Israel Uses AI to Expand Tax Audits from 4% to Full Coverage Amid Rising Deficits

Israel's Tax Authority is undergoing a significant transformation by integrating artificial intelligence (AI) into its tax enforcement processes. Previously, only about 4% of income tax returns were audited, but with AI, the authority plans to examine 100% of tax filings in real time. This shift marks a departure from the traditional model of selective audits and lengthy investigations, enabling rapid data analysis and detection of discrepancies with high accuracy.

This development comes as Israel faces unprecedented budget deficits due to increased defense spending and rising costs for rehabilitation and compensation following the events of October 7. Enhanced tax collection through AI-driven oversight could help boost state revenues by uncovering previously unreported income. At the same time, taxpayers who have evaded reporting face a higher risk of detection, especially as international data sharing and stricter penalties increase.

In response to this new enforcement environment, the Tax Authority reinstated the voluntary disclosure program in August 2025, which had been inactive since 2019. This program allows individuals with undeclared income or assets to come forward, pay owed taxes, and receive immunity from criminal prosecution. Most participants are not professional tax evaders but rather unaware or negligent taxpayers. The voluntary disclosure window is set to close on August 31, 2026.

Legal experts Eli Doron and Shahar Nah from Doron, Tikotzky & Co. emphasize that the combination of AI, international cooperation, and advanced enforcement is reshaping the relationship between citizens and tax authorities. The era of relying on low audit probabilities is ending, and taxpayers are urged to regularize their status before enforcement actions intensify.