SARS’ Nasty Demand Letters
26 November 2010
Posted by: Author: Monique Vanek
SARS’ Nasty Demand Letters
Not only is SARS legally entitled to issue such letters, as it did for many 2006 returns, they are now turning their attention to 2007 as well
If you are one of the many taxpayers to have received the heavy handed "Income Tax: Deductions Claimed” letter, similar to the one reproduced in last month’s issue of Moneyweb’s Tax Breaks, from SARS, and have been pushed from pillar to post trying to work out if it is a hoax or if SARS has the right to send it to you, then read on …
According to Piet Nel, chairman of the Northern Region Tax Committee of the South African Institute of Chartered Accountants(SAICA), and SARS spokesperson Adrian Lackay, the letter is definitely not a hoax.
Unfortunately, not all of SARS’ staff have been told about it, as revealed by the experience of one of our readers who mentioned that his wife received the letter recently and it caused her, firstly, much anxiety due to the heavy-handed nature of the letter, and secondly,frustration as she was not able to get a definitive answer from SARS as to the validity of this letter.She phoned SARS’ call centre,only to be told that there is no note on her file that she is being investigated. A further ‘phone call to the fraud hotline indicated that they "knew nothing” of the letter,and that they will contact head office to find out the legitimacy of the letter.
Is SARS allowed to send a letter like this? And if so, what can a taxpayer do?
Nel says that the moment you receive this letter from SARS, you must respond, and answer it to the best of your ability. In terms of the legislation, SARS has wide powers to obtain information from taxpayers to help and review assessments, so as unpleasant as such a letter may be, SARS is well within its legal rights to send this letter.
When is a tax assessment final?
The specific letter in question refers to the 2006 year of assessment. Nel says that "the basic rule is: if you received an assessment and haven't lodged an objection, it becomes final, and you'll have to pay; or if you are owed money, SARS will have to refund you”.
With regards to the letter, SARS is using the power given to it by legislation, to open prior assessments, says Nel. The legislation gives SARS three years after the date of the original assessment to issue an additional assessment to get more tax.This three-year rule applies in all cases,unless there is fraud, misrepresentation by the taxpayer, or nondisclosure of material facts—in which case there is no time limit, he adds.
SARS’ rights in calling for supporting documentation
There is a duty on any taxpayer to retain documents for five years,even though the assessment my lapse after three years.
Circumstances under which the 200% "additional tax” penalty is invoked
The 200% penalty becomes compulsory the moment you are in default. If the taxpayer omits any amount that should have been included, failed to declare all income, made an incorrect statement, claimed a deduction they are not entitled to, doesn't have supporting documents, or claimed deductions that do not relate to their trade, they can be penalised, warns Nel.
Examples of deductions you are not entitled to include are salaried employees claiming the service fee of the tax practitioner, professional subscription fees, entertainment expenses, etc.Examples of omissions include non-declaration of interest, rental income, capital gains, etc.
Uncovered fraud revealed in the investigation into 2006 now turns SARS’ attention to 2007 SARS, in its attempt to catch out tax cheats, is extending its heavy handed"Income Tax: Deductions Claimed” letter, used recently to review certain taxpayers’ 2006 returns, to the 2007 year of assessment.
Should you be worried?
According to Colin Wolfsohn, a member of SAICA’s National Tax Committee and chairman of the Southern Region Tax Committee, if one earns a salary and your IRP5 reflects code 3601, your claims are limited to medical expenses per the laid down formula, income continuation or income protection policy premiums to cover against loss of income, and pension fund /retirement annuity contributions per the stipulated limits. If you receive a travel allowance, you can claim business travel against it.
In certain instances you will only be able to claim expenses against allowances received.For example, if you receive a cellphone allowance you can claim the wear and tear of the cellphone against this allowance.It is, however, a requirement that the taxpayer must own the cellphone and be able to substantiate the cost.Note further that the monthly contract or airtime purchased is not claimable against this allowance.
Examples of deductions you are not entitled to claim if you are a salaried employee are: the service fee of the tax practitioner,professional subscription fees,entertainment expenses, etc. Wolfsohn adds that tax laws have changed over the last few years.There was an entertainment allowance some years ago but this no longer exists.You are however entitled to claim the service fee of the tax practitioner against non remuneration income.
To ensure you don't fall foul of SARS, Wolfsohn says that you really need to keep up to date on radical tax changes. "If you earn a salary which shows code 3601, you cannot claim any additional expenses other than those highlighted above.In exceptional cases, home office expenses may be claimed.In order to be able to claim home office expenses, the taxpayer must be able to prove that he/she uses part of the house for purposes of trade”.
"If you are an independent contractor, earn commission or fee income you can claim any expense you incurred in the production of that income,” he adds.Wolfsohn says that SARS decided to extend the letter to 2007 because it uncovered substantial fraud in people manipulating their taxes for 2006 and 2007.If you receive a letter of demand, Wolfsohn suggests thatyou show SARS that you are compliant, and send in the requested documentation that substantiates your tax return.
Should you be found guilty, you could be slapped with a 200% penalty and/or be prosecuted. If your tax practitioner claimed incorrect deductions, you, as the taxpayer, are still responsible for any declarations reflected on the tax return submitted to SARS.
Source: By Monique Vanek (Tax breaks)