Tax Penalties: The truth can set you free
07 February 2013
Posted by: Erich Bell
From time to time taxpayers may discover that they did not fully comply with the requirements of specific Tax Acts. A situation like this can terrify the person involved especially when the possible administrative penalties and interest is considered. Fortunately, SARS developed the "Voluntary Disclosure Program” that encourages taxpayers to disclose any misstatements they have made on a return. In certain situations the taxpayer may also be discharged from any additional taxes resulting from the misconduct.
It is important to note that a taxpayer will not always qualify for relief in terms of this program. The Act specifies that no relief will be granted if interest and penalties was levied as a result of the late submission of a return or the late payment of a tax. If a taxpayer did not comply with an exchange control provision, i.e. transactions relating to the sale or purchase of foreign currencies, there will also be no relief available. Taxpayers may, however, benefit from this program if the error that occurred was not significant and the taxpayer did not act negligently. In such instances the taxpayer may be discharged from any administrative penalties as well as penalties resulting from the understatement of taxes.
The Voluntary Disclosure Program is only available when certain conditions are met. Firstly, the Act requires that a "default” had to occur. Therefore an application will only qualify if the taxpayer submitted an incorrect tax return or in the case where he omitted relevant information. As a result SARS should have made an incorrect assessment that entitled the taxpayer to a bigger tax refund or a reduction of his tax liabilities.
In addition the taxpayer is not allowed to apply for this program if SARS is currently performing an audit or investigation on his tax affairs or in the case where he anticipates these proceedings. A senior SARS official may, however, allow the application in such instances once he considered the probability of detecting the default during the audit or investigation. The official has to ensure that the decision he makes represents good governance and the most efficient utilisation of SARS’s resources.
Finally, the taxpayer is required to make this disclosure out of his free will, and not as a result of enquiries made by SARS. It is only possible to qualify for this program if you make a truthful and absolute disclosure of information not disclosed in the past. The disclosure is also not allowed to result into a refund from SARS, but rather additional taxes payable to SARS.
As soon as a taxpayer is satisfied that his application complies with the above requirements, he may initiate the process. Initially, he will have to submit an application form (VDP01) electronically through SARS eFiling. The form consists of three sections that have to be completed. At first, the taxpayer has to supply additional information about the application, for example an indication of the tax type concerned. After this section is completed, the form will be generated according to the information supplied. If the taxpayer did not select the option to apply anonymously, he would be required to provide his personal information and contact details. Following by that, full information regarding the default has to be disclosed: The taxpayer must indicate the year of assessment wherein the default occurred, the nature of the default (for example: over-claiming of expenses), the amount payable as a result of the default as well as a short description thereof. Documentary proof can also be attached to support the information supplied.
By submitting the form, the taxpayer confirms that the information is provided on a voluntary basis and that it is accurate and complete. He also acknowledges that any material omissions relating to the default will result in an invalid application. In such circumstances the Commissioner may forbid any relief available in terms of the VDP, apply any payment received against other outstanding tax debts or prosecute the taxpayer if a legal offence occurred.
Once the VDP01-form is submitted, SARS will consider it for approval and may contact the taxpayer to reach an agreement. If the application was approved, SARS may use the information supplied to alter the original tax calculation and issue a corrected assessment. This assessment is final and the taxpayer will not be allowed to dispute it.
The taxpayer also has the option to submit the above form anonymously, known as the "non-binding private option”. If this route is followed, the taxpayer will not qualify for VDP relief, but SARS will evaluate the information provided and indicate if the taxpayer will qualify for VDP if a future application is made. The opinion provided by SARS may however be changed once the taxpayer’s identity is disclosed and all disclosed facts verified.
It is clear from the above that the main purpose behind the Voluntary Disclosure Program is to encourage taxpayers to get their tax affairs up to date. The fact that SARS offers a reward to taxpayers by discharging them from penalties and interest (subject to certain conditions) will encourage taxpayers to disclose defaults that occurred non-intentionally. It is expected that this program will be successful in the detection of previous tax omissions without the need to perform investigations and audits by SARS. Therefore the process is not only to the advantage of taxpayers, but SARS will also receive a benefit in the form of lesser administrative duties and non-excessive utilisation of resources.