in the government center in Tel Aviv. The suitcase contained over NIS 1.4 million in cash in NIS 50, NIS 100, and NIS 200 bills, all arranged in neat piles. Shortly afterwards, when he left the Tax Authority's offices, he was no longer carrying the suitcase. It was in the hands of the employees in the collection department as payment of a tax assessment made for the old man in the discussions that he had held, and was still holding, with the tax assessment officer in the course of signing a voluntary disclosure agreement for NIS 4.5 million that he had hidden at home.

The voluntary disclosure proceeding enables those who have concealed income to declare their unreported capital and pay the necessary tax without facing criminal proceedings.

Does this sound logical? A natural thing to do? Not at all. Such a large amount in cash was never before received at the Tax Authority's in payment for tax. The Tax Authority headed by director general Eran Yaacov, repeatedly tells taxpayers that it has no cash registers for accepting cash payments from taxpayers at its offices, but that is exactly what happened in this case. The exceptional cash payment was made possible by a creative solution devised by the taxpayer's legal representatives, Adv. Gilad Barone and Adv. Haim Levy from the Baron and Co. law firm, and representatives of the Tax Authority. The solution included a staged "collection" proceeding by the Tax Authority for the purpose of the voluntary payment of the tax owed, before the completion of the voluntary disclosure process.

Millions in safes

How did the Tax Authority agree to accept over NIS 1 million in cash? In order to answer this question, it is necessary to go back to the beginning of the story. In November 2018, the old taxpayer, who was born in 1938, asked the Tax Authority for voluntary disclosure of NIS 4.5 million that he had saved at home over a long period, but had not reported to the authorities and had not deposited in any bank. The money was hidden in a safe in his home and in safes in the homes of relatives and other unknown places. The money was the taxpayer's "foreign income" from 2008-2017 that he had earned from working overseas. As part of the negotiations for voluntary disclosure of the money to the Tax Authority, the taxpayer told the tax assessment officer, "In my time, we kept money to ourselves in cash; we didn't deposit it in banks."

In February 2019, following negotiations between the parties, the taxpayer's lawyers and the tax assessment officer drew up a draft agreement under which the taxpayer's request for voluntary disclosure would be accepted, and his income in 2008-2017 would be increased by NIS 382,000 a year and taxed. The agreement stipulated that in addition to income tax according to the legal tax brackets, the taxpayer would also pay 25% tax, plus interest and linkage, on NIS 67,500.

The taxpayer's total tax bill came to NIS 1.443 million in tax on his foreign income, putting an end to the voluntary disclosure proceeding. The parties further agreed that there would be no deficit penalty in the agreement (the tax assessment officer is authorized to impose penalty on taxpayers in voluntary disclosure proceedings, but the usual practice is to not to impose them).

The agreement included the taxpayer's declaration that the sources of the money that he saved were not illegal economic activity, and involved no violation of the laws against money laundering in Israel or elsewhere. The taxpayer later discovered that his statement was meaningless in the banking system, but the Tax Authority accepted his explanation of the sources of the money, and the voluntary disclosure proceeding went ahead. At the same time, the Tax Authority made it clear to the taxpayer that the agreement did not give him criminal immunity; only the Tax Authority's investigative officer has authority to grant criminal immunity. In other words, the voluntary disclosure proceeding was not finally concluded; there are still a few ends to tie up before the taxpayer can put the affair behind him.

The bank refuses

The taxpayer, however, did not want to wait until the end of the proceeding; he wanted to pay the agreed tax, so that at least this part would be behind him. He therefore contacted the bank in which he kept his account through his legal representatives, Barone and Levy, so that he could deposit the cash that he had accumulated over the years and pay his debt to the Tax Authority.

The taxpayer discovered that the banks had their own system separate from the systems of agreements with the Tax Authority, and that his bank was unwilling to accept his money. He repeatedly asked the bank to deposit the money, and was repeatedly refused. In many cases, banks refuse to accept money and transfer it for payment of tax debts to the Tax Authority, even when they are shown a valid voucher issued by the tax assessment officer and a signed tax assessment agreement, because the banks do not necessarily regard the money legalized through a Tax Authority voluntary disclosure agreement as legal. The banks are subject to the stringent rules in the Prohibition on Money Laundering Law.

A staged bailiff's action

The taxpayer faced a dilemma. He owed tax and had money to pay it, but he was unable to deposit it in a bank in order to transfer it to the Tax Authority. Here is where the creative solution cooked up by his lawyers and the Tax Authority came in. Barone and Levy contacted the Tax Authority collection officer Zilpa Glindos and asked her to allow payment of the tax in cash from the concealed money.

Following a variety of proposals that were not accepted, the legal representatives exercised their creativity: why shouldn’t the Tax Authority institute a collection proceeding by its bailiff department and itself take the money from the taxpayer? Why not collect it with the belligerent tools available to the Tax Authority?

This the following conspiracy was born: the parties agreed first that the tax collectors from the Tax Authority's bailiff's department would go to the taxpayer's house, knock on the door, and seize the money designated for paying the debt, which would be waiting for them on the dining room table, and the problem would be solved. This scenario was later changed; it was decided that the taxpayer would simply bring the money to the Tax Authority's offices, where the Tax Authority's officers would "seize" it. This is in fact what happened.

Tax Authority's response: The Tax Authority is conducting a dialogue with the regulators about deposits of voluntary disclosure money in banks.

Commenting on the case related above, the Tax Authority said, "Due to the duty of confidentiality, we can neither confirm nor deny the details of the case mentioned in your query."

The Tax Authority nevertheless added, "In general, the Tax Authority's primary role is to collect taxes. These taxes constitute the economic basis of treasury of the state and its institutions. By law, the Tax Authority collects taxes from every taxable source listed in the Income Tax Ordinance. In cases in which an unpaid debt exists in the tax system, the Tax Authority has a number of means for enforcing collection, including bailiff proceedings."

In other words, the Tax Authority admits that it used the ostensibly "belligerent" collection tool of bailiff proceedings, available to it in cases in which taxes are not paid, in order to legalize connection of a tax debt agreed as part of this taxpayer's voluntary disclosure proceeding.

The Tax Authority went on to address a broader problem of taxpayers being unable to deposit money in banks in Israel even after the Tax Authority has accepted the taxpayer's declaration that the money originates from a legal source, and was not obtained as a result of money laundering violations. The Tax Authority states on this question, "Concerning the question of measures for obtaining tax money not approved by the banks, such as taxes on profits from virtual currencies activity, the Tax Authority is conducting a dialogue on the subject with the appropriate regulators."

The Tax Authority nevertheless further stated, "Collection enforcement tools are not among the measures mentioned." In other words, it is unclear to what extent the Tax Authority will be willing to accept more payments in cash through creative measures like those employed with the taxpayer in this incident. It appears, however, that once it has allowed this for one taxpayer, it will have to explain why it does not allow a similar proceeding the next time that it is asked to do so.

Published by Globes, Israel business news - en.globes.co.il - on August 13, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Eran Yaacov / Photo: Jonathan Bloom , Globes
Eran Yaacov / Photo: Jonathan Bloom , Globes
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