SARS Will Find Out What You Did in Your Tax Return
20 September 2016
Posted by: Author: Marelize Loftie-Eaton
Author: Marelize Loftie-Eaton (FirstRand Group)
Thanks to a number of information sharing agreements between SARS and other entities, SARS has the ability to competently identify fraudulent tax returns.
George Orwell could have had SARS in mind when he said:
“Always eyes watching you and the voice enveloping you. Asleep or awake, indoors or outdoors, in the bath or bed – no escape. Nothing was your own except the few cubic centimetres in your skull.”
During each tax filing season SARS experiences a significant increase in fraudulent expense claims by taxpayers that results in refunds that a taxpayer is not entitled to. In terms of section 190(1) of the Tax Administration Act (TAA) SARS is obliged to pay a refund to a taxpayer who is entitled to an amount properly refundable under a Tax Act. When SARS pays such a refund that was created by inflated or fraudulent expense claims, the refunded amount, including interest, is regarded as a tax debt from the date of payment to the taxpayer.
SARS has world-class systems that monitor tax risks and irregularities detected in the refund process. SARS obtains a wealth of financial information from various third parties including but not limited to banks, life insurance companies, medical aid schemes, attorneys, estate agents, employers and brokers. The SARS risk engines can therefore validate any amount declared in your tax return to the information provided by these third parties in terms of section 26 of the TAA. All refunds are vetted by SARS by applying certain risk indicators and once SARS detects these fraudulent refunds, SARS will request the Banks to secure the funds and issue an agent appointment in terms of section 179 of the TAA to recover these tax debts. Despite stringent risk rules in the vetting process, some fraudulent refunds still slip through.
SARS needed extra eyes to scrutinise these refunds that slipped through the cracks and therefore introduced section 190(5A) to the Act where all Banks as defined in the Banks Act no 94 of 1990 must alert SARS immediately to any deposits made into a client’s bank as a result of a SARS refund where the bank reasonably suspects that the payment from SARS is related to a tax offence. The banks are obliged to report these suspicious payments to the SARS fraud division and thereafter secure the funds of the client to an amount not exceeding the refund amount deposited. SARS has 48 hours during which they can investigate the reported suspicious refunds and issue an agent appointment to collect the tax debt from the bank.
The banks apply their own risk rules that are used to detect suspicious transactions that banks are to report in terms of the Financial Intelligence Centre Act, 38 of 2001 (FICA) that came into effect on 1 July 2003. FICA was introduced to fight financial crime, such as money laundering, tax evasion, and terrorist financing activities. Despite the fact that the Banks always reported these suspicious transactions to the FIC the new legislation required the banks to report it now directly to SARS as well.
What is a suspicious transaction?
The South African Reserve Bank explains that it is any transaction where there is a reasonable ground to suspect that the accountable institution has received or is about to receive the proceeds of unlawful activities or activities related to an offence to the financing of terrorist and/or related activities. The Financial Intelligence Centre Act (FICA) also places a duty on the accountable institution to report any transaction with no apparent business or lawful purpose, or a transaction conducted purely for purposes of avoiding having to report the information in terms of FICA. A suspicious or unusual transaction will naturally be a transaction concluded with the purpose of money laundering or tax evasion. The duty to report all suspicious and unusual transactions arises, not only when a person knows that a suspicious transaction is taking place, but also in circumstances where there is reasonable suspicion that such a transaction is taking place.
Banks report a considerable number of suspicious refunds to SARS on a daily basis and SARS confirms that in a high percentage of these cases, the refund was paid due to fraudulent or inflated expense claims.
Section 190 refers to an amount that the bank reasonably suspects relates to a tax offence. Section 235 of the TAA deals with the evasion of tax and obtaining undue refunds by fraud or theft and therein a person that intends to evade or assists another person to evade tax or obtain an undue refund is guilty of an offence and, upon conviction, is subject to a fine or to imprisonment for a period not exceeding five years. The offences listed include:
Makes use of, or authorises the use of, fraud and contrivance and
Makes any false statement for the purposes of obtaining any refund of or exemption from tax
A senior SARS official may lay a complaint with the South African Police Service or the National Prosecuting Authority regarding an offence under this section and then the reversal of a refund is the least of your problems.
To conclude, always check your SARS refunds to ensure you have all the supporting documents as the burden of proof remains with the taxpayer.
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This article first appeared on the September/October 2016 edition on Tax Talk.