guy just got 10 months in jail and a 550,000 NIS fine for not reporting revenue via paypal:
http://www.ynet.co.il/articles/0,7340,L-3344685,00.html
here is an article about the regulations:
http://www.ynet.co.il/articles/0,7340,L-2366553,00.html
from what I hear around with a couple of friends in the biz: tax ass motherfuckers are all over the country these days.
regulate and legalize yourself.