The Israel assessor’s office has the right to demand from each citizen a Statement of Net Worth as of December 31st of any tax year. The Statement of Net Worth must be submitted to the authorities within 120 days from receipt of the demand notice.
The Statement of Net Worth must list all family assets and liabilities as of that day, pertaining to the tax payer, the tax payer’s spouse and children under age 19.
All assets and liabilities, including marketable securities, are reported at cost. Inventories are valued at the lower of cost or market. Current market value is not a basis upon which Net Worth Statement items are reported.
The assessor demands periodic reconciliations of Net Worth statements. It is recommended that a professional be consulted in the multi-year reconciliation too ensure that the differences between the current and prior Net Worth statements are satisfactorily explained and accounted for.
Increases in Net Worth are netted with lawful payments such as taxes, national security medical expenses, oversea travel, home maintenance etc. The net increase of net worth after expenses is termed: ‘Increase in Net Worth requiring explanation’. This amount is then broken down into areas of increase such as ‘taxable or non-taxable income’ ‘cash inheritances’, or the like. All increases in Net Worth must be properly accounted for and explained. The tax assessor is interested in determining whether or not the not the tax payer has reported and paid tax on all increases in net worth. Should all increases not be accounted for, the difference is defined as ‘Shortfall before considering living expenses’.
Changes in family and living conditions are then considered. Changes in the number or family members, income level, housing location, changes in tax rates. After all these considerations are made, their effect upon Net Worth is assessed.
Should the tax assessor be convinced that there exists an unexplained increase in Net Worth after all financial and demographic considerations detailed above, the taxpayer may be assessed tax upon he unexplained difference as the presumption is made that the taxpayers accounting records are faulty and income has not been reported to the tax authorities.
It is recommended to file away into safe storage all supporting documents until the end of the tax year. In this way, the taxpayer will be ready to support the Net Worth Statement, in the event that it is requested.
Supporting documentation both for taxable and tax free income should be stored. This information is need for the annual tax return, even if it is not used to compute tax. This documentation could have important relevance in the reconciliation of the Net Worth Statements. Accordingly, all documentation should e saved.
Similarly, it is recommended that the following items be saved in the event that a Net Worth Statement be required:
Bank Statements from all banks. (Personal and business)
Details of Partnerships and Business ownerships
Annual certifications of Net Worth from retirement accounts, pensions, life insurance.
Detailed lists of business assets and liabilities
Taxpayers who receive tax returns are recommended to safely store receipts upon which are listed the returns
Taxpayers who occasionally receive gifts are recommended to safely store bank transfer documents or check copies. Also, gifts should not be received in cash.