Your Taxes: ‘Best estimate’ tax assessments

Other taxpayers can take some comfort from the judgment. The taxpayer is entitled to be heard, and absence abroad should not be dismissed lightly if the taxpayer needs more time.

An accountant calculator taxes 370 (photo credit: Ivan Alvarado / Reuters)
An accountant calculator taxes 370
(photo credit: Ivan Alvarado / Reuters)
One of the things that sends shivers down the spines of some tax professionals is the so-called “best estimate tax assessment” issued by a tax official at the Israel Tax Authority to a hapless taxpayer. This is what gives the ITA its tough cowboy image.
Fortunately for some, but not others, the Israeli Supreme Court has just ruled on the subject (Shpigolant vs. Rehovot Assessing Officer, Civil Appeal 6570/18, issued November 18, 2020).

Facts of the case
A taxpayer owned a locksmith business and filed his 1998 tax return in February 2000. In April 2002, the taxpayer left Israel and became resident of California. On August 31, 2003, the ITA rejected the 1998 tax return and issued a best estimate tax assessment showing tax payable of NIS 2.6 million.
The taxpayer was apparently unaware of the best estimate tax assessment and continued filing Israeli tax returns from California for later years. After more than a decade, the taxpayer decided to return to Israel. Before doing so, he appointed a new accountant in December 2014, who found the best estimate assessment listed in the ITA electronic system. By then, the tax debt had swollen with interest to NIS 10m. Early in 2015, the new accountant lodged an appeal asking for a time extension, but the ITA said it was too late.
In 2017, the ITA sent in the bailiffs, and in 2018 they collected their tax debt by selling property of the taxpayer and paying a small residue of NIS 700,000 to the business then in receivership.
In parallel, the taxpayer appealed to the court system, unsuccessfully at that point.

Assessment procedures
As with other western countries, Israel now has a self-assessment procedure. In general, if you have reportable income in a tax year, you should file an annual tax return (ITO S.131). This constitutes a self-assessment. Businesses also file various monthly returns. The ITA then has four years, from the end of the year the annual return was filed, to check it. The ITA can either accept the tax return as filed or issue a different “best estimate tax assessment” (ITO S.145). A best assessment tax assessment must either be handed to the taxpayer or sent by registered post to the taxpayer’s home or business address (ITO S.149).

The taxpayer may appeal the best estimate assessment in writing within 30 days, unless “the taxpayer can prove to the assessing officer’s satisfaction that he was abroad or sick or any other reasonable reason,” in which case the assessing officer is permitted to extend the time as long as seems reasonable in the circumstances” (ITO S. 150). There are procedures for handling the appeal, but if it is rejected, further appeal lies with the District Court.
A best estimate assessment may only be issued if accompanied by the ITA’s grounds for not accepting the tax return filed and the way the best estimate assessment was done. The taxpayer must be given a reasonable opportunity to make his case heard (ITO S. 158A).

The issues
The ITA could not prove in this case that the grounds for the best estimate assessment were ever sent to the taxpayer. They could only find an unsigned file note dated 2005 saying this had been done, but no registered post confirmation. The ITA said that due to the passage of time, the documents were archived and could by law be destroyed after 10 years.
As for the late appeal, as the taxpayer was living abroad, the ITA said the taxpayer hadn’t bothered to let them know of his new address.

Comment
It is unclear whether the taxpayer was required to do so.
The judgment in this case
The taxpayer won a bitter-sweet victory in the Supreme Court: bitter because the bailiffs had already collected the tax debt; sweet, because the Supreme Court vindicated the taxpayer. Given the above circumstances, the Court ruled that the ITA must allow the taxpayer an extension to appeal the best estimate assessment within 30 days after the judgment was handed down. That means trying to negotiate a tax refund. We don’t know the ITA’s grounds for their assessment in this case.

Concluding remarks
Other taxpayers can take some comfort from the judgment. The ITA must have grounds and state them when issuing any best estimate assessment, not afterward or never. The taxpayer is entitled to be heard, and absence abroad should not be dismissed lightly if the taxpayer needs more time.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com


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