Many businesses in Israel might not “merit” a surprise inspection from the Tax Authority (רשות המסים). However, if you are one of the “lucky” ones, here are a few things to keep in mind that my staff and I noticed during one such visit to one of my clients.
FIRST, fear not, the inspectors are human. We noted that the two inspectors who visited were actually quite polite. There was no out-to-get-you attitude or some worst-case scenario movie scene where the office is being turned inside out. Moreover, they made it a point to tell us that they would not accept anything – and I do mean anything – without getting our permission first. Not a chair. Not a cup of water. Most important, not even a document.
Nevertheless, remember that these pleasant folks are not your friends. Speak when spoken to. Answer their questions. But don’t make small talk or volunteer information.
SECOND, you are allowed to ask them to wait while you call your accountant. This was another thing they said they would not do – they would not collect any material that was not given to them. This is important to remember – this is not a police raid. This is “just” a surprise inspection. In general, calling your accountant is always a good idea in this situation. First, it gives you a chance to catch your breath. You’re going to sweat, but a good deep breath can keep the perspiration to a minimum. Moreover, your accountants might have some relevant background information or a general tip to share. Not to mention that a good-ole “it’s going to be ok” is never a bad thing to hear at these moments. Especially, if it’s your employee who is there alone with no moral support from management (because of Murphy’s Law its bound to happen sometime).
THIRD, the Tax Authority is only concerned about your income. How you spend your money is of no concern during these spontaneous visits. While you can never be fully prepared for these check-ups, if we know that the Tax Authority is putting its focus on income, then this means that you should always have your billing process down solid. Always. How do you send out requests for payment? How timely are you issuing receipts? (You get the gist.) Also, expect to be asked to provide copies of either proforma/tax invoices and receipts, as well as, a list of some of your clients – and they’ll want the bigger clients, of course.
FOURTH, before breathing a sigh of relief, ensure that you have received their report, which consists of one paged carbon-copy sheet (my client’s was yellow) that summarizes their visit. Most of the form is matter-of-fact questions about your business. Nothing exciting or life-threatening. At the bottom of that page there is a space for comments and this is where the juicy stuff would be. (If you don’t see anything spicy listed there at the bottom – that’s a good thing.) It’s important to point out that someone from the company being inspected will be asked to sign the form. Part of the process, no problem. Finally, make sure to send the sheet to your accountant.
While there might not have been anything specific your company did to warrant the inspection by the Tax Authority, two aspects of your business might put you on their radar:
- Reporting an expected high turnover, especially from Day One. The Tax Authority can receive this information a few ways. The most common is that you reported a high budget for the upcoming year, for example, when negotiating mikdamot (מקדמות), prepayments of expected tax revenue on profits. In a similar vein, but from the other direction, you might have reported a high turnover in the previous year when you submitted your audited financial statements.
- If one or more of your clients is paying you a lot of money. This can be either an objectively high amount or relative to your other clients.
There are few things in life that are as intimidating as a surprise inspection by the Tax Authority. However, my hope is that by sharing some of what my team and I have seen, you can rest easier knowing that “this too shall pass.”
Some articles (in Hebrew) that also provide some background and tips for these surprise inspections:
- From a legal perspective (includes a short video as well)
- From an accounting perspective
- Globes article highlighting 10 tips from various guest experts in the relevant fields (might be the easiest read)
– Shuey
If you’re worried that your processes are not in order or that proper financial admin is distracting you from building up your company, feel free to contact us. Introductory meeting are always free of charge, with no strings attached.