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AFTER spending hours poring over your financial affairs and searching for that elusive invoice which once served as a wine coaster, there can be no greater joy than finally submitting a tax return.
If you are one of the lucky winners of a tax audit, however, the fun is only just beginning.
Every year, more than 100 000 individual income taxpayers are audited.
This could range from a routine review of information submitted on a tax return or a full-blown lifestyle audit.
As part of the audit, the South African revenue Service (Sars) will look at whether your tax deductions were allowable and whether you attempted to conceal income. If you have all the paperwork to back up the claims on your tax return, your affairs should be sorted out relatively quickly.
However, in “medium to high-level risk cases” the taxpayers will be subjected to in-depth audit processes which may involve applying detailed checks to determine “end-to-end” compliance, says Jonas Makwakwa, Sars group executive: audit.
Typically, Sars will inform you that your tax return “has been identified for review as part of the income tax assessment verification process”. You are then required to submit supporting documents for all the claims on your tax return.
You may also receive a “letter of engagement” indicating that you have been selected for audit, with the details of the responsible auditor and the information required for the audit.
If you sent through all of the documentation and Sars does not agree with your claims, you will have to pay up any owed amounts and may even face penalties (200% of the tax amount) and interest. You may also be referred to the National Prosecution Authority for further investigation.
A lifestyle audit will be done if there’s an indication that you are living a more extravagant lifestyle than reflected in your income declaration in your tax return, says Makwakwa.
Sars introduced lifestyle audits in 2007, and more than 10 000 people have been targeted, leading to hundreds of criminal prosecutions.
“We normally send a lifestyle questionnaire which the taxpayer is expected to complete honestly and accurately. We have multiple sources of information, so we would already have a lot of information about the taxpayer and if such a taxpayer does not complete the questionnaire honestly, they would be implicating themselves,” Makwakwa says.
Sars also uses information on assets like cars and property from third parties like banks, the vehicle registration authority and the deeds office.
A lifestyle audit is mainly directed at salary earners with additional sources of income, high-profile individuals and sole proprietors, says Ruaan van Eeden, senior associate in the tax department at Cliffe Dekker Hofmeyr.
He says high-profile individuals may be at particular risk of a lifestyle audit, especially where their lifestyles are featured in the media. Sars may also be tipped off about an individual through its anti-corruption hotline.
How to avoid being audited
Full and honest disclosure by an individual in a tax return will certainly reduce the risk of being audited.
There is, however, no guarantee that full and honest disclosure would prevent Sars from auditing you, Van Eeden says.
Sars has different methods of identifying cases for audit, says Makwakwa.
For example, when a return is submitted and processed, the risk engine in the Sars system identifies cases that have risk.
“Sars also receive tips from the public; we track media reports and we randomly select taxpayers using different sampling methods.”
Some tax practitioners claim that an audit will be more likely if you received a big refund or if you paid salaries from your income (in particular to family members).
Make sure that your tax return does not contain incomplete information, which invariably results in queries from Sars, says Van Eeden.
"This could be because third-party information in Sars' possession (eg information received from financial institutions or employers) does not correlate to disclosures made on the individual's tax return."
Mismatches between amounts disclosed on a tax return and those in Sars' possession could result in the return being subject to audit.
Also, don't claim for things like cellphone and leisure expenses, if you are not allowed to.
A typical example would be a salaried employee whose only income is a monthly salary and who therefore cannot claim for deductions to cover business expenses, says Makwakwa.
There are also taxpayers who claim deductions for medical expense related to a disability even when they are not disabled.
“Another example is not including all income received. This can be classified at tax evasion if a taxpayer knowingly decides not to declare income they are supposed to declare.”
Find an expert to advise you on your tax affairs and help you complete your return if you feel unsure.
How to survive an audit
Taxpayers must ensure that in the event of an audit they are able to verify all sources of income and substantiate all deductions – a sort of pre-emptive approach to dealing with Sars is required, says Van Eeden.
Don't ignore the request for information; you have only 21 days to respond.
Organise all your information and keep it neat, to make life easier for the tax official. Group documents together and send them through with explanations. Give as much information as you can.
Don't send through original documents, which may get lost.
Don't try to cover up if you made a mistake or submitted incorrect information - you will pay for it in the end.
Get professional help when in doubt.
Know your rights. By law, you are entitled to object to an assessment, which will force Sars to take another look at your tax affairs. You can also complain about your treatment with the Sars Service Monitoring Office at 0860 12 12 16.
