SARS Modernization 3.0: Navigating Compliance in the AI Era

The South African Revenue Service (SARS) has initiated a range of measures in its ongoing effort to enhance tax compliance through automation advancements. This initiative, known as SARS Modernisation 3.0, aims to highlight specific focus areas that will aid in improving detection, enforcement, and voluntary compliance.

Building on the success of its segmentation model, SARS is now targeting pivotal areas to close the “Tax Gap,” which includes, among others:

• High-net-worth individuals;
• Large and international corporations; and
• Businesses involved in the gig, shared, and social media economies.

By utilizing artificial intelligence (AI), data science, and modernizing systems, SARS has embarked on a three- to five-year strategy to transition to real-time risk profiling and automate an intelligent tax administration platform.

AI Enabling Data-Driven Compliance Insights

The success of SARS in ensuring compliance during this automation era can largely be credited to its use of data-driven insights, sourced from both local and global databases.

These system improvements empower the revenue authority to identify varying levels of non-compliance and hold the offending taxpayer—and sometimes their tax advisors—accountable.

By automating processes, these insights enable SARS to review all transaction records linked to specific taxpayers. With AI, there’s no longer a need for a “fine-tooth comb” to build strong legal cases against non-compliance.

This collaborative strategy gives SARS access to a comprehensive dataset, allowing for more thorough evaluations of taxpayers’ financial behaviors.

While this capability for information gathering has proven effective, a significant challenge was the shortage of qualified personnel to process and enforce actions against violators—solved by “building a smart digital tax administration platform driven by data science and AI”.

This enhancement using AI has already been observed in SARS’s traditional audit processes, allowing for improved accuracy and near-instantaneous insights.

This transition highlights a broader trend of integrating technology into tax administration, which promises to transform how tax compliance is supervised and enforced.

SARS’s AI-Enhanced Audit Capabilities Impacting Taxpayers

It may seem like a storyline from a sci-fi movie, but with the “Rise of the Machines,” SARS has embraced automation, transforming their audit capabilities into something previously unimaginable.

Envision having consistently filed your tax returns punctually and your Compliance Status showing as fully compliant.

Now, imagine waking up to an Audit Notification and Request for Relevant Materials based on detected risks.

This has become a startling reality for many historically compliant taxpayers, as SARS’s audit teams appear to be rigorously enforcing a zero-tolerance policy on non-compliance.

Enhancing their effectiveness, the data-driven insights from AI now allow the processing of taxpayer bank statements without prior warning or consent.

The Criminality of Non-Compliance

SARS has made stark examples of wealthy individuals, influencers, and large corporations who disregard tax laws, facing serious consequences including potential imprisonment. Their names and tax debt figures are well-known.

On a more personal note, it’s crucial to understand the basics to remain compliant in the AI era’s fight against non-compliance. Many are unaware that Section 234 of the Tax Administration Act details various actions and inactions that can lead to criminal offences.

This includes acts arising from a lack of tax knowledge, such as failing to retain specific documents or submitting incomplete documentation to SARS.

Conversely, failing to carry out actions, such as submitting a tax return or notifying SARS of changes to registered details, could also result in criminal charges.

Enhancing Voluntary Compliance Through Technology and Trust

Failure to address this first challenge, especially with incorrect disclosures, will lead to escalating situations, including additional assessments and final demands for overdue tax amounts.

The ultimate consequence is always the Understatement Penalties, reaching a staggering 200% of the owed capital tax!

As a general principle, all communications from SARS should be comprehensively handled by a robust multi-disciplinary team—your “A-Team.”

In cases of tax law non-compliance, legal professional privilege is a necessity, particularly if SARS suspects or has uncovered past or present non-compliance issues or “risks”.

This not only helps protect you or your clients from becoming victims of these circumstances but also establishes the necessary legal barriers to prevent aggressive collection efforts from SARS.

As compliance specialists, assembling the right A-Team ensures taxpayers and their astute advisors are correctly guided towards the best solutions for achieving full tax compliance.

Jashwin Baijoo, Partner and Head of Strategic Engagement & Compliance at Tax Consulting SA.

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