The risk faced for these audits on taxpayers can range from penalties of up to 200%, backdated interest, and/or criminal prosecution.
The use of third-party data
Lifestyle audits are not a “slam-dunk process”, says Professor Keith Engel – CEO of the SA Institute of Taxation. He states that “These audits are not easy to conduct; converting net wealth or assets into a tax assessment based on a deemed taxable income calculation requires a lot of assumptions.”
SARS does not disclose the principles or rules on how they select taxpayers for a lifestyle audit. According to statements made earlier this week at the SA Institute of Taxation’s 2022 Tax Indaba, third-party data is seemingly being checked against returns submitted.
Apart from personal recordkeeping, SARS have direct access to the following third-party sources:
- Bank institutions;
- The Deeds Office for property transactions;
- Financial institutions for mortgage loans or motor vehicle finance;
- Vehicle registrations; and
- Social and other media where your “lifestyle” can be “ascertained”.
Lifestyle audits in practice
According to Lambert Roberts, a senior tax consultant at Tax Consulting SA, if you are selected, you must complete the audit and provide SARS with the requested information in the time set out by SARS.
“As a Top 6 tax return submissions practice, we are privy to a large number of SARS verification requests, allowing us to gauge the extent of a SARS audit and the authority’s ability to investigate and verify a taxpayer. We have seen a recent rise in these lifestyle audits from SARS, and many different iterations thereof”, says Roberts.
A few examples of the requested information may be:
- A SARS lifestyle questionnaire;
- Bank Statements;
- Statement of assets and liability per year of assessments; and
- Book values of assets with purchase and selling dates.
Based on the lifestyle audits conducted by SARS, they will issue selected taxpayers with an estimated tax assessment based on their findings and documents provided. More specifically, Section 95 of the Tax Administration Act allows SARS to raise original, additional, or other assessments by utilizing an estimated assessment if the taxpayer either fails to submit a return or submits a return that is deemed incorrect or inadequate.
“This is not the time to take risks”, says Roberts, adding that “there is no time limit of how far back SARS can go when it comes to your personal and/or company’s records.”
Taxpayer morality check
“It is undoubtedly advisable to do it right the first time and rather ensure you declare your full scope of taxable income to SARS rather than be at risk of these audits, interest and penalties of up to 200%, or to rectify later through dispute resolution”, said Roberts.
The consequences of a lifestyle audit can severely impact your relationship with SARS if irregularities come to light. The time for simply not disclosing income to SARS appears to be coming at an end.