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Auditing of Small and Medium size
Enterprises -Falsification Fraud
Cases
06 October 2010
Contents
Background
Compliance
Value Added Tax (VAT)
Personal Income Tax ( PIT)
Company Income Tax (CIT)
Challenges
SARS Approach
Case Studies
2
Background
Auditing of SMEs and specifically of falsification
and Fraud cases is but one of audit categories
that is conducted by SARS Audit as part of
investigative audits. Other categories are
Random
Refund
Inspection Audits
The Diagram below will illustrate where this
type of auditing fits as part of the bigger
auditing frame work
Investigations
Escalations
Compliance
risk
Hot line
Enforcement
Investigations
Conviction
Prosecution
Media
leverage
Criminal
Illicit
Improved compliance
(incl. Customs)
Audit
Escalation
from small e
Compliance
risk
Administrative
resources
Refunds
(Nat61)
Enforcement
Audit
Low volumes
High impact
High skill
Risk based
High ROI
Investigative:
Assurance
Generic risk
Specific risk
Specialised
Audits
(incl. LBC Audit
Customs)
Improved compliance
Deregistration
Risk engines
Small e
Case Generation
+
+ Research
+Walk ins
+ Media
+ Analysis
+ Surveys
+ Focus Groups
Informants
SAR’s
+ Research and Segmentation
Enforcement Program
+
SARS Audit Architecture
High volumes
Productionised
Administrative
compliance
Light intervention
Low ROI
BEADS
Inspections
Correspondence
Telephone
audits
Low risk refunds
(Compliance
centres)
Customs
(PCI inspections)
Campaigns
Background Cont.
 SARS IT systems are currently not integrated and work
independently from each other i.e.
 Value Added Tax
 Income Tax
 Employees Tax
 Refund is one of the risks that triggers audits in all tax types
 In all the tax types falsification happens at the following stages
 Registration
 Declaration
 Refund Payment
 A refund value threshold system is one of the risk rules used to identify
cases for auditing intervention before a refund is paid out
Cross Tax Registrations - Summary
740,000
IT REGISTERED
PAYE REGISTERED
SDL REGISTERED
NOT IT REGISTERED
NOT PAYE REGISTERED
NOT SDL REGISTERED
19%
2%
81%
24%
UIF REGISTERED
NOT UIF REGISTERED
27%
20,000
Total VAT Vendors
Sanitation
Investigation
98%
COMPANY/CC
76%
ESTATE/TRUST
73%
INDIVIDUALS
Discussion:
• Of the estimated 740” VAT vendors on register, 20” VAT vendor cases were investigated as part of the
WHOLESALE AND RETAIL TRADE;
VAT Register Sanitation initiative
REPAIR OF MOTOR VEHICLES,
• The majority of vendors are of Companies/CC’s, followed by Individuals and Estates/Trusts
MOTOR CYCLES AND PERSONAL AND
• From an economic perspective, these vendors fall mostly in the Financial Intermediation, Insure, Real Estate and Business Services.HOUSEHOLD GOODS;
HOTELS AND RESTAURANTS
• With a few exceptions (probably data quality related), all cases have valid Income Tax registrations
• 76% of the cases are not registered for PAYE yet most cases are Companies/CC’s within industries that should show PAYE behaviour
• Similar to PAYE behaviour, the SDL and UIF registrations for these vendors are also suspiciously low
6
REFUND
VALUES*
REFUND CASES
2004 – 2010: R0.034 Billion
2008 - 2010: R0.019 Billion
15%
R10,836 Billion
R2,671 Billion
R1,414 Billion
R4,566 Billion
9%
15%
8%
21%
11%
25%
11%
12%
18%
9%
7%
40%
49%
50%
FINANCIAL INTERMEDIATION, INSURANCE, REAL ESTATE AND BUSINESS SERVICES
CONSTRUCTION
12544
AGRICULTURE, HUNTING, FORESTRY AND FISHING
WHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES,
MOTOR CYCLES AND PERSONAL AND HOUSEHOLD GOODS;
HOTELS AND RESTAURANTS
7922
9813
OTHER
199
CI & AUDIT CASES
ACTIVE
ADDRESS UNKNOWN
DEREGISTRATION CASES
DEREGISTERED
ESTATE/INSOLVENT
FIELD 14 - PAR 8.2 CASES
SUSPENDED
UNKNOWN
Note: The CI and audit cases are based on preliminary investigations. These cases need to be finalised through further consultation with CI experts.
* Refunds amounts are calculated as a total of all period should any of the periods have Field 14 populated.
non Compliance - VAT
 The voluntary registration requirement for VAT for Vendors with
Turnover of R300 000 and below resulted in :

VAT registration of fictitious entities for purpose of claiming fraudulent
refunds

