In the practice of the audit company “Shmuel Brodetski Rohe Heshbon” there are quite a number of customers, representatives of small businesses, who by the end of the year have not left a shekel with the tax authorities, yet their business is established completely within the law.
Do many people know that the income tax need not be paid by those who have a monthly income from business below a certain wage level?
Do many people know that by indicating the costs of doing business in the annual report, you can significantly cut tax payments and even reduce them to zero?
Yes, at first sight taxes in Israel are rather big, but for any kind of business there are many ways to substantially reduce tax payments without violating the law.
Why does business hide the income and evade paying taxes?
We as experts in matters of book keeping and taxation have such opinion in this respect: from ignorance of the fact that it is simpler to do things correctly.
Auditors often face an attitude where people are afraid to disclose their business and their income because they’ll have to pay huge amounts of taxes. This point of view is most common among repatriates from the countries of the former USSR. This is a kind of mentality in which tax evasion is considered a perfectly normal practice. So, a person thinks that he will not show income and he will not pay taxes on it, and thus gain more money. But as our experience shows,a properly organized small business may pay no taxes at all, or at best conclude a year with a couple of hundred shekels of taxes and as much foraccounting services on outsourcing.
It’s a pity that instead of turning to tax experts, people listen not to professionals, but to friends and acquaintances, believe in myths and soviet stereotypes, risk breaking the law, and when expecting punishment they ruin a lot of their nerves and health. After all, they could have slept peacefully, and paid almost no taxes.
An example from our practice:
A businessman came to us for help in dealing with the tax authorities. They started to check him often, ask for different documents, and already a lot of fines had accumulated. Our negligent entrepreneur was registered as an esek patur and he had to pay the income tax, insurance premiums in Bituach Leumi and report to Maam once a year. But instead of optimizing the taxation of his small business correctly and within the law, he decided to work “in the dark” (without declaring income), on what, as it turned out, he was caught by Mas Akhnasa. As it happens, even a cursory analysis by the auditor has shown that after deducting all expenses, his income could not exceed the minimum mark, under which tax payments would be pennyworth.
How is tax evasion revealed?
The most common situation – the customer was dissatisfied with the goods or services, but could not resolve this issue with the seller, because when making a purchase, he was not given a payment document. He makes this known to the tax authorities and thereby initiates a financial inspection of the entrepreneur. Sometimes the source of such a complaint may be a dissatisfied employee. There are cases when an entrepreneur may not want to conceal his income, but suffers from the machinations of his employees. Unfortunately, the tax authorities will not look into the matter.
Another situation, the tax authorities simply choose to check entrepreneurs by chance. They analyze annual reports, request additional data, check accounts for the receipt of money and the availability of supporting documents. In addition, information and documentation on procurement and other business expenses can also be requested. If they have suspicions as regards the audited entrepreneur, then representatives of fiscal bodies can make special test purchases. In this way they verify whether a sales check is issued.
N.B.:Be extremely careful when preparing annual reports and in the declaration on the capital of the entrepreneur, which Mas Akhnasa may request every 3-5 years. Inconsistencies in your reports may be the basis for additional checks by the tax authorities and entail serious penalties.
Labor disputes may serve as a reason for inspections by the Bituach Leumi. In a word, every agency picks on its own worries.
What awaits an entrepreneur if fiscal authorities reveal tax evasion?
Really huge taxes. If an entrepreneur is caught hiding income, the tax authorities can lay a claim to virtually any amount that he may theoretically have earned and demand taxes on that amount. And in this situation, taxation will be calculated according to the upper mark – if we talk about the income tax, the rate will be 30%. And to these “penalty taxes”, of course, do not apply any favours that a businessman could expect in a normal situation.
Under the supervision of everyone. It should also be remembered that in Israel there are three tax authorities and if a violation is revealed by one of them, then all the others will pull up with their inspections in the near future.
Under observation forever. In addition to the astronomical amounts of taxes payable to the tax authorities, the entrepreneur actually falls into a kind of blacklist. This means that henceforth all state agencies will scrutinize him very carefully, make test purchases, request additional reports, arrange inspections every two or three years. Unfortunately, no exemplary behavior in the future gives pardon and exception from the blacklist to the entrepreneur who has screwed up once. From our experience, we can advise you to take a position of full cooperation with tax authorities, then, perhaps, inspections will become less frequent. And better still, go to a responsible auditor who will undertake handling the fiscal authorities and will spare your time and energy for the development of your business.
Diyun (trial) in the tax authorities. In extreme cases, if the tax audit reveals a number of irregularities in the maintenance of accounting records, concealment of income and unpaid taxes, this can lead to the cancellation of accounting books and huge fines that cannot be ignored. Here the entrepreneur cannot do without professional help.
An example from our practice:
An employee of the firm did not write out the receipt and put 20 shekels into his own pocket, which was the reason for the client’s appeal to the tax authorities. The tax audit revealed a few more small amounts and a bank transfer for 2000 shekels that also did not have receipts. The Mas Akhnasa wanted to call for payment of 200 thousand shekels for 4 years, but the auditor of the company “Shmuel Brodetski Rohe Heshbon” professionally argued that for such business this amount of taxes is unreal and the demand for payment was reduced to 55 thousand shekels.
By the way, on these dyuns the client generally need not be present, only the auditor and the representative of the tax agency are in touch.
What do professionals recommend?
N.B.:Any business activity, provision of goods or services or other transactions that are not of occasional nature, must be formalized in the tax authorities as private entrepreneur or other legal form of business.
If you have already tried to work “in the dark”, but want to correct the situation, then refer to a competent rohe-heshbon (auditor), and he will help. Do not be afraid of exposure. The professional ethics of the auditor says that the relationship with the entrepreneur is absolutely confidential, as with the defence lawyer and the defendant or the doctor and the patient. There is no need to violate the law, when the state has created all the necessary conditions for effective business and fair taxation.
If you did not evade taxes, but consider that you pay too much, consult with the rohe heshbon. Perhaps, you really do not use the prescribed benefits and legal tools to optimize taxation.
If you want to open your business, but fear the tax burden, enlist the support of an experienced auditor and choose the right legal form at once so as to earn money and not to overpay taxes. By the way, the beginning of the year is the best time to open a new business.