Red Flags that Cause SARS to Audit Your Business

SARS can call for a review at any time. Are you prepared? Do you know why the South African Revenue Service would want to audit your business? Here are our reasons.

Did you know that SARS can audit any return for any year for any period and they can re-audit the same period at a later stage?

The following is a standard statement issued by SARS after any review or audit has been performed.

“However, in terms of the Tax Administration Act the South African Revenue Service reserves the right to conduct further reviews in future if required.”

Verification and Audit

The terms verification and audit can seem daunting so let’s have a look at what SARS means by these terms. You can read exactly what SARS has to say at http://www.sars.gov.za/ClientSegments/Individuals/What-If-Not-Agree/Pages/Being-Audited.aspx or read the abbreviated version below. (You’re welcome).

What is verification?

Verification is a face-value verification of the information declared by the taxpayer on the declaration or in a return. This involves a comparison of this information against the financial and accounting records and/or other supporting documents to ensure that the declaration/return is a fair and accurate representation of the taxpayer’s tax position.

Once you have submitted your declaration/return, your declaration/return could be selected for verification.

What is an audit?

It 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.  Where the taxpayer has not made a declaration or filed a return, it is an investigation regarding whether the taxpayer’s actions complies with the provisions of the relevant tax legislation.

SARS

Now that we know what verification and audit mean to SARS. Let’s discuss why SARS would want to verify your information or conduct an audit on your business.

Reasons SARS Will Call For An Audit

Random checks conducted by SARS

It’s not personal. You are just the lucky business that got randomly selected for a review. Congratulations! Don’t stress about this review. If you have a trustworthy accounting firm managing your finances then you don’t have anything to be worried about.

If you need help finding the right accountant for your business read this post which gives you all the questions to ask a prospective accountant during your interview process.

Your business sector is identified as high risk by SARS

What would cause this to happen? Other players in your business sector may have been found guilty of similar offences. Now, SARS wants to check the entire sector for compliance.

Cynical verification by SARS

SARS just doesn’t trust the information you submitted. If you are using accounting software, check that your information has been updated correctly. One misplaced figure can change your results drastically.

Also, remember that your accounting software needs to be updated when legislation changes. This simple oversight often lands small businesses in hot water.

The risk engine SARS uses has identified your business as a potential risk

In our digital age, it’s common practice for many big companies to use computerized systems to detect possible issues. SARS uses software to identify abnormalities.

These systems use the information provided, feed it through an algorithm and spit out what it considers potential risks. This can happen when information submitted to SARS is incomplete or inaccurate.

To avoid this ensure that your information is correct before you submit it. It helps to have a registered accountant look through your records.

Tax Refunds

Hooray! A tax refund!

Oh no! An audit first. The South African Revenue Service is not going to give you a big tax refund without checking their records first. Let’s face it, nobody likes issuing refunds. SARS needs to check that they are not paying out fraudulent refunds.

You have been reported!

Tax crimes can be reported at
https://www.sars.gov.za/TargTaxCrime/ReportCrime/Pages/default.aspx

But, who would report you? Think about it for a minute. Have you ever had a disgruntled employee? What about an ex with an axe to grind? Some other people who have reported business in the past are jealous friends, customers and suppliers. The number of people who could report you is surprisingly large.

Correction of a submitted tax return

Oops! You made a mistake on your tax return. Now, what? While submitting an incorrect tax return is not a good idea, making numerous adjustments can put your business in SARS’s spotlight.

This is why it is so important to have your records checked by a professional accountant before you submit your documents to SARS.

Your recent submitted information differs greatly to previous years submissions

If your new tax submission is very different to the previous year, then SARS is bound to wonder what changed. They will need to conduct a review to see what brought this change about. Any big changes are easily detected and a reason for concern.

Media reports on you

If you have been investigated by the media, then it is likely that SARS will investigate your financial records too.

Unexplained extravagant lifestyle

If you live in a mansion and drive a sports car but your declared income does not allow you to own these expensive things then SARS is going to be suspicious. How can a person pay a R20 000 monthly bond on a declared salary of R15 000?