Posted in sections, this is my Doctoral Thesis on taxpayers rights when audited by the tax authorities in South Africa – equally applicable to many English-based law systems in Africa and abroad (eg. India). This will be of particular use to any tax practitioners doing work in Africa and in other English-based legal systems around the world.

Analysis Of Challenging The Commissioner’s Discretionary Powers In Auditing Taxpayers under The Constitution Of The Republic of South Africa

CHAPTER 3 – LIMITATIONS TO INVOKING SECTIONS 74A AND 74B OF THE INCOME TAX ACT

3.2 THE SARS INTERNAL AUDIT MANUAL

As a part of the justifiable and accountable conduct of SARS that is lawful, reasonable and procedurally fair in making decisions in terms of ss 74A and 74B, it must follow its self-imposed practices impartially, including any published and internal guidelines, that ensures practical compliance with its constitutional obligations,2 when its conduct ‘materially and adversely affect’3 the rights and legitimate expectations of taxpayers.

Internal guidelines are created by management of SARS to set out guidance that assessors should follow in order to control the efficiency and effectiveness of these SARS officials as mandated by s 4(2) of the SARS Act. It also ensures careful direction to a broad group of officials on the procedures they should be following in complying with the scope, purport and spirit of the Constitution, as stated in the Constitutional Court case of Dawood and another v Minister of Home Affairs and others; Shalabi and another v Minister of Home Affairs and others; Thomas and another v Minister of Home Affairs and others4: that in relation to broad, unguided discretionary powers (such as those prevalent in ss 74A and 74B) guidelines should be provided and must be adhered to, ensuring compliance with duties imposed by the Constitution.

The SARS Internal Audit Manual5 sets the expected conduct of SARS in line with the constitutional obligations imposed on them. The creation of the expected conduct of SARS standards creates a self-imposed limitation that SARS should not deviate from, except with sufficient reason. If SARS applies these standards regularly in the exercise of its discretion in terms of ss 74A and 74B, then SARS will violate the principles of impartiality, equality, fairness and accountability if it does not apply them to all taxpayers undergoing audits or inquiries.

To carry this analysis further it is necessary to quote key extracts from the guidelines contained in the SARS Internal Audit Manual, as the manual is not available to the public, despite numerous attempts to have SARS make it available:6

In order to carry out his tasks properly the auditor has to make professionally and technically sound decisions on the nature and scope of the audit. This requires insight into the knowledge of the business process of the taxpayer as well as those of the industry or target group of which it is part.7
…
The risk profiling team will manually select cases to be audited by screening the tax returns in order to determine the level of risk per case, and to establish which cases warrant an audit (desk or field); selection will be done under the guidance and ambit of the Manual Risk document.8

The Audit Assignment

The audit plan includes the schedule and set up of audits to be carried out within a certain time period. The audit plan translates itself into the audit assignment, which indicates which taxpayers and which elements of the tax return(s) need to be audited. This is important for each auditor, as it sets out the nature and scope of the audit.

The audit assignment is thus the link between the audit plan and the auditing process.9

2. Stage 1: AUDIT PLANNING

… The team leader will have to prioritise each case assigned. All decisions taken at this stage of the audit process and all  information and considerations on which decisions are based, are recorded in the audit file.10

Pre-planning

Not as critical in our environment, although the following two components of pre-planning should still be relevant:

• An engagement letter informing the taxpayer of the audit, i.e. notice of the intention to audit, when, purpose, approximate duration, information required and other general aspects.
• Allocation of staff in respect of the specific engagement.

Collecting Information

Prior to the audit, information will have to be collected on the taxpayer to be audited, as this will provide inside information into the entity.

• Information on the taxpayer himself. Obtained from the existing tax files of the taxpayer. …
• Information from other sources (third parties) …
• Information on the business processes, administrative organisation and the internal control of the entity. …
• Information from minutes of meetings e.g. board of …
• Information from the file of the tax consultant and/or accountant/ external auditor of the taxpayer. …

The auditor should restrict the initial information collected to the potential issues of the relevant case, which will be of value to the audit of the risk areas identified.

Carrying out the preliminary analytical review

The purpose of this exercise is not to produce volumes of interesting, but ultimately useless information.

… The preliminary review may require that the auditor researches the tax laws and court cases that are relevant to particular issues to be examined in the audit of the entity. Notes on the research are incorporated into the audit working papers.

Risk analysis based on the tax return

In determining which activities will be carried out to achieve the audit objectives, the team leader continually considers the relationship between the cost and the benefits of the audit …

3. Stage 2: THE IMPLEMENTATION OF THE AUDIT PROGRAMME …

The general rule is as follows:

• Where the auditor finds no or immaterial mistakes or errors, the audit in that particular area should be stopped.
• Where many material mistakes or errors are detected, the audit should be expanded in that particular area.
• If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated.

The auditor must consider whether advice or support from a well informed
colleague is necessary…

All decisions at this stage of the auditing process, as well as the information and considerations on which they are based, are recorded in the audit file…

4. Stage 3: CONCLUSION

In this stage of the auditing process the auditor in charge reviews and summarises the findings of the audit and forms a conclusion based on these findings.

