In the rapidly evolving landscape of artificial intelligence (AI), the South African Revenue Service (SARS) has harnessed this powerful technology to dramatically enhance its audit capabilities. While AI promises efficiency and accuracy, it’s potential ramifications for tax payers are proving alarming.
The Dawn of AI in SARS Audits
Imagine having historically filed all your tax returns on time, fulfilling your obligations to SARS, and reflecting a fully compliant status. Now envision waking up to a Notification of Audit and Request for Relevant Material, “based on risk(s) detected.” This scenario is becoming an unsettling reality for numerous to-date compliant taxpayers. SARS’s audit team is rigorously enforcing a zero-tolerance policy on non-compliance, and this is aided by sophisticated AI-driven insights.
AI in SARS extends beyond traditional audits. It processes taxpayer bank statements without prior warning or consent, identifying risk areas and discrepancies through data analysis. This powerful tool enables SARS to detect potential non-compliance more efficiently than ever before, leading to a significant increase in audits and subsequent adjustments.
The Rise in SARS Audits
Over the past two months, there has been a noticeable spike in SARS audits, often concluding with adjustments. These adjustments typically arise from taxpayers missing the Request for Relevant Material deadline, resulting in adverse findings and upward adjustments on amounts included in “gross income.”
For example, SARS analyses taxpayer bank accounts. Any credit transaction deemed unexplainable is considered part of income, leading to additional taxes that the taxpayer is liable for. To enforce these adjustments, SARS issues additional assessments within three years from the original assessment date. However, this period does not apply in cases involving fraud, misrepresentation, or material non-disclosure, as per section 99(2) of the Tax Administration Act (TAA).
Lifting Limitations to Eradicate Non-Compliance
The TAA outlines that the three-year period of limitation does not apply if the full amount of tax chargeable was not assessed due to fraud, misrepresentation, or non-disclosure of material facts. This provision allows SARS to extend its audit and assessment period, ensuring total compliance.
Recent news highlights numerous tax evaders facing severe penalties, most notably South African celebrity chef Lusizo Mvula, recently sentenced to a 10-year prison term for defrauding SARS. Convicted of multiple charges of fraud and money laundering, Mvula’s case underscores the stringent measures SARS employs to combat tax evasion.
Avoiding Penalties and Prosecution
For taxpayers facing a historic audit from SARS, a timely and accurate response is crucial. Non-compliance can lead to severe penalties, including understatement penalties that can reach up to 200% of the capital taxes due.
All correspondence of this nature from SARS should be addressed comprehensively by a multi-faceted team that includes professionals in finance, income tax and legal matters. Legal professional privilege is essential in instances of suspected non-compliance, safeguarding against SARS’ aggressive collection measures.
Enlisting the right compliance specialists ensures taxpayers and their advisors are correctly guided on the most appropriate solutions to discharge the burden of proof during an audit. This strategic approach helps avoid not only financial penalties but also potential jail time.
Closing thoughts
SARS’s adoption of AI marks a significant shift in the landscape of tax audits. While it offers enhanced capabilities for identifying non-compliance, it also presents new challenges for taxpayers. Understanding these developments and preparing adequately is essential for navigating the complexities of tax compliance in the post-AI era.
MMS Group endeavours to keep our clients proactive and informed, ensuring our clients can navigate the era of AI in SARS audits with confidence. Ensure that you subscribe to our newsletters and remain in regular contact with your income tax professionals at MMS Group. Should you wish to understand in more detail the potential impact of SARS’ adoption of AI on your income tax matters, please reach out to our team of tax professionals.