- Fin24
If you are one of the lucky winners of a tax audit, however, the fun is only just beginning.
Every year, more than 100 000 individual income taxpayers are audited.
This could range from a routine review of information submitted on a tax return or a full-blown lifestyle audit.
As part of the audit, the South African revenue Service (Sars) will look at whether your tax deductions were allowable and whether you attempted to conceal income. If you have all the paperwork to back up the claims on your tax return, your affairs should be sorted out relatively quickly.
However, in “medium to high-level risk cases” the taxpayers will be subjected to in-depth audit processes which may involve applying detailed checks to determine “end-to-end” compliance, says Jonas Makwakwa, Sars group executive: audit.
Typically, Sars will inform you that your tax return “has been identified for review as part of the income tax assessment verification process”. You are then required to submit supporting documents for all the claims on your tax return.
You may also receive a “letter of engagement” indicating that you have been selected for audit, with the details of the responsible auditor and the information required for the audit.
If you sent through all of the documentation and Sars does not agree with your claims, you will have to pay up any owed amounts and may even face penalties (200% of the tax amount) and interest. You may also be referred to the National Prosecution Authority for further investigation.
A lifestyle audit will be done if there’s an indication that you are living a more extravagant lifestyle than reflected in your income declaration in your tax return, says Makwakwa.
Sars introduced lifestyle audits in 2007, and more than 10 000 people have been targeted, leading to hundreds of criminal prosecutions.
“We normally send a lifestyle questionnaire which the taxpayer is expected to complete honestly and accurately. We have multiple sources of information, so we would already have a lot of information about the taxpayer and if such a taxpayer does not complete the questionnaire honestly, they would be implicating themselves,” Makwakwa says.
Sars also uses information on assets like cars and property from third parties like banks, the vehicle registration authority and the deeds office.
A lifestyle audit is mainly directed at salary earners with additional sources of income, high-profile individuals and sole proprietors, says Ruaan van Eeden, senior associate in the tax department at Cliffe Dekker Hofmeyr.
He says high-profile individuals may be at particular risk of a lifestyle audit, especially where their lifestyles are featured in the media. Sars may also be tipped off about an individual through its anti-corruption hotline.
How to avoid being audited
Full and honest disclosure by an individual in a tax return will certainly reduce the risk of being audited.
There is, however, no guarantee that full and honest disclosure would prevent Sars from auditing you, Van Eeden says.
Sars has different methods of identifying cases for audit, says Makwakwa.
For example, when a return is submitted and processed, the risk engine in the Sars system identifies cases that have risk.
“Sars also receive tips from the public; we track media reports and we randomly select taxpayers using different sampling methods.”
Some tax practitioners claim that an audit will be more likely if you received a big refund or if you paid salaries from your income (in particular to family members).
Make sure that your tax return does not contain incomplete information, which invariably results in queries from Sars, says Van Eeden.
"This could be because third-party information in Sars' possession (eg information received from financial institutions or employers) does not correlate to disclosures made on the individual's tax return."
Mismatches between amounts disclosed on a tax return and those in Sars' possession could result in the return being subject to audit.
Also, don't claim for things like cellphone and leisure expenses, if you are not allowed to.
A typical example would be a salaried employee whose only income is a monthly salary and who therefore cannot claim for deductions to cover business expenses, says Makwakwa.
There are also taxpayers who claim deductions for medical expense related to a disability even when they are not disabled.
“Another example is not including all income received. This can be classified at tax evasion if a taxpayer knowingly decides not to declare income they are supposed to declare.”
Find an expert to advise you on your tax affairs and help you complete your return if you feel unsure.
How to survive an audit
Taxpayers must ensure that in the event of an audit they are able to verify all sources of income and substantiate all deductions – a sort of pre-emptive approach to dealing with Sars is required, says Van Eeden.
Don't ignore the request for information; you have only 21 days to respond.
Organise all your information and keep it neat, to make life easier for the tax official. Group documents together and send them through with explanations. Give as much information as you can.
Don't send through original documents, which may get lost.
Don't try to cover up if you made a mistake or submitted incorrect information - you will pay for it in the end.
Get professional help when in doubt.
Know your rights. By law, you are entitled to object to an assessment, which will force Sars to take another look at your tax affairs. You can also complain about your treatment with the Sars Service Monitoring Office at 0860 12 12 16.
- Fin24
