Can the Tax Authority force accountants to hand over information?

Lawyers have legal privilege, accountants don’t

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The Israel Tax Authority has begun asking accountants to hand over all tax opinions that taxpayers and parties related to them have received regarding current and past tax years before beginning any tax audit. Can they do this? After all, lawyers have legal privilege, accountants don’t. Nevertheless, the Institute of Certified Public Accountants in Israel has just advised its members how to brush off such requests from the ITA.
The CPA institute did so by publishing an opinion from a firm of tax lawyers!
What is an opinion?
The Israeli Income Tax Ordinance contains detailed rules (ITO 131D) requiring disclosure of certain opinions to be disclosed in annual tax returns. But not all opinions, and there is no need to attach the opinion itself to the tax return. All that is disclosed is: the existence of the opinion, the act or asset discussed and the type of tax issue arising.
Not all opinions need to be disclosed, only opinions costing at least NIS 100,000 that facilitate or aim to facilitate a tax advantage (reduction, deferral, payment, installment, tax avoidance, withholding tax, expenses or losses). In addition, the fee should be success-based or the advice should be “shelf advice” copied to at least three clients within two years regardless of their special circumstances.
That was what was enacted by the Knesset in amendment 215 to the ITO, the original bill proposed to require filing the actual text of all opinions and other advice that facilitated a tax advantage.
So the CPA Institute points out the ITA cannot ask for what the Knesset did not legislate. (Most tax memos and opinions do not cost NIS 100,000 or meet the other “opinion” criteria mentioned above.)
Can’t the ITA demand anything?
Separate rules in the tax law (ITO Sec 135) allow the ITA to demand from a taxpayer or other party with a business connection information or documents regarding the taxpayer’s income or his wife or minor children.
The CPA Institute points out that this does not reply to income of any others, only of the taxpayer, his wife and children. And it contracts the above rules regarding opinions.
Fishing expedition?
The CPA Institute says that use of broad sweeping language by an assessing officer to demand a tax opinion, regarding a taxpayer and related parties, unrelated to any tax issue, is a forbidden “fishing expedition” which needlessly burdens the taxpayer.
A land tax tribunal rejected such a fishing expedition (Tamars v. Land Appreciation Tax Director). The CPA Institute says that such a sweeping demand isn’t necessary and acts as a negative factor impeding taxpayers from obtaining a written opinion from tax experts that may help them plan their steps.
The bottom line?
In the light of the above, the CPA Institute concludes that members may respond to the assessing officer in such cases that such requests for all tax opinions are not in conformity with the provisions of the Income Tax Ordinance, nor the VAT law, and are ultra vires. Obviously, the accountant should consult his client first before responding to the ITA.
The question of whether to hand over tax opinions to the ITA is already starting to look dated. The outcome of any such tax planning is generally reportable. And the ITA is increasingly using other automatic information exchange means (such as the US FATCA and the OECD common reporting standard) to obtain details of income and assets from financial institutions, behind the taxpayers’ backs. Furthermore, if you successfully carry out tax planning, before you can enjoy your money, you must now convince the banks that all required taxes were paid on that money, due to tough anti-money laundering rules.
In practice, any tax planning should have a reasonable purpose and not look aggressive. For example, if you carry out e-commerce internationally, avoiding multiple taxation – income tax, VAT/Sales Tax, in each country is a must. There are around 200 countries in the world. If the ITA read your e-commerce tax advice, they may learn something.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
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The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.