S.Africa: Verifications vs Audits by SARS – is there a difference?

A transcript of a Podcast by Prof. Dr. Daniel N. Erasmus

Today I have been asked to talk to you about the question of verification versus audits by the Commissioner in terms of the Tax Administrative Act (TAA) for those of you obviously who are taxpayers, and from time to time, might receive notification from SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... to conduct what they call a “verification” or an “audit”.

Now what’s quite interesting is the powers have to be given to SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... by virtue of  legislation such as the Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... Act (TAA).  The Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... Act (TAA), Section 40  specifically states – and I am going to read off my computer here “ SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... may select a person for inspection, verification or audit on the basis of any consideration relevant  for the proper administration of the Tax Act , including on a random or on a risk assessment basis.”  Then it goes on to say  that in certain instances such as  a field audit – they must have written notification and written powers delegated to them by the Commissioner, which is dealt with in Section 41. And the important section, is Section 42 – keeping the taxpayer informed. Now here SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... seems to draw a distinction between a verification and an audit.

And so, let’s just quickly look at what is the difference.

From a practical point of view, the way we look at it, is that a verification is when SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... sends notice either to your tax advisorA Tax Advisor is a professional who provides specialised advice to individuals, businesses, and organisations on various tax-related matters. They play a crucial role in guiding clients through complex tax laws and ensuring compliance with the latest regulations while identifying opportunities for tax efficiency. Tax Advisors must stay updated on legislative changes and understand the impact of international tax treaties,... or yourself, questioning a particular item that might have  appeared on your tax return  and then they’re wanting to verify whether or not that particular number is correct and they may for instance ask you for certain vouchers,  invoices or receipts, or whatever the case may be. Now, if they come back and accept everything as it is, and there is no further questioning, that verification is simply what we understand it to be  – a verification.

And that is to verify against information something that exists. And they seem to think under those circumstances, they don’t have to give you this Section 42 notification to keep you informed.  And that seems to make practical sense because if there is going to be no adjustment to your tax affairs, or to your tax returnA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations... or to the tax assessmentA tax assessment is a formal determination made by a tax authority to calculate the amount of tax an individual or entity owes. It is a comprehensive evaluation based on financial records, declared income, expenses, deductions, and any applicable tax laws or regulations. Tax assessments may arise from routine self-assessments by taxpayers, or they may be conducted by revenue authorities... that is been raised against you, then there is no need to correspond any further.

But then, there is an issue of audits. And so here they attempt to draw the distinction that if the verification has been to simply to ask you for information which they verified and they see something is then wrong and/or they interpret something as being wrong and they adjust your assessment, they will then simply say well, we’re entitled to do that without issuing you what we call out of the Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is..., a “letter of findings”.

And a letter of findings is something which you are supposed to receive at the conclusion of an audit explaining to you, precisely which facts SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... are relying upon, which law they’re applying and why they believe what you have done is incorrect, so you’re given an opportunity to respond to that.  They cannot just simply issue an assessment.

So,  what they are doing, if it’s a verification audit, where they now take the next step and make an adjustment to your assessment, they’re saying ‘because it’s a mere verification, we’re not in a position where we have to grant you this letter of findings’ and what they’re trying to do there is to say is that, and I’m going to read this to you, that “the audit identified potential adjustments of a material nature, SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... must within 21 business days or a further period that may be required based on the complexities of the audit, provide the taxpayer with a document containing the outcomes of the audit including the grounds of the proposed assessment.’ SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... is saying, ‘if we term the document or notice we send you as a verification, that’s not an audit and therefore it doesn’t  matter what we do, we don’t have to send you this notice.’ Now, that doesn’t make sense. And that’s also not fair.

I am holding this big book here. It’s the Compact Edition of the Oxford English Dictionary which contains a tremendous amount of definitions for each word. And one actually, literally needs a microscope so you going to please excuse me as I now look at extracts from this particular dictionary and to tell you what an audit means versus a verification.

What is the definition of an “audit”?

“It is the official examination of accounts with verification by reference to witnesses and vouchers.”

That sounds to me like a verification or is it an audit? Well it really does seem to cover both.

Then let’s take a look at what “verification” means.

Verification is actually a lot more detailed.  The word verification means “the action of demonstrating or  proving to be true or legitimate by means of evidence or testimony formal assertion of the truth, demonstration of truth or correction by facts or circumstances. The action of establishing or testing the truth or correctness of a fact theory statement by means of special investigation or comparison of data.”

So, the two words sound very similar to me, In fact, verification seems to be lot more detailed in the definition of verification than in the definition of an audit.

So, really whether SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... terms it as a verification or as an audit, in my view it is quite frankly and most likely, within the ambit of audit, if one considers these definitions that come out of the Oxford dictionary.  And from that that point of view, they are duty-bound to issue you with a letter of findings.

If you find yourself in a position where they have now gone and amended your assessment without issuing a letter of findings, then you would definitely fall under the policy which is issued by Greatsoft (Greatsoft Financial Services) and that policy will pay for any legal representation and accounting representation that you need and require, in order to reverse the unlawful and invalid conduct of SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... in changing your assessment without issuing a letter of findings first.

So, there is really very little difference between the meaning of verification and audit.

As I said to you earlier, if it’s a mere verification and they do nothing, well nothing else needs to be done. By it is termed a verification and they change your assessment without issuing a letter of findings, then you would qualify for the representation allowance under the tax riskTax Risk refers to the uncertainty surrounding the potential financial or reputational impact of tax-related decisions and events on a business or individual. This risk arises due to various factors, such as complex tax regulations, inconsistent tax authority interpretations, or evolving international tax laws. Effective tax risk management involves identifying, assessing, and mitigating potential tax-related threats to prevent financial penalties,... insurance policy will provide to you.