Palestinian women walk past a money changer in the West Bank city of Ramallah February 16, 2010. REUTERS/Mohamad Torokman/File Photo.
(photo credit: REUTERS/MOHAMAD TOROKMAN)
What happens if you change your mind and find you need to amend a tax return you already filed? Presumably this would be to fix an error that may reduce the resulting tax payable. Will the Israeli Tax Authority (ITA) notice or care? Should you do nothing, just grin and bear it? A new tax circular discusses all this and makes it clear that filing amended tax returns should not be done lightly (Operating Instructions 3/2018 of January 8, 2018).
What Does The Law Say?
The circular reminds us that Israel, like many other countries, requires residents and non-residents to file an annual tax return in various circumstances, based on the principle of “self assessment.” The ITA has express authority to review those tax returns and fix obvious misprints and arithmetic errors. But when it comes to taxpayers wanting to re-assess themselves by filing amended returns, the law is largely silent.
The circular quotes a series of court cases regarding revised tax returns. For example, in the Rajwan case, the District Court said: “Amending a return should not be a routine matter, but an exception, with due care from the viewpoint not only of the applicant that would cross the boundaries the law, but also have regard to other law abiding taxpayers that honor the time limits and finality of their signed tax returns” (Civil Appeal 05-1228)
The Circular instructs tax officials to accept generally technical amendments to a tax return. These are amendments which do not materially change the tax liability, e.g. filing charitable donation receipts which merely validate the donations.
When it comes to material amendments, things get more serious. According to the circular, material amendments are corrections to an annual tax return which affect taxable income, tax losses or the tax liability in the same or other tax years, or other related tax files. The circumstances may include:
• A change of position regarding the method, timing or classification of something affecting taxable income
• A mistake which is not technical, nor a misprint.
What will the ITA do about a materially amended return?
They will check for good faith, for example something that could not have been known when the original return was filed.
A material amendment won’t be accepted in the following cases:
• Amendment based on hindsight regarding a transaction
• Changed position if the facts are the same
• Out-of-time appeals
• After a tax assessment has been issued
What are the Consequences?
The ITA will review the amended return in light of the above. If the ITA accepts the amended return, they must enter it into the ITA system and note in box 125 that it is amended. This is to make it easier for the ITA Investigations Department to scrutinize the return if they want to.
And the filing date of a materially amended return – not the original return – will be used to determine any late filing penalties.
An amended return that shows higher income won’t stop any other possible criminal proceedings for tax evasion.
The Circular does not apply to tax returns which
• lack supporting documents
• contain claims for a tax exemption on the grounds of serious illness or disability
• apply the voluntary disclosure procedure (“tax amnesty”)
Also, the circular appears to refer mainly to annual income tax returns, not monthly or VAT returns. An return amended due to a Supreme Court judgment or an ITA circular is considered acceptable.
As always, consult experienced tax advisors in each country as early as possible in specific cases.
The writer is a Certified Public Accountant and tax specialist at Harris Consulting & Tax Ltd.