SARS is ramping up audits using AI and third-party data, often without prior warning, leading to steep penalties of up to 200% for unexplained income or non-compliance.

Jashwin Baijoo, Associate Director and Head of Strategic Engagement & Compliance at Tax Consulting SA, explained that SARS, with a R535.9 billion debt book, is looking for any means to expedite seamless collections.

To do this, SARS can leverage Artificial Intelligence and data-driven insights from third-party information, including processing taxpayer bank statements without prior warning or consent.

This empowers the revenue collector to fully capitalise on their legislative power to audit taxpayers based on “risk(s) detected”, typically going back 5 years.

“Imagine having historically filed all your tax returns on time, making good on your dues to SARS, only to wake up to a Notification of Audit and Request for Relevant Material,” Baijoo said.

“This has become the new normal for many South African taxpayers, be it individuals or companies.”

Baijoo explained that since the start of 2025, Tax Consulting SA has seen a significant spike in SARS Audits. In most cases, people miss SARS’s request for documents, so the audit is finalised without their input.

This usually leads to SARS making an adverse finding against the taxpayer. The taxman will then increase the tax paid on their gross income.

The adjustments often stem from an analysis of taxpayer bank accounts, and where a credit transaction is unexplainable, it is deemed to form part of income.

Additional taxes are then levied on this upward adjustment amount, for which the taxpayer is wholly liable.

Current technological advancements, including machine learning, now grant SARS access to taxpayer information from crypto trading/investing platforms. This allows the revenue authority to determine crypto taxes owed.

“It is noteworthy that to give effect to these adjustments, SARS must issue Additional Assessments, which in extreme cases of non-compliance, may impose ‘Understatement Penalties’ of up to 200% of the tax due,” Baijoo warned.

Delays will cost taxpayers

Baijoo explained that SARS has made significant progress in modernising its systems to detect fraud and enhance compliance.

It is also building its tax collection capacity and has a track record of in-depth Audits when any inkling of non-compliance is detected.

These data-driven insights inform SARS of all transactional records pertaining to specific taxpayers. Using AI, the human resourcing element is significantly reduced in “risk detection” and subsequent compliance-centric actions.

This collaborative approach enables SARS to gain access to a comprehensive dataset, facilitating more robust evaluations of taxpayers’ financial activities.

This results in risk detection and the subsequent issue of a “Notification of Audit and Request for Relevant Material.”

Taxpayers have a limited time to respond before Audit Findings and Finalisation are issued. Baijoo stressed that where taxpayers face a historic audit from SARS, it is imperative to ensure a timely response with all correct supporting documentation.

“We have seen in the market a number of ill-advised taxpayers seeking the correct counsel only after the fact and paying the price for it, such as when those Additional Assessments are issued post-Audit Finalisation.”

“The nail in the coffin is always the Understatement Penalties, capping at a bank-breaking 200% of the capital taxes due!”

He advised that, as a rule of thumb, all correspondence received from SARS should be holistically addressed by a strong multi-faceted tax, legal, and financial team.

“In instances of non-compliance with tax laws, legal professional privilege is a must, especially where SARS have suspicion of, or has already detected, ‘risk(s)’.”

“This will not only serve in safeguarding you against potential jail time but also allow for the correct legal stopper to be put in place, preventing SARS from implementing aggressive collection measures.”

Economist Dawie Roodt suggested that South African companies should pay a 15% corporate income tax (CIT), as other countries are reducing their CIT rates to attract investments from businesses.

As other countries reduce their CIT rates, South Africa’s 27% looks increasingly unattractive, warding off potential investment that would boost economic growth.

Moreover, the tax bill imposed on companies is often passed on to consumers in the form of higher prices, meaning that individuals ultimately foot the bill.

Roodt, who is the chief economist at the Efficient Group, recently told Daily Investor why South Africa should reduce its CIT rate.

He explained that South Africa is over the Laffer Curve with regard to CIT, with any increase likely to result in less tax revenue as companies close down or look to minimise their tax liabilities.

Inversely, a reduction in CIT is likely to result in increased revenue from this source as companies grow, invest, and new businesses are formed.

South Africa has one of the most concentrated CIT bases in the world, with only 1,051 companies covering 72.3% of the state’s revenue from this source.

This translates into 0.1% of all companies paying 72.3% of CIT in the country. These are companies classified by SARS as generating taxable income greater than R100 million annually.

SARS outlines this data in its annual Tax Statistics, with the most recent edition being published in December 2024.

It showed that South Africa has a highly concentrated CIT tax base, despite over one million businesses being registered for tax in the 2023/24 financial year.

Of these companies, 287,802 made a loss and 637,435 had no taxable income. There were 198,695 companies which made a profit of up to R1 million and paid R7.4 billion in company income tax.

Another 41,709 had a taxable income of R1 million to R100 million and paid R82.5 billion in tax. They accounted for 25.5% of all company income tax.

72.3% of company income tax was paid by companies with taxable incomes of more than R100 million, and 66.5% by large companies with taxable incomes of more than R200 million.

South Africa’s over the curve

Roodt said this shows South Africa is over the Laffer Curve with regard to CIT, with a small number of companies being squeezed for most of the revenue.

The Laffer Curve depicts the relationship between tax rates and revenue, according to a theory by economist Arthur Laffer.

It suggests that taxes could be too low or too high to produce maximum revenue and that both a 0% income tax rate and a 100% income tax rate generate no revenue.

As such, the ideal tax rate, at which the maximum revenue is generated, is somewhere in between. Roodt thinks South Africa has strayed over the edge of the curve, with a CIT rate higher than the ideal.

More worryingly for Roodt, companies tend to pass this tax on to consumers through higher prices, putting strained South Africans under more financial pressure.

“Corporates don’t pay taxes. They shift the CIT burden down to individuals. So, we have to reduce corporate taxes quite dramatically as well, and I would try to aim for 15%,” Roodt said.

“Another reason why I say this is because it seems that this is the lever where corporate taxes are heading internationally.”

South Africa appears to be heading this way, at a very slow pace. The CIT rate was reduced from 28% to 27% on 31 March 2023, providing some relief to companies.

In contrast, the average rate for members of the Organisation for Economic Co-operation and Development is 23.2%.

This means that South Africa is fundamentally uncompetitive globally, and its elevated CIT rate prevents companies from setting up operations in the country.

Foreign companies and investors would rather allocate their capital towards countries where they can pay a lower rate, keep more of the profits, and have a business that generates more cash to reinvest and grow.