Tax practitioners have been raising concerns about tax refund delays, while SARS says it is dealing with the challenges.

While 90% of tax returns are processed without further verification by SARS, those taxpayers who are identified for further scrutiny find themselves caught in an administrative nightmare.

Most of these taxpayers are small businesses where a significant delay in refunds, especially for VAT, has serious financial implications.

One business owner who contacted me has been waiting for over a year for a VAT refund of R1 million.

A tax practitioner complained that she has a client who is constantly being audited and experiencing delays of six months on VAT refunds. Their tax returns are always correct, and the client is eventually paid, but with a total of R3 million in VAT refunds outstanding, it has a significant impact on the cashflow of the business.

Another tax practitioner told me that he has 12 clients who are waiting for tax refunds.

“SARS requested supporting documentation and it has been submitted, but now we are at 60 business days and SARS has not finalised the verification.”

The Office of the Tax Ombud (OTO) says that the number of complaints relating to VAT refunds is a concern and that they are constantly looking into the matter.

Its annual report found that a number of refunds were unduly delayed and that the refunds should have been paid earlier. “In such instances, no satisfactory explanations were given by SARS for the tax refund  delays.”

Tax practitioners have cited long turnaround times, requests for documentation already submitted, and a lack of communication as major challenges.

One practitioner is dealing with a case where SARS had the return for six months before asking for documentation for an audit. “They asked for all the same documentation we had already submitted,” says the practitioner.

Another practitioner complained that there is no communication after they submit the returns. “They never issue any correspondence to inform us they have put a stopper on the refund. We only find out when we lodge a query.”

“Special stoppers” are codes that SARS places on tax profiles that block tax refunds. Thabo Legwila, CEO at the Office of the Tax Ombud says stoppers are used to delay the payment of refunds in specific circumstances, for example, in debt equalisation, fraud investigation or outstanding returns.

“The OTO conducted a systemic investigation back in 2017 regarding allegations of SARS delaying paying out refunds. Various root causes that resulted in the delay in the payment of refunds were identified. It was found that delays in the lifting of stoppers were indeed one of the root causes for the delays.

“The OTO is still receiving complaints where SARS delays lifting the stoppers, affecting the payment of taxpayer refunds,” says Legwila.

A frustrated tax practitioner said, “I never get asked for anything anymore, they just never finalise anything. It is a tactic they can use, they can just keep calling for additional documentation to push the goal out further and give them more time. You have to follow up, it is a slow war of attrition to keep you tied up in the system.”

The OTO explains that the 21-day period for finalising verifications is not a legally prescribed timeframe. It is a period undertaken by SARS as prescribed by its Service Charter and is only applicable if the taxpayer is up to date with the filing returns, and that the returns are verified for that current year.

“When a non-compliant taxpayer submits returns for multiple years, the timeframe applicable is 90 days. Furthermore, the timeframes only start from the day the taxpayer submits information requested by SARS for purposes of verification.

“In other words, where SARS is still within the timeframe to verify the documents, the OTO is unable to intervene.”

SARS responds to complaints over tax refund delays

In response to complaints about tax refund delays, the newly appointed SARS deputy commissioner for taxpayer engagement and operations, Johnstone Makhubu, points out that in the last tax year, SARS paid out R381bn in refunds of which R319bn were VAT refunds.

Of the 4.3 million returns submitted for refunds, only 10% (430 000) were stopped for an audit. Of these, 75% are processed within 21 days. This leaves approximately 107 500 returns which were identified for further investigation.

While this represents only 2.5% of the total volume of tax refunds, these are concentrated on small businesses.

Due to the nature of the risk of VAT refunds, small businesses are the ones most likely to be targeted for further investigation, says Makhubu, who explains that when a tax return is filed, it goes through a risk engine which applies several rules.

If a taxpayer triggers one of the rules, further verification is required. Makhubu says last year alone SARS stopped R41bn in fraudulent VAT refunds, most of which was from small businesses.

Makhubu acknowledges that there is a capacity issue at SARS.

“In the National Budget, funds have been allocated to SARS to employ further skills. We are trying to get those skills in the market,” says Makhubu.

Adding to SARS’ capacity issues was an attack on SARS this year by criminal syndicates which created fake VAT returns. The syndicate would purchase a shelf company with a VAT number and submit a tax return. The syndicate would test the risk engine with several VAT returns to see if it would go through the risk engine.

“Our algorithm picks it up and it generates a suspicious case which needs to be verified. This created additional work for the same number of verifiers.”

Apart from dealing with capacity constraints, Makhubu says SARS is reviewing its systems and workflow to improve outcomes.

For example, SARS has changed the way the system automatically issues letters. “If there is a further investigation, letters are automatically sent to the taxpayers asking for additional documentation, but it is generic. Now we have updated for the requests to be more specific.”

Makhubu says many of the delays are, however, caused by the taxpayer who does not respond on time or does not submit all the documentation requested.

“Many of these are sole proprietors who do not have an accountant and their record-keeping is not that great.”

Makhubu adds that bank details that have not been updated is another cause of delays, with around R2.4bn of refunds delayed due to incorrect bank account details.

Makhubu acknowledges that there is a breakdown in the communication process once a return has been sent to an auditor, which would explain the complaints by tax practitioners about a lack of communication.

Once the information is received it is allocated to an auditor who only has 20 minutes to work a case. If the taxpayer has not submitted all the required documents, the auditor moves on to the next file.

Currently the auditor does not contact the taxpayer directly to inform them of the outstanding information. “We do not want a relationship between the verifier and taxpayer. We are creating a hub where all those follow-ups will happen,” says Makhubu.

Changes to the SARS workflow

Going forward, SARS is implementing changes to their workflow to address some of challenges. Some of the changes are:

• Stopping the request for frivolous documents by tracing how many times a tax verifier (auditor) has asked for supporting documents.
• Moving to case ownership where the same auditor works on one client until the case is resolved.
• Verifying certain types of businesses that may trigger an audit – for example export companies. Once it has been established as an export business, then the risk engine should adapt accordingly.
• Entity compliance index: where the overall compliance of the business is good, more leeway is provided before triggering an investigation.

This article first appeared in City Press.