Splurging big while reporting small?

SARS intensifies lifestyle audits to combat tax evasion

Ahead of Tax Season 2024, the South African Revenue Service (SARS) has stepped up its use of lifestyle audits to identify discrepancies between individuals’ reported income and their actual lifestyle.  This move aims to ensure that all taxable income is accurately declared to combat tax evasion.

What are lifestyle audits?

Lifestyle audits involve a detailed examination of an individual’s financial affairs to verify that their declared income matches their lifestyle. This process scrutinises property ownership, luxury vehicle purchases, extravagant spending habits and other signs of wealth.  “Up to now, the main focus SARS had in any review was to only examine what was disclosed in the tax return,” explains Michael Rushby, Managing Director of tax and audit firm Galbraith Rushby. “The lifestyle audit is now streamlined to identify what was potentially excluded or left undisclosed,” he adds.

Why the increase in lifestyle audits?

Several factors have driven SARS’s decision to intensify lifestyle audits, impacting taxpayers in various ways:

  1. Closing the tax gap: Lifestyle audits help identify those who may be under-reporting their income or evading taxes, thereby reducing the difference between taxes owed and taxes paid.
  2. Enhancing compliance: By increasing the frequency and rigor of lifestyle audits, SARS aims to promote voluntary compliance among taxpayers.
  3. Leveraging technology: Advances in data analytics and AI allow SARS to conduct more effective and efficient audits by analysing large volumes of data to identify discrepancies.
  4. Addressing public perception: Targeting individuals and entities with lifestyles that significantly exceed their reported income helps enhance the perception of fairness in the tax system.

The lifestyle audit process

The lifestyle audit process typically involves several steps:

  1. Data collection: SARS collects data from various sources, including bank statements, property records, vehicle registrations, social media, and other publicly available information.
  2. Analysis: Advanced data analytics tools compare the collected data against the individual’s declared income, flagging any significant discrepancies.
  3. Investigation: If underreporting or evasion is suspected, SARS may conduct a detailed audit, including reviewing financial statements and gathering additional documentation.
  4. Resolution: Depending on the findings, SARS may require the taxpayer to pay outstanding taxes, penalties, and interest. In severe cases, legal action may be pursued.

Implications for Taxpayers

The increase in lifestyle audits has several implications for taxpayers:

  1. Increased scrutiny: Taxpayers, especially high-net-worth individuals and those with significant assets, can expect greater scrutiny of their financial affairs.
  2. Importance of documentation: Proper documentation and record-keeping are critical. Taxpayers should maintain detailed records of their income, expenditures, and transactions.
  3. Professional advice: Seeking professional tax advice can help individuals navigate the complexities of tax compliance and avoid potential pitfalls.

“The current lifestyle audit process at SARS appears somewhat haphazard, resembling a shotgun approach,” says Rushby.  While SARS has introduced new tools, they are still navigating how best to utilise them effectively.   Initially, there were instances 18 months ago where SARS issued additional assessments based solely on the value of credits in taxpayers’ bank accounts, without thorough verification.  However, the approach has since evolved to include comprehensive audit notices that demand detailed transaction reviews and evidence to justify non-taxable inward payments.

As this process matures, we anticipate its extension to a broader spectrum of taxpayers beyond high-net-worth individuals.

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