Every small business owner will feel a sense of relief once their tax returns are submitted to SARS. That relief can quickly turn to distress once you are notified by SARS that your business is going to be audited. If you have never experienced a tax audit before, the process can feel overwhelming and concerning. We cover every aspect of business tax auditing to prepare you for a potential audit. SureBooks is a small business accountant that will ensure your small business is tax compliant and offer you reliable assistance if your business is selected for a tax audit.
What is a Tax Audit?
A SARS tax audit is an extensive examination of an individual’s or business’s financial and accounting records as well as any supporting documentation. The tax audit is aimed at determining whether the taxpayer has declared either personal or business tax correctly and in accordance with relevant tax legislation. From government officials to small business owners to individuals, any South African taxpayer can be selected by SARS for a tax audit.
A SARS tax audit is not to be confused with a SARS tax verification. A tax verification is the comparison of the declared information on the tax return and supporting documents. A tax verification is performed by SARS to ensure that the tax return accurately represents the position of the taxpayer. If SARS requests a tax verification from your small business and the verification process is completed, it is important to note that your small business can still be selected for a tax audit to ensure compliance.
Why is My Business Being Tax Audited?
There are two main reasons why a small business is selected by SARS for a tax audit. The first cause for a tax audit is a result of a random selection process. SARS performs random tax audits on both businesses and individuals to ensure that there is no opportunity for non-compliance with tax in South Africa.
The second and most likely reason that your small business has been selected by SARS for a tax audit is due to your business being determined as high risk. A high-risk small business is typically a business that has not filed their tax return, has filed an incorrect tax return, or there are high risk aspects on their tax return.
What Happens When My Business is Tax Audited?
South African businesses can expect an increased likelihood of their business being tax audited by SARS. This is a result of SARS receiving an additional R3 billion to modernise and upgrade technology and infrastructure, with a portion of this allocated amount going towards the expansion of the SARS audit and investigation skills. The increased data-gathering abilities and skilled personnel is aimed at reducing non-compliance to tax in South Africa. If your small business is selected for a tax audit, know what to expect with our outline of the SARS tax audit process.
1) Receive Notification of Audit:
If your small business has been selected for a tax audit, you will receive a SARS Notification of Audit. A Notification of Audit will include the specific auditor that will be handling your audit, the relevant documents that you need to submit to SARS, and the specific timeframe you are allocated to provide the required documentation. SARS typically allocates 21 business days as the time allowance for you to provide the relevant documents.
You must acknowledge the Notification of Audit immediately. Once a Notification of Audit has been formally issued, the audit is in commence, and not responding immediately will only delay the auditing process. SARS recommends that you directly contact the auditor that has been allocated to your small business tax audit.
2) Provide Documentation:
The documentation that is required by SARS will depend on the scope of your tax audit for your small business. The relevant documentation that is requested by SARS for your tax audit needs to be provided promptly. SARS can acquire any relevant documents from a third party, therefore, you must provide them with the required documents that are accurate.
SARS offers many convenient ways for you to easily upload the required documents for your business tax audit. You can upload the documents via eFiling or you can deliver the documents to a SARS branch. Alternatively, you can arrange with your specific auditor to collect the documents from your work premise during a field audit, upon which you will need to be issued an Authorisation Letter from your SARS auditor for the field audit.
It is important to note that during your tax audit, your assigned SARS auditor can request additional documents. These documents will also need to be provided promptly and correctly. Not submitting the additional documents can lead to an assessment of your audit.
3) Audit Outcome:
A SARS audit can take between 30 business days to a year to complete. The timeframe your small business tax audit takes will depend on the scope of the audit and your cooperation with your assigned auditor. Throughout the audit process, you will receive progress reports issued at 90-day intervals from your auditor to keep you informed. If you are owed a tax refund, you will not be paid your tax refund until the audit has been completed.
Once the audit is complete, you will receive a Finalisation of Audit Letter. If no findings were made and your business has been tax compliant, your tax audit process is complete and any refunds due to you will be paid. If your SARS auditor has confirmed an incorrect tax position, an additional assessment will commence.
