Lifestyle audits not a new thing

2010-04-07 13:03

The Democratic Alliance (DA) has welcomed the lifestyle audits carried out by the South African Revenue Service (Sars) on individuals suspected of tax evasion.


In a written reply to a parliamentary question by the DA’s Dion George, Finance Minister Pravin Gordhan said Sars had conducted 4?787 lifestyle audits since 2007 on individuals suspected of tax evasion or tax fraud.


The audits had led to 234 criminal prosecutions, Gordhan said.


George said on Wednesday: “The DA welcomes this use of this mechanism... In fact, the powers and scope of lifestyle audits must be expanded to such a level that all individuals are made equal before the law.”


He added: “The worrying trend of what appears to be blatant tax evasion by prominent ANC members cannot be tolerated, and this is the ideal way to clamp down.”


Gordhan’s answer confirmed that lifestyle audits were not a politically motivated new idea, but long-standing best auditing practice employed by Sars.


“The next obvious step is to investigate senior government and ANC officials who seem to be involved in serious tax evasion, like [ANC youth league leader] Julius Malema,” George said.


In his reply, Gordhan said as part of the risk-based approach used by Sars to identify and investigate non-compliance with tax and customs laws, risk-profiling was applied to all tax entities (individuals and businesses) and across all tax types or tax products such as personal income tax, corporate income tax, value-added-tax (VAT), and Customs and Excise duties.


As part of the risk-profiling of individual taxpayers, Sars used a variety of sources of information including third-party data and risk rules that assisted in identifying potential discrepancies between the income declared by taxpayers and the income and assets they were thought to have.


Where such a potential discrepancy was identified, a taxpayer was selected for audit.


A Sars income tax audit of an individual comprised various activities by a Sars auditor that primarily relied on the obligation of a taxpayer to honestly declare income, assets and liabilities in a standard periodic return to Sars on the one hand, and then to systematically examine and verify records or books of account, transaction records and any other relevant documents in relation to what was declared by the taxpayer on the other hand.


A discrepancy identified by the Sars auditor was usually followed up with further engagements between Sars and the taxpayer.


Where discrepancies had been confirmed, the Sars auditor would typically issue an additional assessment to take into account income not previously considered, and would usually have an interest consequence and additional tax consequence.


In addition, under certain circumstances, penalties could also apply.


In essence, the practice of reviewing the “lifestyle” of a taxpayer from a tax audit perspective related to the comparison of the taxpayer’s apparent living standards and assets and liabilities obtained from third party data-sources against the values of income and assets declared in the tax return by that taxpayer.


Another tool at the disposal of an auditor was the so-called “lifestyle questionnaire” which enabled a tax auditor to pose additional questions to a taxpayer beyond what was normally required in a tax return.


The questionnaire was designed to rely on the obligation of a taxpayer to honestly and truthfully declare to Sars to enable Sars to determine whether all income had been declared or not.


On average, Sars selected about 68?000 individual taxpayers for audit each year.


In a small percentage of these cases, the audit process identified further risks warranting criminal investigation.


On average, Sars conducted about 1?500 investigations of individual taxpayers a year.


There were currently about 1?480 cases that had been handed to the National Prosecution Authority (NPA) for consideration for prosecution, he said. – Sapa


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