Question

John, an old friend of Eddie, who is also a registered chartered accountant, has requested a tax opinion from Eddie’s Inc. John has been selected by the South African Revenue Service (SARS) for an audit on his assessment for 2019. John prepares and completes his own annual income tax return (ITR12). John identifies investment opportunities and invests large sums of money accordingly. Every year John works through his bank statements to identify the various entries and transaction codes for purposes of completing his tax return. In completing his 2019 ITR12, John decided to omit a certain amount of income reflected on the one bank statement. John was not familiar with the particular transaction code reflected against the entry, but he ran out of time and decided to omit the amount without making any enquiries as to the origin and nature of the amount. Considering the upcoming SARS audit, John is concerned that the omitted amount is taxable and that he understated his normal tax liability for the 2019 year of assessment. John will give his full co-operation during the audit, but he does not want to act in advance and alert SARS to the omitted amount. He has never dealt with an issue like this in the past.

John wants to know if he will be penalised and if so, what the penalty implications would be if SARS identifies the amount as being taxable. In the event of this happening, John wants to submit an argument to SARS that he completed his return with reasonable care and that he, at the time of preparing his tax return, decided to omit the amount from his tax return as a result of his lack of knowledge and experience. John, however, admitted to Eddie’s Inc. that he intentionally decided not to investigate the origin of the amount to determine its nature and willingly opted to rather omit the amount from his tax return.

John is in a taxpaying position and is taxed at the marginal tax rate of 45%. He has no refunds owing to him by SARS and no assessed loss brought forward from a prior year of assessment.

Question

Eddie’s Inc. has been requested to provide a tax opinion to John to advise if SARS will impose a penalty if it is found that the omitted amount is taxable and, if penalised, what the amount of the penalty would be if it is assumed that the understated tax does not constitute a ‘substantial understatement’. Furthermore, John wants to know if it would make any difference to the imposition of a penalty by SARS if he were to notify SARS of this potential additional tax liability prior to the upcoming audit.

Respond to all John’s queries by providing a tax opinion. Support your opinion with references to the relevant provisions of the Tax Administration Act, 2011 (Act 28 of 2011), as amended.

Answer 1

South african revenue service audit (SARS)- it is the examination of financial and accounting records and supporting documents of a taxpayer to determine whether the taxpayer has correctly declared his taxable income in his or her return.It is basically an inspection regarding whther the taxpayer complies with the relevant tax provisions or laws.
Tax payer may also be selected for audit on risk basis or on random basis.
Under SARS audit a taxpayer has to submit the requirements with in 21 business days to the relevant auditor for the purpose of audit
In the given case john is selected for SARS audit for his assesment for 2019 and he himself prepares and files his tax return for past few years and this year he missed some taxable transaction due to lack of knowledge and experience which makes his taxble income understated and seeks for help regarding penalty provions.
As per the provision of Tax Administration Act 2011 SARS may impose penalty of percentage equal to unpaid tax amount. this percentage is not specifically prescribed it may vary with the nature of the understaed transaction.
The Following table shows the percentage of tax which is variable at discretio of authorities

Reason of understated tax	Percentage of penalty
Reasonable care not taken (standard )	50%
If repeated negligence or misbehaviour exists	75%
if voluntary Disclosed after notification of audit	25%
if voluntary Disclosed before notification of audit	0%

TAA make provision of volutary disclosure program (VDP) which appreciates taxpayes for volutary disclosure of misstatement of non compliance of tax provisions , which may lead to decrease in percentage of penalty.

Hence it is advisable to john that penalty of 50% may be imposed on john and may extend to 75% but if he discloses the same to authorities before audit then he will be reliefed from some percentage but this percentage will not reduce to 0% as notification for audi is already been issued by SARS