Representation in VAT Audits and Withholding Tax Audits

Representation in a VAT audit or a withholding tax audit begins when the Tax Authority contacts the business, before an assessment is issued. In a VAT audit, the Director is authorized to demand books, documents, and information (Section 108 of the VAT Law), and upon its conclusion may assess the tax according to his best judgment within 5 years of the filing of the return (Section 77). In a withholding tax audit, the Assessing Officer examines wages and tax withheld at source, and an objection to a withholding tax assessment must be filed within only two weeks (Section 168 of the Income Tax Ordinance).

Received an audit notice? Send it to us before you hand over any documents.

Usually when the first letter arrives, because what is handed over during the audit forms the basis for the assessment:

• The VAT office notified you of a book audit, or demanded that you submit ledgers and documents for a specific period.

• Auditors arrived at the business without prior notice, asked to see receipts and invoices, and prepared an audit report.

• The inspector notified you in writing of a matter under review prior to a partial assessment (Section 77(d)(3)).

• You applied for a VAT refund, and the Director ordered an examination of the books before payment (Section 39(a)(1)).

• The Assessing Officer summoned the company for a withholding tax audit and demanded pay slips, Form 101s, and expense ledger cards.

• At the end of the withholding tax audit, you received findings or a proposed agreement regarding the value of employee benefits and withholding tax from suppliers.

If investigators — rather than inspectors — arrived at the business, or you received a summons for questioning under caution, this is a criminal proceeding. It is explained on the page Representation in VAT Investigations.

The inspector may demand any document and any information relating to the tax, and you are obligated to hand them over. Refusal or failure to comply after a demand has been made constitutes an offense (Section 117(a)(1) of the VAT Law).

• The Director may demand information and access to documents from any person, and ledgers and documents from the dealer itself. Materials handed over are returned within 3 months, unless a complaint regarding an offense has been filed beforehand (Section 108(a)).

• A person authorized by the Director may require you to appear, in person or through a representative, and to bring ledgers and documents for examination (Section 109(a)(4)).

• A book-keeping audit primarily examines whether every receipt was recorded. An unrecorded receipt may lead to disqualification of the books for that year (Section 77A).

• Before the Director determines that you issued an invoice unlawfully, or that you deducted tax based on such an invoice, he must give you an opportunity to present your arguments (Sections 62 and 77B). This issue is explained on the page Fictitious Invoices Attorney.

• Maintaining books with a material deviation from the regulations may result in a penalty of 1% of the transaction value for that year (Section 95(a)).

How Does a VAT Audit Conclude?

Usually with a discussion of the findings. If the Director believes the return is incomplete or inaccurate, he may issue an assessment according to his best judgment, and the assessment notice must specify the reasons (Section 77(c)). This is where the objection process begins, which is explained on the page Objection to a VAT Assessment.

A withholding tax audit examines whether you withheld tax at source and remitted it as required by law. The obligation to withhold applies to anyone paying employment income, interest, dividends, and other payments specified by order (Section 164 of the Income Tax Ordinance), and the withholding party must remit the tax and file a report (Section 166). The audit typically covers the following matters:

• Pay slips and Form 101s, and the reconciliation between payroll reports and the expenses in the financial statements.

• Benefits not imputed to salary, such as a vehicle, telephone, and gifts, and the question of whether tax grossing-up should have been applied.

• Payments to suppliers and service providers without withholding tax, where they did not hold an exemption certificate or a reduced-rate certificate.

• Annual reports: Form 126 for wages and Form 856 for payments to suppliers, filed electronically by April 30 (Section 166(b)).

Withholding Tax Assessment and Its Deadlines

• Where tax was not withheld, or where there are reasonable grounds to believe the report is inaccurate, the Assessing Officer may issue a best-judgment assessment of the tax that should have been withheld (Section 167(a)).

• The assessment may be issued during the period in which the employer's income for that year may be assessed, or within 4 years from the end of the tax year in which the last annual withholding report was filed, whichever is later.

• An objection to a withholding tax assessment must be filed within two weeks (Section 168), after which the standard objection and appeal rules apply.

• Tax that was withheld but not remitted to the Assessing Officer without reasonable justification constitutes an offense punishable by up to two years' imprisonment (Section 219).

1. You send us the audit notice and the list of documents requested. We review who initiated the inquiry, which period is under examination, and the deadline for submission.

2. Before submission, we go over the books and reports for the relevant period together with your accountant, and flag issues likely to be disputed, such as input tax deductions on employee welfare expenses or benefits not imputed to salary.

3. The documents are submitted with an accompanying letter explaining them, and a copy of everything submitted is retained.

4. At the findings discussion, we present a written legal position. Where the dispute involves interpretation, we cite the relevant case law. Where possible, we settle the open issues by agreement, including in a partial assessment (Section 77(d)(4)).

5. If an assessment is issued, we immediately mark the objection deadline: 30 days for a VAT assessment and two weeks for a withholding tax assessment.

In an audit, the Jerusalem VAT Director determined that some of Mobileye's inputs were employee-related inputs and therefore not deductible. Even before the judgment, the Director waived the charge on dining room rentals and reduced the charge on dining areas, following the Amdocs ruling by the Supreme Court. In the judgment (TA 10835-01-22, May 27, 2025), the Jerusalem District Court allowed the deduction of tax on a gym, a music room, and a spa facility, as well as on accounting services, and dismissed the appeal regarding employee transportation and pension consulting. Attorneys Shlomi Vaknin and Ariel Epstein represented Mobileye. Mobileye Judgment.

Audit representation is led by Adv. and CPA Shlomi Vaknin together with his firm's team. He previously served as a national inspector in the Professional Division of the VAT department at the Israel Tax Authority. The books and payroll reports in each case are also reviewed from an accounting perspective before they are handed over to the inspector.