Don’t go back on your tax return

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 Israel Tax Authority (ITA) notice or care? Should you do nothing, just grin and bear it?

A new tax circular discusses all this and makes clear that filing amended tax returns should not be done lightly. What does the law say? The circular reminds us that Israel, like many other countries, requires residents and nonresidents 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 reassess themselves by filing amended returns, the law is largely silent.

The circular quotes a series of court cases on 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 who honor the time limits and finality of their signed tax returns.”

Technical amendments: The circular instructs tax officials to accept generally technical amendments to a tax return. These are amendments that do not materially change the tax liability, e.g., filing receipts for charitable donations that merely validate the donations.

Material amendments: When it comes to material amendments, things get more serious. According to the circular, material amendments are corrections to an annual tax return that affect taxable income or tax losses or the tax liability in the same tax year or other years or other related tax files. The circumstances may include:

• A change of position regarding the method or timing or classification of something affecting taxable income;

• A mistake that is not technical, nor a misprint. What will the ITA do about a materially amended return? It will check for good faith, for example, something that could not be known when the first 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 the light of the above. If the ITA accepts the amended return, it 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 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 criminal proceedings for tax evasion.

Not covered: The circular does not apply to tax returns that lack supporting documents, claims for a tax exemption on the grounds of serious illness or disability, nor the voluntary disclosure procedure (“tax amnesty”).

Also, the circular appears to refer mainly to annual income-tax returns, not monthly tax returns nor VAT returns. An amended return due to a Supreme Court judgment or an ITA circular is considered okay. As always, consult experienced tax advisers in each country at an early stage in specific cases. leon@hcat.co The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.