Registration of Entities that does not Exist
 Entities create or increase their input claim by claiming
fraudulent purchases
 Manipulation of thresh hold system for payment of refunds
without audit intervention
Challenges -VAT
 Registration for VAT is not linked to other tax types .
 Registration numbers are Different for different tax
types
 Identification of Tax payers (especially Foreigners )
 Use of Tax Practitioners Banking Details by Vendors
 Limited Audit Resources
 Administration burden created
SARS Approach - VAT
Specialised focus Initiative
Tightening of VAT registration requirements
Focus on VAT Inspections
Centralised Risk identification & Auditing
Deregistration Cases
Outstanding Returns
Unclaimed refunds
Criminal Investigations
Modernisation of VAT IT system due in
2011/2012
VAT Fraud Case Study
A refund Audit of a property investment Company
 The Risk indentified on the case was Claiming of Input Tax for properties
bought.
 Initially the auditor found that properties bought were valid,
 further investigation showed that
 properties were transferred on the same day to all the purchasers (new
Pty Ltd).
 a search of the system and found that this vendor have eighty nine(89)
other companies on his name.
 The accountant, explained that all the Companies s are guesthouses and
that they are located in different places
 At the same time the Registration division requested audit to verify about
sixty(60) new registrations of different companies with the same director
and it was found to be the same vendor under investigation .
VAT Fraud Case Study Cont.
The auditor decided to visit one of the properties and found
that all 59 guesthouses are in one complex?
 The auditor requested the following information on property
purchased from one of the companies .
 proof of property bought
 Explanation of how the guesthouse works.

 The property owner requested a meeting with the auditor and
explained that the properties were actually used for residential
purposes.
VAT Fraud Case Study Cont.
How the property Scheme works
 The taxpayer registered the purchasers as a directors of these various
companies .
 All registration of the bonds at the bank are in the taxpayers name
 Bond registration are less than what the property was sold for.
 The difference is then financed by the taxpayer and he charges interest on
this amount. This amount was then apparently used to make provision for
the shortfall between rent received and bond payment.
 The property dwellers pay rent into a rental pool Company which is used
by the taxpayer to pay the Bonds ( Some of the units arrangement was
changed due to the fact that Property Skills did not pay the bonds of the
townhouses as agreed)
 The taxpayer informed the property dwellers that they will be allowed to
claim the inputs back for the “purchase of the properties”.
VAT Fraud Case Study Cont.
Audit Results
 All Vat refund to the value R50 million on the properties
purchased was reversed
 Refunds to the value of R1 7000 000 was prevented from being
payed out
 All the Companies are deregistered
 Additional tax of 200% is levied
 The taxpayer is currently under criminal investigation
 There is a possibility that the taxpayer might be operating in
other regions as the audit was conducted in one region only
Non Compliance -PIT
 Individuals claim fraudulent deductions
 Use of the other category on the new IT system to claim
against salary income
 This is also a scheme that is used by practioners who use
various taxpayers and give them a percentage of the
refunds paid
 Non declaration of all other income received i.e.
 Interest from Investment
 Rental Income
SARS Approach – PIT
Use of new system to identify possible fraud
cases through refunds
Use of third party information to get
information i.e.
Banks for Interest payments
Deeds office for additional properties owed by Tax
payers
E-Natis for Car Ownership
PIT- Fraud Case Study
It came attention that some practitioners are
selling a scheme to Salary earners to benefit
from fraudulent refunds
How the scheme works
 The practitioners lure taxpayers with promises of money from
refunds
 They use the return correction options on the e filing on
behalf of the taxpayers to claim expenses under other which
them results in a refund
 They then collect the refunds and pay a portion to the
taxpayers
PIT- Fraud Case Study
Results
 A total of 1,031 cases were identified for audit
 All cases audited were found to be fraudulent and refunds
reversed
 Cases finalised to date: 88 cases with assessments raised of
R2,118,265.17
 Cases in progress: 400 cases with possible assessments
of R2,076,175.84
 Cases not commenced with: 543.
Non Compliance -CIT & VAT Tender cases
 Entities to which tenders were awarded to
 Not registered for IT or VAT
 Do not declare the income received
 Under- declare income received
Non Compliance -CIT & VAT Tender cases
Data extraction containing:
Payments made to vendors
that delivered
products/services to governmental departments
Transactions for 2007 – 2009
Bank account of payment
Governmental department to which the
products/services were rendered
Payment date
Payment amount
Challenges – Tenders
Data supplied by National Treasury was in segments.
It is assumed that the segments do not overlap and that the cardinality
between the data is accurate.
Data is matched to the SARS systems where the payment bank account is
the same as the VAT vendor’s bank account. In various cases, multiple VAT
vendors linked to a singular payment bank account. These vendors were
treated as one entity.
The estimated total turnover for all matched VAT vendors calculated as at
the first financial year end after the payment. The turnover is compared to
the total payment amount of the bank account for the relevant financial
year period. Only the vendors were the declared VAT turnover was less
than the value of the payments received, were considered.
The analysis only focussed on the cases identified following the above
mentioned criteria.
SARS Approach & VAT Tender cases
Match to SARS
Value Added Tax (VAT)
Unmatched
Transactions
Continue With
Matched Transactions
Must follow a
separate
Enforcement
process
Only
Suspicious
Cases
Scope of the analysis:
Exclude:
• Investigation of payments made.
The turnover of all VAT vendors linking to a • Bus Transport (Incl. Taxis)
matched bank account is compared to the • Property Letting: Residential Acc
• Government Departments
payment amount.
• An investigation of the compliance of all • Provisional Administrators
• Regional & Local Authorities
matched VAT vendors
• Primary, Secondary & Special Education
Schools
• Welfare Organisations
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