How Can I Prevent Tax Auditing?
Once you have been through a tax audit, you are most likely not going to want to experience the auditing process again. While you cannot prevent a random tax audit, there are steps that you can take as a business owner to ensure that your small business is at low risk of being selected for a tax audit. We highlight a few tips to assist in preventing your business from being selected for a tax audit.
1) Accurate Books and Records:
The best way to reduce your risk of a tax audit is to have accurate books and records of all your income and expenses. If your books are accurate, it will be easier for you to complete your tax return and your tax return will be an accurate portrayal of the financial situation of your business. Keeping accurate books and records is also helpful if you are randomly selected for a tax audit, as you will be able to readily provide supporting documents that will match your business’s books.
2) Submit Tax Return Correctly:
Submitting your tax return correctly means ensuring that your tax return is accurately filled in. This means that are no mistakes in your provided business information or income and expense amounts. A correct tax return that is filed on time should ensure there is no reason for SARS to be concerned about your business tax compliance.
3) Avoid Excessive Deductions:
Your tax deductions need to be in line with the relevant expenses for your business. Excessive deductions for items such as entertainment, fuel, travel, or donations will warrant SARS to perform a tax audit on your business. When listing your expenses that will go towards your tax deductions, you need to be specific and have all relevant supporting documents readily available.
4) Minimise Independent Contractors:
As a small business, it can make financial sense to outsource work to independent contractors. If your listed ratio of independent contractors is greater than your amount of employees, then SARS may be inclined to perform a tax audit. It may appear that you are trying to avoid payroll PAYE to reduce your tax by hiring more independent contractors than full-time employees.
5) Have a Legitimate Home Office:
Many small businesses operate from home to save expenses on rent and SARS allows you to incorporate your home office as an expense towards your tax deductions. Due to the increase in people listing a home office as an expense, this is becoming a reason for SARS to perform a tax audit on a business to ensure that they do have a legitimate home office space. A table pushed into the corner of your lounge does not suffice for a home office deduction as it needs to be a separate room used exclusively for business-related purposes.
6) Avoid Reporting a Loss Every Year:
Reporting a loss can incline SARS to perform a tax audit on your business. If your small business is continuously operating at a loss, your business may appear to be more of a hobby than a legitimate business, which will then affect what business expenses you are allowed to deduct from your business taxes. If possible, reduce your listed expenses to avoid reporting a loss and risking being tax audited.
7) Hire a Professional Small Business Accountant:
The best way to prevent your small business from being tax audited is to have a reliable and professional small business accountant handling your business finances. A small business accountant will keep your books accurate, store all relevant documentation, and advise you on deductions that are aligned with tax legislation. Your small business accountant will then also file your tax return that is on time and accurate. Your small business accountant will also be able to provide you with advice that is relevant to your business to ensure that you are remaining tax compliant and still growing your bottom line.
SureBooks Small Business Accountant:
SureBooks is a small business accountant that will ensure your business is tax compliant. There is no need to worry about inaccurate books, lost documentation, or incorrect tax return filing with our small business accountant services. From accounting to payroll, we are the small business accountant that will keep your small business in line with tax regulations.
If your small business is selected at random for a tax audit, there is no need to worry with us as your small business accountant. We will assist you with providing the accurate documents in the correct formatting to your SARS auditor. From keeping your books accurate to ensuring that your payroll is handled to assisting during a SARS tax audit, SureBooks is the small business accountant that will provide you with peace of mind with our financial managerial efficiency.
About SureBooks:
SureBooks is a small business accountant that offers reliable and affordable accounting and payroll services. The SureBooks team is comprised of experienced and qualified accountants that will be able to sufficiently handle your business’s books, no matter your industry or current financial health. We handle financial management so that you can get back to running your successful small business.
SureBooks is the small business accountant you can trust to keep your business tax compliant and to provide you reliable assistance during a tax audit.
