As SARS is facing an ever growing Tax Deficit they are forever looking for more ways to collect more tax from Corporates. One of the ways in which they do this is through the notorious Payroll Audit. This is one of the vehicles that users prefers to use because of the propensity of a payroll to contain errors. Let’s face it, errors/mistakes do occur within the organization’s payrolls, but this could be magnified by the size of the company payroll. One small mistake on several employees can quickly escalate and then leave the company with a large tax exposure. Other instances include inexperienced Payroll Administrators that simply do not know the law which then results in errors for the organization.
A new approach that is currently being used by SARS in this regard is to conduct a Payroll Audit from a financial statement perspective and not to concentrate on specific items that might be incorrect on the system. The trend from such a SARS audit these days are that SARS rather looks at the differences between the Payroll Reconciliation and the Cost of Employment in the Annual Financial Statements of the organization. Although there are many reasons why these costs will not align the onus is still on the organization to make sure it disputes this and provide accurate reasoning as to why items are exempt or simply not taxable. This is a way for SARS to in some cases get around the prescription periods for Audits of more than 5 years and sight the reason of potential fraud for differences that were declared to SARS.
When SARS contacts an organization with the intention of conducting a Payroll Audit adequate notice should be provided by SARS indicating precisely what the scope of the Audit is going to include and that the person within the Organization has a clear understanding of the process and their rights during this process so that the organization will not be intimidated by SARS. It is also very important that all correspondence with SARS is in writing as to ensure accurate record keeping.
The selection of an organization to conduct a Payroll Audit on can simply be a random process or it can be more specific relating to issues or themes which it deems to carry a high risk. The organization does have the right to request reasons why they have been selected accordingly for the Payroll Audit.
As mentioned the Payroll Audit may be looked at from a Financial Statement point of view, but the scope of each Payroll Audit must clearly be identified by SARS and such items may include but are not limited to the following:
- Do they want to verify that all Incomes and Expenses have been taxed correctly?
- Have all Fringe Benefits been applied correctly in the payroll and thus was the correct amount of tax calculated on these Fringe Benefits?
- Are the correct IRP5 codes being used as set out BRS (Business Requirements Specification)?
SARS has the authority to request the relevant information that it needs from the organization in order to conduct the Payroll Audit, but this must be for the purposes of the Payroll Audit. The Organization has the right to request in writing the full relevance of the information that it is requesting and also an adequate timeline in which to do so. Should the timeline initially provided not be sufficient an application for an extension may be submitted. As SARS also receives information from the IRP5’s that are submitted to them in the Interim and Annual EMP501 submissions it may pave the way for them to request additional info from this point of view as well. Examples of this are as follows:
- Do you provide any Allowances or Travel related payments to employees?
- Do your employees enjoy any Fringe Benefits that are paid to them which can lead to further questions on if the organization provides a Medical Aid, Provident or other Fund benefits to employees together with the contributions made to these funds.
SARS may also exercise an option to interview employees, but it should be noted that the employee that is being interviewed should have full knowledge of the details from the payroll and should the person from the organization being interviewed not have the full information or knowledge of the question or information being requested the employee should inform the SARS interviewer immediately as any information provided can be used as evidence later on during the process.
With regards to the timelines that are legally allowed for a Payroll Audit it should be noted that SARS is bound to release an Update of the status of the audit every 90 days after the commencement of the Payroll Audit. The status should include the current scope of the audit, the stage of completion and if any material is outstanding upon which the organization can either object or provide a written response. It should be noted that the 90 day response period is applicable during the process of the Payroll Audit.
Upon completion of the Payroll Audit SARS has 21 days to provide an outcome. The organization in turn also has 21 days in which to respond to the finding or to raise any objections that may arise from the outcomes document. Also take note that the organization has the right to apply for an extension depending on the complexity of the issue raised with SARS.
The best approach would always be to be timeous with any response that is issued by SARS and raise the required response in writing when required. An additional assessment can be raised by SARS if there are reasons why they think the correct amount of PAYE, SDL and UIF have not been paid over to SARS, although reasons for this should be provided by SARS. Although, as mentioned, objections may be raised to SARS within 21 days the assessment amount raised is still owed to SARS. SARS will however consider the facts with regards to the payment of the additional assessment and may at its discretion consider a delay in the payment of the amount or by making use of the facts of the case. Irrespective of this the “pay now, argue later”, rule is still effective and the payment is not suspended because of any current appeal process.
The key to the successful survival of a Payroll Audit, if your organization should be identified for an audit, would be in the absolute accurate processing of the company payroll to ensure complete compliance with all relevant South African laws and regulations that govern payroll. Management should be aware of each potential risk on the payroll so that measures could be put in place to mitigate these potential risks accordingly. There is no escaping a SARS Payroll Audit. Further to this the best approach would also be to have an organizations payroll independently audited and have any potential errors amended/corrected accordingly where possible. And should any error/omission be known to management the best course of action would be to submit a declaration of this via the Voluntary Disclosure Programme before the Payroll starts accordingly.