During the discussion with the taxpayer the auditor informs him of the conclusions reached on the tax return(s) and explains the decision. If the taxpayer does not agree with the judgement, the auditor listens to the reasons and considers whether these reasons may call for an adjustment of the conclusion. If it is decided that no adjustment is required, bearing in mind the outcome of previous consultation with colleagues, the auditor discusses the taxpayer’s reason and arguments with the audit manager.

Where compromises are reached, they are recorded in the file and included in the report. SARS and the taxpayer should sign the compromises.

After the concluding discussions with the taxpayer and the audit manager, the position of SARS is determined. There are two possibilities:

• No further action is required; or
• The results of the audit necessitate further action, which usually involves adjustment of the assessments as well as the levying of interest, penalties and additional tax.

In some instances this is not sufficient and it is necessary to extend the audit to the criminal domain. This calls for a change in the nature of the audit. The timely recognition of such a change is an essential element of the auditing process. Refer to part 7 of the audit manual.

The audit report is completed and forwarded to the team leader who reviews,  monitors and controls the completion and quality of the audits being performed.

The team leader communicates the relevant findings to the research and analysis team and the risk evaluation committee. (Emphasis supplied)

The significance of the SARS Internal Audit Manual is that it sets out internal SARS guidelines that SARS must follow to conduct a lawful, reasonable and procedurally fair inquiry and audit into the tax affairs of a taxpayer, in terms of ss 1(c), 33, 41(1) and 195(1) read with s 4(2) of the SARS Act. These guidelines ensure SARS are acting within the boundaries of the rule of law, where they are: acting with a high degree of professional ethics, in an efficient, effective, impartial, fair, unbiased, transparent, accountable and coherent manner, and will not assume powers or functions except those conferred on them in terms of the Constitution. Any transgression from these guidelines would be an indicator that the SARS officials are violating these principles. Reference will be made in this thesis infra to relevant portions of the SARS Internal Audit Manual, read together with the publically published Code of Conduct.11 Furthermore, its provisions are in line with the international benchmark rules of the International Ethics Standards Board for Accountants and its Code of Ethics for Professional Accountants.12

Next:  3.3 LAWFULNESS

In accordance with Circular 230 Disclosure

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Footnotes:

2 Sections 1(c), 33, 41(1) and 195(1) (a) – (g) of the Constitution analysed in this thesis: rule of law, just administrative action, high standard of professional ethics, impartiality, fairness, unbiased, accountable and transparent conduct.
3Section 3 of PAJA; Key elements of PAJA are ‘borrowed’ from German law and Germanic administrative law will have a bearing on interpretations given to administrative law concepts such as ‘materially and adversely affect’; Mahendras P Singh German Administrative Law in Common Law Amazon Kindle Edition Location 2378 (last accessed 31 March 2013).
4 2000 (3) SA 936 (CC).
5 An unofficial copy was obtained from SARS for the purposes of this thesis: SARS Internal Audit Manual – Part 4: The Audit Process; In Scherer v Kelley (1978) 584 F.2d 170 (quoted from the headnote): where the United States of America Freedom of Information Act §552(a)(2)(C) requires agencies to make public administrative staff manuals and instructions to staff that affect members of the public; See also Williams R C et al Silke on Tax Administration (April 2009) Lexis Nexis at para 8.17 generally; Minister for Provincial and Local Government of the RSA v Unrecognised Traditional Leaders of the Limpopo Province, Sekhukhuneland [2005] 1 All SA 559 (SCA).
6 The writer corresponded with SARS requesting an official copy of the SARS Internal Audit Manual, but was advised it was not available due to the fact that it was still in draft form. This is contrary to information obtained from the SARS Germiston office that the manual was being used as a field audit manual  for taxpayer inquiries and audits. The attitude of SARS is also contrary to the decision of Minister for Provincial and Local Government of the RSA v Unrecognised Traditional Leaders of the Limpopo Province, Sekhukhuneland [2005] 1 All SA 559 (SCA) where the appeal court found in favour of the public member seeking a report upholding the right of access to information held by
the State, read with sections 36 (the limitation clause) and 39(2) (obliging every court to promote “the spirit, purport and objects of the Bill of Rights of the Constitution”);Bato Star Fishing (Pty) Ltd v Minister of Environmental Affairs 2004 (7) BCLR 687 (CC) followed; In Earthlife Africa (Cape Town Branch) v Eskom Holdings Ltd [2006] 2 All SA 632 (W) the court referred to the United States decision of Vaughn v Rosen (1974) 484 F.2d 820 where the Vaughn
index originates, describing each exempt record with enough detail for the court to determine whether or not the record is subject to exemption from ‘transparency’ and disclosure, where a copy is handed to the opponent to enable them to challenge the exemption claims. This procedure is in line with ss 195(1) and 32 of the Constitution of the Republic of South Africa 108 of 1996, read with the Promotion of Access to Information Act 2 of 2000.
7 SARS Internal Audit Manual – Part 4: The Audit Process, at page 2.
8 Ibid. at page 4.
9 Ibid. at page 5.
10 Ibid. at page 6.
11 referred to by SARS as the ‘SARS Service Charter and Standards (under review)’; http://sars.gov.za/home.asp?pid=54086 (last accessed 31 March 2013).
12 Handbook of the Code of Ethics for Professional Accountants, 2012 edition, International Federation of Accountants (IFAC), www.ethicsboard.org, at pages 17-24; See section 4.2.3: High Standards of Professional Ethics infra for a summary of the relevant rules.