Are SARS lifestyle audits the answer to corruption?

By Tax Consulting SA

The 2021 Tax Indaba commenced on 20 September 2021 and the first day of the conference saw an enthralling panel discussion chaired by Jerry Botha, Managing Partner of Tax Consulting South Africa on lifestyle audits. The panel, which included former Acting SARS Commissioner Mark Kingon and CEO of the South African Institute of Tax Practitioners, Keith Engel, shared great insight into this audit strategy.

As we know, these audits are aimed at measuring a taxpayer’s lifestyle to see if it accords with the income disclosed to the taxman. The question is if SARS can fulfil its promise of more lifestyle audits and if this initiative can serve the broader purpose of tackling corruption in South Africa?

Does SARS have the capacity to conduct lifestyle audits?

The truth is that SARS has more information at their disposal than ever before. SARS receives information from an array of third parties, which extends beyond our borders. Information is shared from over 87 countries across the globe in terms of the Common Reporting Standard, in addition to other international agreements that allow for the exchange of information. Mr Kingon also mentioned that they have access to registers of the owners of aircraft and yachts, which supplements other analogous sources such as the deeds registry. SARS also procures the details of foreign investments and credit card transactions provided by SARB, not to mention the insights that can be gleaned from social media.

A valid question raised by Mr Botha, however, was if SARS can put all of this information to good use? In response, Mr Kingon noted SARS’ massive recruitment drive launched earlier this year, which includes the search for a Chief Data Scientist, who will ensure the information does not end up in File 13. He also confirmed there is an initiative to recruit veteran forensic auditors who have the skills to interrogate the data, which is a laudable step for SARS. The results will follow if SARS leaves the information in the right hands.

Efficacy of lifestyle audits

These audits arguably serve two purposes. Primarily they are directed towards detecting non-compliance, but they also serve a deterrence function. A question on the latter was also posed to Mr Kingon, in that there may be a handful of recent examples of successful prosecution off the back of lifestyle audits, but there is hardly a surge in cases in the public domain that prove this to be a bountiful exercise.

Mr Kingon noted that there are several reasons for this perception. First of all, these cases take time to conclude, and SARS will not air their success until the case is finalised. Then, in many cases, the matter is brought to resolution before the taxpayer is convicted. In these cases, SARS may decide that it is in the best interest of the tax system and state resources to settle with the taxpayer to speedily collect the taxes and penalties, rather than to wait for protracted criminal cases to conclude. Further to that, the fact that a conviction emanated from a lifestyle audit will not necessarily be disclosed to the public.

In other words, the perceived lack of success is misplaced. In fact, Mr Kingon confirmed that SARS has handed over 500 cases to the NPA for prosecution, which includes cases identified from the ongoing Zondo Commission. Mr Botha reiterated the hope that some of these cases will result in some high-profile convictions, as the deterrence factor is equally important. Taxpayers need to see and fear the consequences of lifestyle audits.

Can lifestyle audits be used to fight corruption?

Mr Kingon answered this question with an unwavering yes. Foremost, for SARS, the objective is to detect and collect undisclosed income. But tax evasion is a natural by-product of corruption because those who steal state funds will hardly declare their loot to SARS. As an added benefit, investigating the tax element of the crime as point of departure lays the groundwork to secure convictions on more serious offences, such as fraud and corruption – the so called “Al Capone” strategy.

In short, lifestyle audits can become an indispensable tool in the fight against corruption. But Mr Kingon reminded us that SARS must adhere to its governance framework in selecting taxpayers for audit. SARS cannot be seen to enforce selectively, as this will simply erode taxpayer morality further. To repeat what Mr Kingon said, SARS must reek of integrity, even when it comes to delinquent taxpayers.

Will SARS fulfil its promise of lifestyle audits?

Mr Kingon asserted SARS’ commitment to this initiative and those in doubt should perhaps look at what has been happening at SARS over the last two years. Seemingly, there is a scarcity of concrete examples of successful lifestyle audits in the public domain, but this is not necessarily reflective of the reality at SARS. More importantly, SARS is in the process of marrying all the key pieces to this puzzle; in due time it will have a fully functional system that may make it very difficult for tax dodgers. Detractors who wait for more proof may do so at their peril.  

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