Israel's black market is thriving amid economic crisis

The compensation plan currently in place for businesses is designed to reflect a decrease in turnover compared to the previous year, but this inadvertently creates an incentive for businesses to underreport their income or conduct transactions off the books.

Both of these practices are considered offenses and are subject to scrutiny by the Tax Authority. While the Authority is primarily focused on investigating large businesses involved in tax evasion, it has not overlooked smaller businesses.

Doron Arbely, former director of the Tax Authority and head of the customs directorate, warned taxpayers of the prevalence of the black market in Israel.

How did Israel reach this economic crisis?

The COVID-19 pandemic has exacerbated this issue, as many business owners turned to undocumented work or manipulated their reported income in order to receive government grants.

Despite criticisms of the compensation plan and the perceived leniency of the investigation department, it is clear that the number of businesses committing tax offenses has increased during this challenging period.

Certain industries have a higher tendency for tax evasion, particularly those where cash payments are common. Mind-body treatments, plumbing and electrical services, and the trucking industry are all marked by rampant cash payments and potential tax evasion.

Additionally, independent chefs who previously worked in restaurants have shifted to providing catering services during the pandemic, often resulting in underreported income.

It is difficult to estimate the exact amount of black money in Israel, but studies conducted by the OECD suggest that the black economy accounts for approximately 20% of the country's GDP.

With the GDP estimated at NIS 1.52 trillion in 2021, this translates to around NIS 300 billion within the black economy. More conservative estimates place the scope at 15%, still amounting to approximately NIS 200 billion lost during the pandemic.

What are the main concerns during an economic crisis?

In times of economic crisis, certain groups may take advantage of the situation and manipulate their circumstances to improve their financial position. Divorced men, for example, may try to reduce their alimony payments by falsely presenting lower incomes.

While not all individuals in these groups are tax evaders, gaps in the system can tempt those looking to exploit them.

Attorney Tomer Liner, an expert in tort and insurance law, explained that divorced men can request a reduction in alimony payments based on a change in circumstances. The pandemic provides a logical explanation for a significant decrease in business activity or income, making it easier for some individuals to deceive the system.

However, judges who oversee these cases are well aware of such tactics and are experienced in detecting false representations.

The burden of proof lies with the party requesting a reduction in alimony payments. They must provide financial data and supporting documents to substantiate their claims.

However, it can be challenging for recipients of alimony to afford the costs of hiring a private investigator to gather evidence contradicting the claims of the other party.

The consequences of presenting false representations extend beyond reduced alimony payments. In the event of a traffic accident, compensation for the injured party is typically calculated based on their reported income.

If an individual has been working illegally and fails to provide sufficient proof of their actual income, the compensation they receive may be substantially lower than what they would be entitled to.

Liner acknowledged that self-employed individuals who earn money illegally often do not maintain accurate records of their income. This lack of credible evidence further complicates the burden of proof and can result in significantly reduced compensation for victims.

These examples highlight the need for increased enforcement efforts by the Tax Authority. While the Authority has faced some challenges during the pandemic, it remains committed to addressing tax offenses and the thriving black economy.

In the coming months, enforcement efforts are expected to intensify, serving as a warning to those who engage in tax evasion.