The Israel Tax Authority (ITA) recently published a series of reminders saying businesses in Israel must keep proper account books.

Approved Israeli software or printed books must be used – not Excel, Word, QuickBooks or Sage. Otherwise, the ITA not only levies fines, it can also estimate taxable income, which is never good for the taxpayer.

The ITA can also deny good bookkeeping and reporting certificates. This can be disastrous as it makes it impossible to do business with public bodies and public companies.

In practice, smaller business typically outsource accounting and tax reporting to an accountant or bookkeeper.

Immigrants do not need to report overseas income in their 10-year Israeli tax holiday. They must still record and pay taxes on income derived in Israel from day one. That includes work done for a foreign customer if the work was done physically in Israel.

• Sting audits

The ITA often leaves its ivory towers to see what taxpayers are really up to. This involves sting operations which may then be published, with embarrassing consequences.

For example, at a Tel-Aviv law firm, a check for NIS 67,470 wasn’t in the books. The lawyer came up with a “creative excuse” that he “only issues receipts after depositing checks in the bank and checking they don’t bounce.”

Another law firm which failed to record checks totaling NIS 27,233 claimed, “Not everyone knows how to record receipts in the books and the boss is abroad.”

Yet another lawyer who didn’t record two bank transfers totaling NIS 2,485 said, “There was a mess-up”.

A clothing store owner in Tel-Aviv who failed to record a purchase by undercover tax officials said, “I’m on pills, leave me alone!”

In Rehovot, intrepid undercover tax officials visited a laundry and were surprised to discover laundering of a different sort. They found a slip of paper specifying income not in the books. Someone claiming to be an employee told them, “Perhaps a neighbor who substituted for me yesterday received the money.” The tax officials found the neighbor from the slip and learned the “employee” was really the owner of the laundry.

A hair and make-up specialist was caught and said, “I left the receipts book at home.”

In Jerusalem, VAT officials found some golden eggs at an egg stall in the Mahaneh Yehuda market. The first time they visited, there was a crowd and they were turned away. So they went back with a police escort. Two cash registers had no paper rolls in them, but there was NIS 2,000 in the cash registers and another NIS 20,000 in a concealed drawer underneath.

The ITA describes guest houses in the North as “simply sizzling.”

A guest house in the Acre area didn’t record income in the account books for several weeks in the summer, but recorded in the guest book that 11 families paid NIS 47,100. The owner explained, “I’m dyslexic and my handwriting is terrible. I write up the guest book and before the VAT due date I record everything neatly.”

Another guest house owner told tax officials, “The guests came on Thursday and paid cash. I told my husband we must issue the receipt on Sunday, and in the meantime you showed up.”

At a different guest house, income was recorded on a slip of paper but not in the account books. The owner claimed, “I don’t know how to write, I’m waiting for my son.”

And a carpenter didn’t record NIS 35,100 as income even though his customer recorded it as an expense. The carpenter said, “I didn’t get around to it. I promise to go home and record everything.”

• Closing remarks

The ITA has thrown down the gauntlet. It wants to see everyone record income and pay their fair share of taxes on a real-time basis, using kosher books and no excuses. That means using software or paperwork approved by the ITA. Don’t let them poke fun at you.

If you are part of a multinational group that wants to use a bona fide international accounting system, you must apply to the ITA for a special dispensation.

And the official language of Israel is Hebrew. If you want to keep the books in English, you may need a special dispensation for that, too.

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 Consulting & Tax Ltd. leon@hcat.co.