Tax Ombud Judge Bernard Ngoepe released his second report on the investigation into systemic issues at the South African Revenue Service (Sars) on Tuesday.
Complaints received by the Office of the Tax Ombud by taxpayers, tax practitioners and recognised controlling bodies highlighted a combination of factors that are discussed below.
Accuracy of PAYE statements of account
The investigation revealed five aspects that might have given rise to complaints about statements of account related to pay-as-you-earn (PAYE) tax.
- Lack of communication: Sars has been requested to consider improving its communication with taxpayers, and to desist from issuing generic letters.
- Errors: Even though errors are isolated incidents, Sars should attempt to eradicate these.
- Standardised letters: Letters issued by Sars contain “standard paragraphs” that cannot be edited, these at time refer to incorrect processes. This causes confusion.
- Credit balances: Sars has historically raised assessments to clear credits on PAYE accounts. Even though it has stopped this practice, it does not rectify the assessments raised unless requested to do so by a taxpayer. However, when Sars raises incorrect assessments, the EMP501 reconciliation is reflected as outstanding. The taxpayer then cannot file an amended EMP501 reconciliation as the initial declaration is deemed correct. Sars ceased this practice on July 20, 2017. It is recommended that Sars identifies all these cases and corrects them. The ombud says it is unfair to place the burden on the taxpayer.
- Taxpayer lack of knowledge of the payment allocation rules: This is an education matter, and not a systemic issue.
Industry bodies have also raised concerns that the balance of a statement of account may change constantly during the day, with neither the taxpayer nor Sars having any idea what the real status is. This can result in the taxpayer being denied a tax clearance certificate, through no fault of their own, and this would negatively impact business opportunities.
Penalties and interest are automatically levied if no payment is made. Sars asserts that when a payment is subsequently correctly allocated, it is done using the date on which the payment was actually received, and the penalty and interest will automatically be reversed.
Sars insists that if it raises an assessment (revised declaration) due to an audit or verification, a notice of revised assessment is issued to the taxpayer.
The ombud recommends that:
- The quality of the correspondence issued to taxpayers be improved, and that it be promptly issued.
- Sars should ensure that sufficient reasons are provided to taxpayers in all instances where assessments are raised.
The ombud observed that Sars relies on certain functionalities within its system to track allocations made in statements of account: “Even Sars itself finds it difficult to explain certain transactions by merely looking at a statement of account without accessing its systems.” Taxpayers and tax practitioners do not have access to Sars systems.
Sars responded that major changes have been made, including validation rules on the submission of the EMP501 to ensure complete and accurate submission, validation of IRP5s, validating the calculations of the employment tax incentive and non-compliance, warning messages on the EMP501 where values differ, and automatic correction of EMP501s.
Sars’s failure to adhere to the prescribed timeframes
The ombud found that:
- Sars at times failed to adhere to the timeframes prescribed by the Tax Administration Act (TAA) and the dispute resolution rules promulgated under the act.
- There is an unnecessary clogging of the system by unjustified reassessments against which taxpayers have to appeal, only for most appeals to be conceded.
- Taxpayer don’t submit documents in time.
- Sars should enforce its assessment against a taxpayer within 75 days to bring finality.
Dispute resolution rules
The TAA prescribes procedures to be followed in lodging an objection and appealing against an assessment or decision that is subject to objection and appeal. The dispute resolution rules also set out the procedures for alternative dispute resolution.
Sars adopts a very strict approach towards taxpayers in enforcing compliance with the timeframes; however, it does not itself always adhere to the timeframes.
The ombud says Sars has not taken the necessary steps to resolve the underlying causes of the delays, which persist into the present.
“Sars often enforces its tax collection measures with rigidity against the taxpayers’ non-compliance, while the taxpayer is often helpless to hold Sars to the prescribed timeframes.”
The ombud obtained substantive data from Sars to interrogate:
- Objections: 449 096 cases
- Condonation for late filing of objections: 80 369 cases
- Appeals: 17 356 cases
- Condonation for the late filing of appeals: 2 334 cases.
Of the 449 096 cases, only 53 804 (12%) of objections were disallowed, and 243 664 (54.3%) were invalidated. The ombud found a 31% error rate where the objections were incorrectly invalidated.
The ombud says Sars should:
- Channel objections correctly (and taxpayers must furnish the correct codes); and
- Review and improve the process of raising additional assessments, as well as the efficiency of its objections committee mechanism.
Automated calculation of days
The ombud established that the Sars system does not correctly calculate dates for dispute resolution; for example, it does not exclude public holidays or weekends.
This results in objections that are filed on time being routed for condonation by the system automatically. This creates delays in the dispute resolution procedure and adds to the workflow of both taxpayers and Sars staff by introducing a separate and unnecessary procedural step.
The incorrect calculation of days also impacts appeals.
Standardised letters are often incorrect and may, for example, contain a fixed paragraph referring taxpayers to an incorrect process step for the resolution of the dispute.
The ombud says Sars should:
- Amend its system to correctly calculate the number of days during the dispute resolution procedure in accordance with the dispute resolution rules.
- Consider improving its communication with taxpayers, and desist from issuing generic letters.
Ngoepe said he is “grateful for the contribution made by our stakeholders, the cooperation and support we received from Sars, and most importantly my [Office of the Tax Ombud] colleagues who conducted the investigation. I am confident that working together with our stakeholders, including Sars, we would continue to reduce systemic issues and improve our country’s tax administration system”.
Even though taxpayers are also often at fault in failing to submit documents on time or follow the correct procedures, Sars has the greater power that it can wield against taxpayers. Taxpayers can therefore suffer more prejudice.
The tax ombud’s role in enabling an ongoing process of open discussion and cooperation will hopefully lead to a stronger, more efficient Sars – and taxpayers who have more faith in the tax system.