JOHANNESBURG – There has been considerable speculation as to exactly how the South African Revenue Service (Sars) chooses individual taxpayers for audit.
While some taxpayers have assumed that refunds would trigger an audit, or that a different pool of surnames is chosen each year, the revenue authority does not disclose “red flags” for an audit.
Marika Muller, Sars deputy spokesperson, says Sars does not discuss specific details of its work as regards tax enforcement.
“Case selection takes place via automated risk scoring systems based on taxpayer history and third party data.”
While tax audits are quite common where companies are concerned, it is much less so for individual taxpayers.
Di Seccombe, senior tax manager at Mazars, explains that after an individual has submitted their tax return, Sars may request supporting documentation proving that the information initially offered is correct. This is known as the verification process.
Piet Nel, project director for tax at the South African Institute of Chartered Accountants (Saica), explains that an audit is a much more comprehensive process that could typically include a lifestyle questionnaire and may look into the growth of an individual’s asset base over the past five years.
Seccombe says “something quite substantial” must trigger an interest for an audit. For example if a lifestyle questionnaire indicates that an individual has significant assets, but his tax return only shows a small income for the year, this could prompt an audit. However, an audit will typically only be conducted after other avenues, such as the verification process, have been exhausted.
But while the red flags for verification are shrouded in secrecy and even tax experts don’t know what triggers the automated system use to identify individual submissions for verification, there are certain areas where requests for verification are common.
Professor Sharon Smulders, head of tax and technical research at the South African Institute of Tax Professionals (Sait) says requests for supporting documents for medical expenses are common.
Seccombe says while it is easy for Sars to check contributions to a medical aid, supporting documents are often requested for other qualifying medical expenses that weren’t reimbursed by the medical aid.
This means that individuals have to submit every medical aid slip or invoice as well as proof of payment for qualifying medical expenses.
“I think that is where a lot of tax practitioners and a lot of taxpayers go wrong. They only submit the invoices but they don’t submit the actual proof of payment which is what Sars is actually looking for,” Smulders says.
Nel adds that normally individuals only have to prove that a deductible expense was incurred, but with regards to medical expenses the regulatory requirement specifically states that the expense must have been paid in the year of assessment.
Taxpayers often claim medical expenses that were invoiced in February (the last month of the tax year), but only paid the next month.
Sole proprietor and home office
Rupert Oberholster, tax practitioner at Pro-Accounting, says in almost 90% of cases his clients who are sole proprietors (individuals with a business in their own name) were marked for verification in the previous tax year and had to submit additional supporting documents for expenses claimed.
Nel says it is also fairly common for home offices expense claims to be verified.
Company cars and travel allowances
Seccombe says Sars also often requests verification of information with regards to company cars and travel allowances.
Here the request is for detailed logbooks showing business kilometres travelled.
If taxpayers cannot supply the information, the deductions claimed in their tax returns can’t be verified and won’t be allowed.
Repairs and maintenance
Seccombe says if a taxpayer rents out a second property and claims repair and maintenance costs it could also trigger a request for proof.
Sars have also been known to do a site inspection so that the taxpayer can show the revenue authority that the repair and maintenance expenses claimed were in respect of the rental property.
It is quite tempting for someone to paint their own private home and then claim it as a repair painting expense on their rental property, she says.
High net worth individuals
Sars’s compliance program for 2012/13 to 2016/17, has identified a number of broad focus areas – high net worth individuals and their associated trusts is one of them.
“We have around 2 300 wealthy individuals on register. This group of taxpayers is a significant contributor to the fiscus, with wealthy individuals contributing an average of R1.7 million each to tax annually.
“Our preliminary sampling exercise has shown that under-declaration of income is an area of concern, where an individual’s declared income is not consistent with their asset base.
“To date, 467 potential wealthy individuals have been identified where there are discrepancies between their asset base and declared income, and they can expect much closer scrutiny from Sars,” a Sars compliance program document states.