The South African Revenue Service (SARS) has been given significant powers to perform tax audits on returns submitted by taxpayers. This article deals with the rights of the taxpayer whose tax return has been selected for audit by SARS.

The South African tax system, just like many other tax systems around the globe, substantially operates on self-reporting or self-assessments. Taxpayers are required in terms of the law to file their returns in the form and manner prescribed by the Tax Act . The self-assessment system is susceptible to abuse by some taxpayers as it relies heavily on their honesty and/or their good or bona fide behaviors. The South African Revenue Service (SARS) has been given significant powers to perform tax audits on returns submitted by taxpayers. In the performance of the tax audits, there are obligations that SARS must comply with as set out in the Tax Administration Act (TAA). Understanding your right as a taxpayer is critically important in ensuring that you do not pay no more and/or no less tax than is required by the law. This article deals with the rights of the taxpayer whose tax return has been selected for audit by SARS.

The tax audits are nothing new in the tax administrations. The tax audits have been known since biblical era and are generally performed to close or narrow the tax gap, being the differences between the tax owed and the tax paid voluntarily by taxpayers. In terms of section 40 of the TAA, SARS may select a person for inspection, verification, or audit on the basis of any consideration relevant for the proper administration of a Tax Act, including on a random or a risk assessment basis. The TAA does not provide definition of the terms "audit" and "verification". However, SARS provides the following definitions in its website.

Verification is a face-value verification of the information declared by the taxpayer on the declaration or in a return. This involves a comparison of this information against third party data gathered by SARS from various sources, the financial and accounting records and/or other supporting documents provided by taxpayers to ensure that the declaration/return is a fair and accurate representation of the taxpayer's tax position.

Audit is an examination of the financial and accounting records and/or the supporting documents of the taxpayer to determine whether the taxpayer has correctly declared his/her tax position to SARS.

The primary role of tax audits to detect and deter non[1]compliance with tax legislation. Tax audits must be performed by SARS within the prescripts of the law. We set out below SARS obligations when executing tax audits as set out in the TAA or taxpayers' rights when selected and subjected to tax audits:

Right to be informed of the commencement of an audit

According to section 42(1) of the TAA, a SARS official involved in or responsible for an audit must provide the taxpayer with a notice of commencement of an audit. The notice of commencement of audit must be provided in the form and manner as may be prescribed by the Commissioner for SARS by public notice. At the time of writing this article, the Commissioner had not issued a public notice in this regard. In the absence of the public notice, SARS official has to provide the taxpayer with a notice which contain such information as the scope of the audit (tax type and periods), timing of the commencement of the audit, how the taxpayer was selected for audit etc.

However, SARS is not obliged to notify a taxpayer of the audit if SARS official has a reasonable belief that providing the notice would impede or prejudice the purpose, progress, or outcome of the audit (section 42(5). Where the audit is conducted without a notice of commencement being provided to the taxpayer, the onus is on SARS to prove that providing such notice would impede or prejudice the audit. In the event of failure by SARS to discharge this onus, a taxpayer may have reasonable ground to dispute any assessment resulting from the audit irrespective of the merit of the case.

Right to receive progress reports

In terms of section 42(1) the taxpayer must be provided with a report indicating the stage of completion of the audit. According to the Public Notice issued by the Commissioner for SARS, progress reports must be issued at intervals of 90 calendar days from the date of the notification of the audit until the conclusion of the audit.

Right of a taxpayer to receive notice of audit findings Where SARS has identified adjustments of a material nature, section 42(2)(b) places the obligation on it to provide the taxpayer with a document (generally referred to as a "letter of audit findings") containing the outcome of the audit including the grounds for the proposed assessment. A letter of audit findings is required only if SARS intends or proposes to make adjustment of a material nature. However, SARS does not have an obligation to provide a letter of audit findings if a senior SARS official has reasonable belief that providing such document would impede or prejudice the purpose, progress, or outcome of the audit.

Taxpayer's right to provide a response to audit findings

In terms of section 42(3) of the TAA, a taxpayer who has been provided with a letter of findings must be afforded an opportunity to respond to such findings prior to additional assessments being raised by SARS. The taxpayer must provide a response within 21 days from the date of the letter of findings.

Right to Confidentiality

There is general obligation on current or former SARS officials to preserve the secrecy of taxpayer information obtained during the execution of the audit (Section 69). SARS official (current or former) may not disclose taxpayer information to a person who is not a SARS official. Consequently, a taxpayer has a right to have his or her information treated with secrecy or confidentiality and not to be disclosed to any person who is not a SARS official.

As aforestated, the TAA contains provisions which impose obligations on SARS when conducting tax audits on taxpayers' returns. Failure by SARS to comply with these obligations may render any additional assessments arising from the audit invalid and taxpayer may have grounds to challenge the assessment without dealing with the merit thereof. It therefore imperative for taxpayers to know and understand their rights when selected for or subjected to tax audits by SARS. It would also be advisable for taxpayers to engage their tax advisors upon receipt of the notice of the commencement of the audit from SARS.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.