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In the Dima case, the taxpayer rented out a single property at a loss and sought to offset the loss against other income that year. The Tel Aviv District Court ruled that the loss could not be used in this way because the rental activity was passive in nature, not an active business.
However, serious concern was raised by the taxpayer about tax officials breaking the rules regarding tax appeals.
The tax-appeal process The tax law says that if a taxpayer appeals against a tax assessment, the appeal should be handled by someone else at the Israel Tax Authority (ITA) – “whoever prepared the assessment shall not discuss it” (ITO Sec. 150A).
In Israeli tax jargon, the period up to the assessment is referred to as “stage A,” and the appeal stage within the ITA is referred to as “stage B.” If the taxpayer is unsuccessful at stage B, further appeal lies to the District Court.
The Dima case In this case, it emerged that a tax official involved in the stage B appeal had already visited the property during stage A. According to the tax official’s testimony, “My only involvement in stage A was to visit the property. I did not take part in any discussion at stage A. I did not reach any conclusion. At stage B, I entered a number of discussions at the final stage.”
The judgment states that tax law does not require a complete break between the official who prepares the assessment and the official who discusses the appeal.
Nevertheless, it would have been better had this tax official refrained from visiting the property or taking part in the decision regarding the appeal, since the testimony proves that the visit influenced that person’s judgment.
However, the court went on to say that this error would not cause the assessment to be canceled, but had the matter been raised sooner in the process (before going to court apparently), the discussions would have been reopened at the ITA.
Since the court had now discussed the appeal at length, there was no point in remitting the matter back to the ITA for discussion, and the court should decide the case.
Furthermore, the taxpayer waited until the summing up in court proceedings to challenge the fine levied by the ITA. The court ruled that was too late.
Comments The taxpayer failed to achieve a technical knockout, but there is a wider issue.
In 2016, the World Bank ranked Israel in 103rd place out of 189 when it comes to ease of paying tax.
Unlike many other countries, Israel lacks a tax court or tax-tribunal system. If the ITA rejects a taxpayer’s appeal (after stage B) against an assessment, appeal lies directly to the District Court, which is formal, slow, costly and uncertain.
Not all judges specialize in tax matters. And the tax not in dispute must be paid within 15 days.
It is time Israel had a tax court or tax-tribunal system to enable smaller disagreements with the ITA to be sorted out efficiently and cheaply. Such a system only exists for real-estate taxation disagreements.
What happens in other countries? In the US, the Tax Court is a federal trial court. Because it is a court of record, a record is made of all its proceedings. It is an independent judicial forum. It is not controlled by or connected with the Internal Revenue Service (IRS). Congress created the Tax Court as an independent judicial authority for taxpayers disputing certain IRS determinations. A taxpayer may file a petition with the Tax Court even if he does do not have a representative (accountant, etc.). The taxpayer may also present the case to a judge without being represented.
The taxpayer does not usually need to pay the amount in dispute while the case is pending before the Tax Court.
In the UK, a taxpayer can appeal to the First Tier Tribunal (Tax) to challenge some decisions by HM Revenue and Customs (HMRC).
The taxpayer can ask for a First Tier Tribunal decision to be “set aside” (canceled), but only if the taxpayer thinks there was a mistake in the process. The taxpayer may be able to appeal to the Upper Tribunal (Tax and Chancery Chamber) if the First Tier Tribunal made a legal mistake, e.g., it did not apply the law correctly or fully explain its decision. The taxpayer must usually pay upfront what HMRC says the taxpayer owes.
To sum up: If you negotiate with the ITA, put forward your best arguments sooner rather than later. The appeal process is not so hot.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
email@example.com Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.