SARS Modernisation 3.0 – compliance crackdown in the age of AI

In its relentless pursuit of tax compliance, the South African Revenue Service (SARS) has launched a series of initiatives to streamline tax processes through automation enhancements. Specifically, these initiatives identify focus areas to strengthen detection, enforcement and voluntary compliance. As a result, SARS has introduced SARS Modernisation 3.0.

Following SARS’s successful implementation of its segmentation model, it now targets key areas to fill the “Tax Gap”.

These areas include, amongst others:

• High-net-worth individuals;
• Large and international businesses; and
• Businesses in the gig, shared, and social media economy.

SARS now leverages Artificial Intelligence (AI), data science, and system modernisation to transform its operations. Consequently, it has embarked on a three-to-five-year plan to shift to a real-time risk profiling system. Furthermore, this plan includes automating an intelligent tax administration platform under SARS Modernisation 3.0.

AI aiding data-driven compliance insights

SARS achieves compliance success in this age of automation partly through data-driven insights. It derives these insights from both South African and international sources. As a result, these system modernisations enable the revenue authority to detect non-compliance at any level. Moreover, SARS holds the perpetrating taxpayer, and in some instances the tax-aggressive advisor, accountable.

Through automated processing, data-driven insights inform SARS of all transactional records relating to specific taxpayers. In addition, AI eliminates the need for a “fine-tooth comb” to extrapolate these records into strong legal cases for non-compliance. This collaborative approach gives SARS access to a comprehensive dataset. Consequently, it can conduct more robust evaluations of taxpayers’ financial activities. These capabilities sit at the core of SARS Modernisation 3.0.

Although SARS has tried and tested this information-gathering capability, it previously lacked trained manpower to process and prosecute guilty parties effectively. Therefore, the solution lies in building a smart digital tax administration platform embedded in data science and artificial intelligence.

SARS has already applied this AI-driven capacity-bolstering technique across its historic audit processes. It maintains thoroughness and accuracy while generating data-driven insights almost instantaneously. Accordingly, this move reflects a broader trend toward integrating technology into tax administration. Ultimately, it promises to revolutionise how tax authorities monitor and enforce compliance.

SARS’ AI-enhanced audit capabilities are wreaking havoc on taxpayers

It may sound like the prologue to a Terminator movie. However, with the Rise of the Machines, SARS has capitalised on the automation trend. It has enhanced its audit capabilities beyond a “quick count”. As a result, it now operates at proportions previously thought impossible.

Imagine that you have historically filed all your tax returns on time and settled your dues with SARS. Your Compliance Status reflects full compliance. Then, imagine waking up to a Notification of Audit and Request for Relevant Material, “based on risk(s) detected”.

Excerpt from a SARS-issued Notice of Audit on Personal Income Tax, dated March 2024

This scenario has become a shocking reality for many historically compliant taxpayers. SARS’ Audit Team now strongly enforces its zero-tolerance policy on any non-compliance. Moreover, data-driven insights derived from AI support their efforts and ease their workload. For example, SARS processes taxpayer bank statements without warning or consent as part of SARS Modernisation 3.0.

Criminality of non-compliance

Like all strategic movers, SARS has made distinct examples of wealthy individuals, influencers, and large businesses that flout tax laws. Authorities often publicly expose them, and in some cases, courts impose serious jail time. Consequently, the public knows their names and their tax debt numbers.

At a foundational level, you must understand certain basics to stay on the right side of SARS’ War on Non-Compliance in the Age of AI. For instance, many people remain unaware that section 234 of the Tax Administration Act provides a laundry list of actions and inactions that constitute criminal offences.

This list includes acts that stem from an absence of tax literacy, such as failing to retain specific documentary items or issuing an incomplete document to SARS. Conversely, failure to perform certain acts may also result in criminal charges. For example, failing to submit a tax return or notify SARS of a change in registered particulars can trigger prosecution.

Enhancing voluntary compliance through technology and trust

If you, or in the case of finance professionals, your clients, find yourselves facing non-compliance allegations, you must respond to SARS timeously and submit all correct supporting documentation. However, if you fail at this first hurdle and make an incorrect disclosure, the consequences escalate quickly. You may then face Additional Assessments or receive Final Demands for overdue tax debts.

Understatement Penalties often deliver the final blow. Notably, they can reach a bank-breaking 200% of the capital taxes due.

As a rule of thumb, a strong multi-faceted tax, legal, and financial team, the “A-Team”, should holistically address all correspondence received from SARS. In cases of non-compliance, legal professional privilege becomes essential. This protection proves especially important when SARS suspects or has already detected current or historic non-compliance or “risk(s)”.

This approach not only safeguards you or your clients from becoming prisoners of war. It also ensures that professionals implement the correct legal stopper in time. Consequently, this prevents SARS from pursuing aggressive collection measures. As compliance specialists, the right A-Team provides appropriate advice and identifies the most suitable solution to secure full tax compliance.