Israel's new secret tax weapon: form 5328/9 - declaring sources of income in Israel and abroad
Have you received form 5328/9 asking you to declare your sources of income in Israel and abroad? It's very important that you answer correctly. Choosing the wrong path can lead you straight to a tax audit.
- How can I protect myself?
- Why did you receive it?
- What are the mistakes to avoid?
- Does this apply to new immigrants?
- Do you have to declare your foreign bank accounts?
We tell you all about it.
In recent days, many Israelis (and sometimes tourists) have received a request to fill in a personal data report and a declaration of sources of income in Israel and abroad (form 5329).
Sending out these requests is another aspect of the Israeli tax authorities' drive to widen the circle of taxpayers required to declare their income in Israel.
This operation is the logical continuation of a number of manoeuvres begun in 2014.
What is form 5329 - Declaration of sources of income in Israel?
Form 5329 - Declaration of sources of income in Israel, is a declaration of personal information and a declaration of sources of income in Israel and abroad. It is a combination of "asset declaration and an annual tax return.
This is the first tool in the hands of the tax authorities that enables them to examine whether the income declared by the taxpayer "really" includes all their income.
Without going into detail, the Israeli tax authorities require the taxpayer to provide information about himself and his spouse, as well as to strengthen his position on various issues, such as:
- Residence - The taxpayer is required to declare whether he is a resident of Israel or a foreign resident. Of course, the taxpayer's declaration on this question has important implications in many cases. (Notably in the context of the automatic exchange of banking information between Israel and foreign countries).
- Taxpayer's bank accounts - For example, if the taxpayer has bank accounts abroad, in most cases these must be detailed on the form, and the tax investigator can obviously check later whether these accounts have generated taxable income in Israel.
- Real estate owned by the taxpayer - for example, if the taxpayer owns a number of apartments, offices, land or other properties, the tax authorities may examine whether rental income has been generated, triggering a tax declaration obligation.
- Vehicles - For example, a person who owns a luxury vehicle but doesn't file an annual tax return is likely to come under scrutiny.
- Income sources and details of occupations over the last two years. The tax assessor will examine, for example, whether there is a correspondence between the sources of income and the declarations submitted by the various employers.
In many cases, forms were sent to taxpayers generating taxable income and not reporting it to the tax authorities - an omission with criminal and civil consequences, but in many cases no offence had been committed by the taxpayers.
For example, the owner of several apartments whose children were living in apartments without compensation.
Those who received the form 5329 - Declaration of sources of income in Israel are obliged to complete it as required and return it to the tax authorities within 30 days.
In cases where income has not been declared and no tax has been paid as expected, we need to consider ways of eliminating this failure and reducing the criminal exposure incurred.Download Tofes 5329
Who is affected by this request to declare the source of income in Israel?
Numerous trips abroad, no salary, no tax declaration in Israel
An analysis of the dozens of customers who have applied to us as part of the current wave of requests shows that the recipients are generally people without active tax portfolio but who have assets in Israel, a financial activity and travel abroad more frequently than the average.
It is very important to respond to these requests. A correct response can sometimes put an end to a tax inquiry, whereas incorrect actions and misrepresentations can lead to a long, ongoing and often ineffective saga.
Many of the people concerned are "Former residents returning to live in Israel". or "new immigrants" who, by law, are not required to declare and pay taxes on their income from foreign sources.
On the other hand, legal rights must be preserved and, consequently, not declaring foreign income and/or assets, including, of course, any facts indicating that the person is a "foreign national". "former resident returning" or a "new immigrant". In some cases, the question of a person's new residence is a matter of interpretation: a person's residency status must be carefully examined before submitting the report.
Suspicious signs: owner of several apartments in Israel
Another group of people to whom the requests have been addressed are those with several real estate assets who, in the light of the data available to the tax authorities, do not appear to be declaring any income from these assets.
Here too, the way in which reporting defaults are handled is very important. It's worth pointing out that in some cases (for example, where the only undeclared income is rental income), as soon as the request is received, action must be taken as quickly as possible to declare and pay the tax.
The removal of this "declarative failure" must be the subject of concrete measures. In such cases, recourse to a "voluntary disclosure - Guilouye Meratson" process is not the right thing to do, and is likely to hinder and complicate the process.
According to a circular published by the tax authorities in 2014, if the only failure is not to have declared income from the rental of a residential apartment, this "problem" can be effectively resolved, benefiting from a maximum tax rate of 10%. In some cases, the retroactive reporting period will be subject to 7 years.ALSO READ: How is rental income taxed in Israel?
This action requires accounting and tax support, but it is effective, fast and generally eliminates the criminal threat.
It is important to point out that the tax investigation department does not grant immunity from criminal prosecution under the voluntary disclosure procedure if the applicant has received a request for a declaration on form 5329, because it asserts that the person does not meet the conditions of the voluntary disclosure procedure.
In other cases, where additional income has been omitted from reporting and declarations, proper and strategic thought must be given to finding a situation in which the problem can be eliminated as quickly as possible, while minimizing the risk to the taxpayer.
In any case, anyone who receives such a request needs to plan their response and decide on the best strategy to adopt.
In a nutshell:
Optimum action must be taken to ensure that the tax situation in Israel of a person receiving such a request does not deteriorate from that point onwards.
Our firm can help you fill out this application, put your tax file in order and represent you before the Israeli tax authorities.
It is very rarely advisable to respond to this type of document alone.