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PAYE Attention to Your Rights during an Audit

Tuesday, 09 January 2018   (0 Comments)
Posted by: Author: Marelize Loftie-Eaton
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Author: Marelize Loftie-Eaton, marelize.loftieeaton@firstrand.co.za

Undergoing an audit can be a harrowing experience for any taxpayer. However, knowing as much as possible about the laws governing the process should help to alleviate some of the fear.

 

There is no need to hyperventilate when you receive a call from a SARS official, informing you of a looming PAYE audit. Adequate notice of the nature and purpose of the proposed audit must be provided to you. And, it is imperative that you understand and exercise your rights during this audit and not be bulldozed by the powers of SARS.

 

From the beginning of this process, it is therefore vital that you ensure that all correspondence regarding an audit is in writing. Also, note that you have the right to request the SARS official’s written authorisation to conduct an audit and request proof of identity.

 

Included are a few questions that may occur to you or your client, should a client become subject to an audit.

 

Why my company?

 

Section 40 of the Tax Administration Act empowers SARS to select a taxpayer for an audit. An audit can be initiated randomly or based on a risk assessment. SARS also chooses specific issues or themes that it believes are particular high-risk issues, e.g., the correct tax treatment of employee share schemes. You have the right to request the reasons why your company has been selected for an audit.

 

What is the scope of the audit?

 

SARS must clearly identify the scope of the audit, including the following:

 

  • Does SARS want to verify that all the earnings and allowances are taxed correctly according to the requirements of the relevant sections and schedules of the Income Tax Act?
  •  Does SARS want to verify that the value of the fringe benefits is calculated correctly in terms of the Seventh Schedule to the Income Tax Act?
  • Does SARS want to verify that all the earnings are correctly reported on the IRP5 under the correct code as set out in the Business Requirements Specifications?

 

You will benefit from understanding what information SARS needs, what area of the taxpayer’s taxes are under review and whether the information is relevant to the scope of the audit.

 

What information must I provide?

 

Section 46 gives SARS the power to request relevant material needed for the purpose of an audit. The words “may request” indicate that SARS has discretion to request this information and this discretion allows the taxpayer the right to request reasons why the specific material is relevant to the audit. It is important to note that, in accordance with section 3(2) of the Tax Administration Act, this information must be requested for the purpose of the administration of a tax Act. SARS must provide detailed reasons that are adequate. The information requested must also be clearly specified and SARS must provide a reasonable period in which to provide the material.

 

The factors that must be taken into account when a reasonable period is determined include:

 

  • The type of information needed;
  •  Whether the information is readily available;
  •  Where the information is stored;
  • The volume of information needed; and
  • The period covered by the audit.

 

A taxpayer has the right to request an extension of the time in which the information must be submitted and SARS must provide reasons why the extension is not approved, if that is the case.

 

Here are more rights related to the information that must be provided:

 

  • The definition of “relevant material” is exceptionally wide as it also includes material that is deemed “foreseeably relevant” by SARS. Yet, a taxpayer has the right to request reasons why SARS believes the information is relevant to the scope of the audit or why it will be foreseeably relevant in the future.
  •  SARS cannot request material that is already in its possession. Yet, it is common for SARS to request information that is easier to obtain from the taxpayer than searching for it on its systems.
  •  SARS cannot go on a fishing expedition and issue a payroll questionnaire that consists of more than 70 questions which are not all relevant to a specific employer.
  •  SARS must request very specific material that relates to the scope of the audit.

 

SARS receives IRP5s from employers that specify all the remuneration earned, including allowances, fringe benefits and deductions made under a specific identifiable code. Therefore, the following types of questions can be referred back to the submitted IRP5s:

 

  • Do you pay travel allowances and reimburse travel claims? Please provide a list of all employees that receive an allowance or have received payments as a result of a claim.
  • Does the company provide fringe benefits to its employees the relatives of its employees?
  • Does the company offer a medical aid, pension or provident fund? Provide a list of all the contributions made by each member of the fund.

 

This information is readily available to SARS as the IRP5 certificates submitted to SARS have specific codes that will identify travel allowances, travel reimbursements, medical aid contributions and any other fringe benefit or allowance.

 

SARS can only request material that is reasonably maintained and kept by the taxpayer in the original format required. Due to the complexities of employee share schemes, SARS often requests a taxpayer to draw a flow diagram to explain the transactions and rules of the share scheme. A taxpayer has no obligation to maintain or keep such a document and, therefore, you should not create such a document for the purpose of this audit. Rather refer SARS back to the rules of the scheme.

 

Can SARS interview my employees?

