Smuggling 6 tons of tobacco in artificial pebbles. September 18, 2023/Tax Authority Spokesperson
At the beginning of May, business owners and also some Israeli citizen employees will be required to submit the annual reports for the previous tax year to the income tax authorities. The annual reports are submitted via the Internet or physically, either independently or through a representative accountant.
In recent years, there has been an increase in the number of taxpayers who chose to submit the report without the assistance of an expert, and accordingly, the number of reports in which an error was found also jumped. Its independent transfer to the Tax Authority. After examining the documents, an error or deficiency was found in 47.2% of the reports.
Section 145 of the Income Tax Ordinance lists a limited number of cases in which a taxpayer can amend a report, and it is only about technical corrections. What happens in other cases, when a fundamental error is discovered in a report that was made in good faith? Is it possible to correct it? What about correcting reports in the area of deductions? What happens with a correction for which a tax refund is required? There is no answer to this in the Income Tax Ordinance. The answers to such cases are found in the rulings and the practice that has developed over the years in the working relationship between taxpayers or representatives and the tax officials.
Beware of the opposite result
First, it is not possible to amend a report after the statute of limitations, which is currently three years from the end of the tax year in which the report was submitted (4 years with the administrator's approval) - after which the assessment became a final assessment. The courts attach great importance to the finality of the assessment and are reluctant to open such assessments. When a taxpayer requests to correct a self-assessment in the event that no procedures have been initiated in the assessment such as a hearing or investigation, the assessor will almost always order to make the requested correction.
Of course, the correction will be made after the assessor receives an explanation that will form his opinion regarding the necessity or correctness of the correction. However, the applicant for a correction should take into account that there may be situations in which such a correction will invite the tax official to review the file and perhaps even demand a discussion of the file - a discussion whose results can be the opposite of the correction required, that is, you may find yourself paying more taxes. In fact, the more substantial the correction, the more likely it is that the taxpayer will be summoned for a hearing on the assessment and, of course, for all tax years that have not yet expired. Of course, such a matter can be subject to planning regarding the appropriate timing for the correction request - there is no legality here, and in any case, professionals should be consulted.
Despite all of this - did you choose to submit a report on your own? CPA Yoram Shifer details a series of aspects that you must take into account:
Deductible expense? involved? partially?
In the annual report that is submitted every year to the income tax, the known expenses must be listed, that is, expenses that are part of the income generation, for example advertising expenses, office equipment, rent for the business, wages and more. Every business has different types of expenses that are recognized for them by the income tax, therefore the annual report does not include expenses that are not recognized for tax purposes. Along with this, there are expenses that are mixed - expenses that are used for both business and private needs. In such a case, in order for part of it to be recognized, it is required that it be possible to separate the business part from the private part. If such a separation cannot be made, the expense is not recognized.
Also, there are expenses that the income tax regulations state that, even though they were spent in the production of income, they will not be fully recognized, but only partially, up to the established ceiling. The ceiling can be an amount or a percentage of the expenditure. Regarding each type of such expense, detailed instructions have been established as to what is the recognized part and what is the excess (unrecognized) part. It is extremely important to observe proper reporting because on the one hand, this way you can reduce the annual profit and the tax liability, but on the other hand - this must be done accurately.
The assessor 'doesn't like' being skipped over
The Tax Authority takes the annual report seriously and each report is examined individually to calculate the tax liability. Depending on the type and nature of the business, additional certificates and documents must be attached, beyond the appendices and standard documents that most taxpayers are required to submit. , CPA Schiefer, managing partner at Ziv CPA firm, Schiefer & Co., points out that it is important to know that failure to submit an annual report to the income tax, without approval from the assessor, constitutes a criminal offense that may result in a financial fine and/or imprisonment. The assessor may determine the The tax liability and the taxable income in case of failure to submit the report. After checking the tax official calculates the tax liability, if the self-employed person paid more than he has to pay he can apply for a tax refund, preferably with the help of an accountant.
Excess payment to National Insurance
National insurance status (the definition of the business for the purpose of social insurance liability) - there are cases in which it is possible not to pay social insurance premiums, cases that depend on a number of variables and criteria and thus a person who is not knowledgeable in the field, may pay excess payments to the national insurance. For example, a person submitted a report to the income tax but did not inform the National Insurance that he only works once a week, so it is possible that he will pay more. Or a person who is not aware that he has passive income and did not mark in the correct slot and thus paid more.
Optimization of social expenses
It is extremely important to maximize the tax deductions and deposit the most funds into a provident fund, a training fund, a pension, for loss of working capacity, etc. in order to reduce the tax liability on the one hand and strengthen your benefit in the future. For example, it is sometimes possible to transfer expenses between spouses and significantly reduce the tax burden. Alongside this, there are cases where income can be spread over several years, to minimize the tax liability.
How to profit as much as possible from losses
The tax deduction mechanism is structured so that a loss can be deducted from the payment of tax on profits only if the loss occurred before the profit. To clear the tax on capital gains, investors must take an active action and submit in the annual report a request for offsetting losses. For example, losses can be carried over the years. For example, a person manages a real estate portfolio in two places - one in a bank and one in a private fund. One made a profit and the other lost.
In conclusion, according to a recent study, 60% of the self-employed are not aware of the net line in their business, and over a quarter of them - pay income tax advances, at a level that is not corresponds to their earnings. Filling out an annual income tax return is considered a complex task, since it is the basis for calculating the tax liability. The submission of the annual return, with an emphasis on the first annual return, is critical for every self-employed person Independent? Do this with utmost care and devote sufficient time to studying the various topics that appear in the report, before filling it out.