Most of tax season requires businesses to ‘audit’ themselves and submit copious amounts of paperwork to remain compliant. For small to medium-sized enterprises (SMEs), submitting paperwork to the South African Revenue Services (SARS) is much easier than preparing for the dreaded SARS audit.
Receiving a SARS audit notification can be a stressful experience for business owners. Tax authorities leverage technologies like data analytics and third-party integrations to make financial reviews much more targeted.
Being prepared and knowing how to handle intense scrutiny is essential for SMEs. In this article, we look at what a SARS audit is, how it works and how you can prepare for when it’s your turn.
The SARS Audit
A SARS audit is an examination of the financial and accounting records and/or the supporting documents of the taxpayer to determine whether the taxpayer has correctly declared his/her tax position to SARS.
The SARS audit is different from a SARS verification. Verification is a face-value verification of the information declared by the taxpayer on the declaration or in a return. SARS will notify you that the return or declaration is subject to verification. SARS will conclude the verification within 21 business days from the date all required relevant material is received, if your return is for the current filing period.
What Triggers a SARS Audit?
Regulatory reviews are rarely random. SARS uses a robust algorithm to flag specific patterns and data inconsistencies. The following are some of the factors that can trigger a SARS audit.
Inconsistent or Suspicious Reporting
When your value-added tax (VAT) submissions, pay-as-you-earn (PAYE) declarations, and income tax returns do not align, the SARS system will raise a red flag. Declaring a high turnover but displaying minimal profit margins will frequently prompt an investigation into underreporting.
Frequent Refund Claims
Businesses that regularly claim VAT refunds attract additional scrutiny from SARS. The entity will closely examine these claims to verify that the input VAT is legitimate and properly supported by valid tax invoices.
Unusual Expense Deductions
Claiming deductions that appear inconsistent with the nature of your trade guarantees further investigation from SARS. Writing off luxury vehicle expenses or extravagant travel costs within a small, home-based consultancy is a common trigger.
Late or Amended Returns
Continuously submitting late returns suggests poor record-keeping and a lack of compliance. Repeatedly amending returns after submissions also signals a high risk of inaccuracies to SARS.
Third-party Data Mismatches
SARS cross-checks taxpayer data with third-party submissions from employers, medical aids, banks and cryptocurrency exchanges. Any non-alignment between your reported figures and those provided by external institutions will trigger a deeper investigation.
High-risk Industries or Unusual Transactions
Certain sectors carry a higher risk of tax evasion, such as cash-heavy retail businesses or complex cross-border trades. Large and unusual transactions, like the sales of a major asset, can bring your profile to the top of SARS’ audit list.
Discrepancies Between Reported Income and Lifestyle
If your declared income is low but you consistently acquire luxury properties and expensive vehicles, SARS will notice. Discrepancies between your reported earnings and visible lifestyle often lead to robust lifestyle audits.
What to Expect from the SARS Audit Process
The following are the various things you should expect before, during and after a SARS audit.
1. Notification of Audit
The audit officially begins as soon as you receive a Notification of Audit letter. This letter outlines the initial scope of the investigation, the specific tax periods under review, and the contact details of your assigned auditor.
2. Information Requests
The notification letter will list the specific documents you need to prepare for the review. Typically, you are given 21 business days to upload the requested material via SARS eFiling. You must strictly adhere to the file size limits and accepted document formats to avoid technical delays.
3. Meeting with SARS Officials
SARS may arrange with you a time to conduct a field audit at your premises. During a field audit, officials will inspect your physical records and ask questions about your daily operations. You are legally required to provide reasonable assistance and make appropriate facilities available to the visiting auditors.
4. Audit Progress Reports
Throughout the investigation, SARS will send you progress reports every 90 calendar days from the date the audit commenced. However, SARS can withhold these reports if they believe that sharing them will jeopardise the outcome of the audit.
If no issues are found, SARS will issue a Finalisation of Audit Letter to close the review. If discrepancies exist, you will receive an Audit Findings Letter detailing the proposed adjustments. You are then given 21 business days to respond with evidence supporting your disagreement. After considering your response, SARS will issue a final Notice of Assessment outlining any additional tax liabilities and penalties owed.
Preparing for a SARS Audit
The following are the elements you need to prepare in case you receive an audit letter from SARS.
Tip 1: Robust Record-keeping
You are legally required to retain all relevant financial records, invoices, and supporting documents for at least five years from the date you submit your return. Keeping comprehensive digital archives ensures you can easily produce evidence the moment an auditor requests it.
Tip 2: Conduct Regular Internal Audits
Conducting regular internal reviews will help you identify minor errors before they are found by SARS. For SMEs, partnering with a registered tax practitioner ensures your submissions align with the latest legislation and provides you with expert representation during formal disputes.
Tip 3: Leverage Accounting Software
Modern accounting platforms integrate easily with banking feeds and eFiling systems. Using cloud-based software reduces the risk of human error, ensures figures match across all ledgers, and makes compiling requested documents remarkably straightforward.
Tip 4: Respond to Audit Notices Promptly
Ignoring a request for information from SARS is the fastest way to compound your tax problems. If you fail to respond within the given timeframe, SARS can raise an estimated assessment based entirely on the little information they have.
Tip 5: Utilising the Voluntary Disclosure Programme (VDP)
If you realise you have made a historical error or omitted taxable income, you can leverage SARS’ voluntary disclosure programme (VDP). By coming forward before SARS notifies you, you can regularise your tax affairs and significantly reduce potential penalties.
Remember, consistent record-keeping and internal reviews of your financial records will ensure compliance and help you navigate a SARS audit easily.
Most of tax season requires businesses to ‘audit’ themselves and submit copious amounts of paperwork to remain compliant. For small to medium-sized enterprises (SMEs), submitting… Read More