 

SARS may request an employee to attend an interview to acquire more information. But, it is imperative that an employee does not answer a question unless he or she truly understands the question and has complete knowledge regarding the policy or process in question. In all other cases, the employee should let the interviewer know that he or she does not know the details of the policy as the answers provided can be used as evidence to support SARS’ interpretation of the legislation in the letter of findings and the assessment.

 

SARS should interview the specialists in the company who understand the policies or remuneration structures, such as the head of human resources or the remuneration specialist.

 

How will I know what the status of the audit is?

 

Section 42 of the Tax Administration Act compels SARS to provide regular updates to the taxpayer while they are under audit. In terms of this section, the Commissioner has issued a public notice which requires SARS to submit a status report after 90 days from the commencement of the audit and every 90 days thereafter.

 

The report must contain:

  • A description of the current scope of the audit;
  • The stage of completion of the audit; and
  • The relevant material that is still outstanding.

How will I be informed of the audit findings?

 

Within 21 days after the audit has been concluded, the taxpayer must receive a letter of findings. The taxpayer then has the opportunity to respond in writing and raise anomalies regarding the facts and conclusions within 21 business days. The taxpayer can also request an extension of the period in which they are expected to respond based on the complexity of the matter.

 

A taxpayer can waive its right to receive the letter of findings, but this is not advised.

 

Will an assessment be raised after SARS receives my response?

 

SARS can issue an additional assessment, if SARS is satisfied that the taxpayer has not paid the correct amount of employees’ tax, SDL and UIF levies or has declared the incorrect amounts on the IRP5s.

 

SARS must provide reasons why the assessment has been raised. Where no reasons or insufficient reasons have been provided by SARS, you can exercise your right to request adequate reasons. Where SARS does not comply, the case may be referred to the Office of the Tax Ombud to ensure that SARS adheres to the administrative procedures set out in the Tax Administration Act.

 

Where there is no audit finding, SARS should inform the taxpayer. This will provide certainty that the audit has been completed. Should future audits occur, this letter can be used to argue that a legitimate expectation exists because SARS has previously audited the area of concern and indicated that it is correctly reported and treated correctly for tax purposes. This will make it impossible to challenge the tax treatment retrospectively in subsequent years, unless facts have been omitted or the legislation has been amended.

 

Should I pay the amount due despite disagreeing with the assessment?

 

As mentioned above, a taxpayer can object to an assessment within 21 days after the assessment has been raised. The taxpayer can request an extension of the period for lodging the objection, if the taxpayer provides reasonable grounds. The taxpayer may object against the SARS decision not to extend the objection period and SARS will have to provide reasons why it disallowed the extension request.

 

SARS must consider a valid objection in the manner and within the period prescribed. SARS can disallow the objection, or a part thereof, with reasons. The taxpayer can request reasons for the disallowance of the objection and can appeal against the objection to a tax board or tax court.

 

Once on appeal, the taxpayer and SARS can try and resolve the dispute in an alternative dispute resolution hearing, although this does not seem to be a successful channel since the presiding officer is not always independent. Proceedings of the appeal are suspended while the alternative dispute resolution process is running. Should the dispute not be resolved, it will be heard by the tax board or Tax Court and the judgments made by these courts can be appealed to the Tax Court or a higher court, respectively.

 

The “pay now, argue later” rule still applies

 

Despite the objection or appeal process being underway, the taxpayer is still liable to pay the tax debt, unless a senior SARS official directs otherwise. In the case of Metcash Trading v CSARS and another (2001 (1) SA 1109 (CC)), the Constitutional Court stated that the “pay now, argue later” rule comprises the following:

 

  • The obligation to pay in light of an assessment is not suspended by an appeal.
  •  The Commissioner may enforce payment of the unpaid tax.

 

The judge has indicated in the obiter dicta that it is important to note that the Commissioner:

 

  • Cannot instantly dismiss the taxpayer’s request to suspend the payment of tax until the appeal has been heard;
  • Must suitably exercise its discretion in terms of the relevant legislation; and
  • Must take into account the facts of the specific case.

 

In a subsequent media release, SARS stated that it will consider the following when they receive a request to suspend the obligation to pay tax and the right of SARS to receive or recover tax (which should be read with section 164(3) of the Tax Administration Act):

 

  • Whether the payment of the amount will result in serious hardship which will not be reversed if the taxpayer will succeed in the appeal;
  • Whether the circumstances of the case give rise to reasonable doubt; and
  • Certainty whether the amount will be paid when the appeal fails.

 

Despite the provisions of the Tax Administration Act, a taxpayer has the right to expect fair, reasonable and lawful conduct from SARS in terms of section 33 of the Constitution and the provisions of the Promotion of Administrative Justice Act.

 

The more informed a taxpayer is about his or her rights and obligations during an audit, the less daunting the audit and post-audit period should be for the taxpayer.


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This article first appeared on January/February 2018 edition of Taxtalk.


 

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