Sharpening its revenue collection tools has seen the South African Revenue Service (Sars) require that several taxpayers explain why the revenue declared in their income tax return does not match the deposits detected in their bank accounts.
Unsatisfactory answers have led to estimated or additional assessments and even hefty penalties being imposed.
Nico Theron, founder of Unicus Tax Specialists, writes that Sars has taken to augmenting taxpayer revenue.
“Revenue augmentation is a process of comparing what a taxpayer declared as revenue in [their] tax return to the amounts actually deposited into taxpayer’s bank accounts.”
If a taxpayer declared R1 million but the deposits suggest revenue of R10 million, they must explain why Sars should not raise an additional assessment to tax the “undeclared revenue”.
Improved capacity
ENSafrica tax executive Mmangaliso Nzimande says Sars has had access to taxpayers’ information from third-party data providers such as banks and other financial institutions since 2012.
“As you can imagine that is a lot of data. They have lately improved their capacity and systems to process this data much more efficiently. That is why we are now seeing an increased utilisation of the data to verify information that is being declared [in relation] to what is being received from third-party service providers.”
His firm has seen an increased audit focus on individual taxpayers since January.
Discrepancies between declarations and third-party data of more than R500 000 have been targeted.
“These variances are huge, so it does make sense for Sars to pursue cases where they are likely to recover undeclared revenue,” says Nzimande.
Taxpayers must realize that Sars is continuously seeking new, better, and more efficient ways in which to obtain a “360-degree view” of taxpayers’ affairs.
“This includes a review of movements in their bank accounts, their world-wide income, and other assets in or outside SA,” adds Elle-Sarah Rossato, head of tax controversy and dispute resolution at PwC.
PwC has seen Sars reach out once or twice to a taxpayer for an explanation of the discrepancy. If the taxpayer does not respond or does not supply adequate reasons why the deposits have not been declared, or that they relate to loans or inter-account transfers – or potentially from other non-taxable income – then Sars will raise these assessments.
Time, effort, money
“The revised assessments can be challenged through the relevant dispute mechanism procedures. However, as we know these procedures take time, effort and can be costly,” says Rossato.
Theron points out that tax law places the burden of proof on taxpayers.
Sars may require a taxpayer to reconcile amounts on a line-by-line basis, and explain on a line-by-line basis – with evidence – why a particular deposit does not stand to be included in their gross income.
It may take a taxpayer weeks to fend off additional assessments. If they do not go through this extensive line-by-line exercise a likely outcome is that Sars will collect or try to collect the amount it has assessed, despite these assessments often – but not always – being ultimately incorrect, Theron adds.
Rossato says taxpayers who are currently the focus of Sars’s attention are the ones who are unlikely to respond when questions are asked about deposits in their bank accounts, or by the time Sars gets around to them there will be no assets in their name or money in the bank account.
Non-compliance
Nzimande agrees that there are instances of downright non-compliance and says taxpayers must appreciate that they are “ultimately held accountable for the correctness of their tax returns”.
“Once Sars has alerted the taxpayer to the discrepancy they have to engage with Sars.
“Taxpayers should realize that filing an incomplete or incorrect tax return is a criminal offence,” he warns.
Rossato notes that the latest compliance drive on a segment of individual taxpayers started in January and it is therefore a bit early to see the outcome. “The noise effect will only filter through in the next month or so.”
The important thing is to be vigilant, and to be transparent and include all deposits (income) in your tax return to avoid additional assessment, penalties, and interest, she advises.
Invest the time
Taxpayers should also note that if Sars raises an estimated assessment they will not be able to object to the assessment.
“This means they cannot, in law, request reasons for the assessment, nor can they, in law, ask for payment of the often-overstated assessment to be suspended pending a challenge against these assessments,” warns Theron.
Taxpayers must distinguish between an original, additional and estimated assessment.
If a taxpayer receives an estimated assessment, they will only be able to object once the relevant information has been submitted.
Nzimande advises taxpayers to invest time to understand and review the information declared on their tax returns, even if they have a professional that assists with the filing of their returns.
“If there are issues with the declarations, the taxpayer is the one who will ultimately be held accountable.”
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