Without Tax Practitioners the Tax System Will Collapse
Tax practitioners are the backbone of our tax system, They are the unsung heroes of the tax world. They bridge the gap between the complex tax system and the everyday taxpayer, ensuring that individuals and businesses pay what they owe and not a penny more.
At the same time, they've got our backs against SARS, which, let's be honest, has a tough job but the South African Revenue Service (SARS) can sometimes come on too strong in its quest to collect taxes, and that is why parliament decided to create the Tax Ombud. In their mission to gather more revenue, SARS is a giant with immense power, and without someone to keep things in check, it's easy for things to get out of hand.
Tax practitioners and the Tax Ombud have partly the same aim—not only do they help keep the tax system running smoothly, but they're also standing guard, making sure taxpayers are treated fairly and not bulldozed over by the system. They're not just working within the system; they're making sure it works for us, too.
SARS reported 53 tax practitioners to their Recognised Controlling Bodies (RCB) for non-compliance with their tax obligations. Furthermore, SARS identified certain banks, attorneys, and tax practitioners as "professional enablers" of tax evasion, assisting wealthy clients in avoiding their rightful tax payments.
However there are more than 10 000 tax practitioners whose taxes are in order and are daily protecting and assisting tax payers and helping to collect the R2trillion annual tax budget. These Tax Practitioners are essential professionals and SARS should be careful to distinguish them from the “professional enablers”. The 10 000 Tax Practitioners should not feel attacked by SARS.
This underscores their critical importance to the functioning of our tax system. Tax practitioners operate in a challenging environment, often without the level of support and access to SARS systems that would enable them to work more effectively.
Acknowledging the indispensable role of tax practitioners highlights the need for a partnership approach. It's about working together to ensure that the tax system is not only efficient but also fair and accessible for all involved.
Time to Back Up Our Tax Heroes: Why SARS Must Step Up
In a recent article, Advocating for Tax Practitioners: They Need a Supportive Tax System we discussed how the tax system is failing Tax Practitioners. We even advocated for an intervention by the Tax Ombud. Tax Practitioners help us all understand taxes – they make things easier for everyone. But to do their best work, they need more support from SARS. It's important they get the support they need so they can keep helping everyone effectively.
In this article we discuss what Tax Practitioners can do to avoid reputational risk and de-licensing.
Due Diligence - The Holy Grail of Being a Tax Practitioner
Performing due diligence is crucial for tax practitioners when compiling tax returns on behalf of clients. This process helps ensure accuracy, compliance with tax laws, and reduces the risk of being involved with illicit activities.
The below checklist aims to be a quick reference for maintaining high standards in tax practice, highlighting essential actions ranging from establishing a diligence checklist for all returns to terminating risky client relationships. This approach underscores the importance of consistency, thoroughness, and adherence to legal standards in tax preparation and advisory services, providing a clear pathway to excellence in professional tax practice.
Here are key due diligence steps tax practitioners should consider:
Establish a Diligence Checklist for Returns: Implement a standard checklist for all returns to ensure consistency and compliance.
Document and Retain Records: Keep detailed records of all advice, decisions, and client communications.
Make Appropriate Inquiries: Review the taxpayer’s prior returns and relevant documents, and ask necessary questions to gather complete information.
Request Supporting Documents: For claims requiring documentation, request and review the supporting evidence.
The Bigger the Claim, the Greater the Need for Diligence: Exercise increased diligence for large or unusual claims to ensure accuracy and compliance.
Comply with Special Claims Requirements: Follow heightened diligence for specific deductions or credits as per SARS requirements.
Consider Return Information Holistically: Never evaluate information in isolation; consider the broader context and how various pieces of information interact.
Avoid Casual Tax Advice: Provide advice based on a comprehensive understanding of the client’s situation and document it formally.
Inform Clients of Risks and Benefits: Clearly explain the pros, cons, and potential risks associated with tax positions, ensuring clients are fully informed.
Never Assume the Law: Always verify the current state of tax laws and regulations instead of making assumptions.
Ensure Competence: Only prepare returns or provide advice in areas where you have sufficient knowledge and expertise.
Terminate Risky Client Relationships: If a client insists on unreasonable positions or refuses to heed advice, consider ending the professional relationship to mitigate risk.
This checklist synthesizes the key points from the document, providing a clear and actionable guide for maintaining due diligence in your tax practice.
By following these due diligence steps, tax practitioners can better protect themselves and their clients from legal and reputational risks, ensuring compliance with tax laws and contributing to the integrity of the tax system.
Establish a Diligence Checklist for Returns
A diligence checklist serves as a comprehensive guide to ensure that all relevant aspects of a client's financial situation are reviewed and considered when preparing tax returns. This checklist helps in maintaining consistency across different clients and ensures compliance with tax laws and regulations.
Detailed Checklist:
Personal Information Verification: Confirm the client's name, identity, address, and filing status.
Income Review: Gather and verify all sources of income, including salary, business income, interest, dividends, and any foreign income.
Deduction and Credits Verification: Ensure eligibility for claimed deductions such as mortgage interest, medical expenses, and charitable contributions by reviewing receipts and statements.
Verify eligibility: for allowances such as travel, office and other deductions such as RAF, Medical through supporting documents.
Previous Year Tax Return Comparison: Compare current year data with previous years to identify significant variances or inconsistencies.
Review of Tax Notices or Audits: Ask the client if they have received any notices from the IRS or other tax authorities and address any issues or audits from previous years.
Document and Retain Records
Keeping detailed records of all client interactions, advice provided, decisions made, and the basis for those decisions is crucial. This documentation can prove invaluable in the event of an audit or dispute, demonstrating that due diligence was exercised and providing a clear rationale for the tax positions taken.
Detailed Checklist:
Documentation of Client Communications: Maintain records of all communications with clients, including emails, notes from phone calls, and meetings. Document the advice given and any decisions made during these interactions.
Retention of Tax Documents: Keep copies of all tax documents provided by the client, such as income statements, receipts for deductions, and records of credits claimed.
Record of Research and References: When specific tax issues require research, document the sources, interpretations, and conclusions drawn from the tax act, rulings, and other relevant guidance.
Evidence of Client Decisions: If a client makes a decision contrary to your advice, document the advice given, the client’s decision, and any warnings provided about the risks associated with their choice.
Secure Storage: Ensure that all documents and communications are stored securely, whether in electronic or physical form, to protect client confidentiality and comply with data protection laws.
Make Appropriate Inquiries
Making appropriate inquiries involves engaging with the client to obtain all necessary information to accurately prepare tax returns. It means asking detailed questions to understand the complete financial situation, including any unusual or complex transactions. This process helps uncover any discrepancies, inaccuracies, or omitted information that could affect the tax return.
Detailed Checklist:
Understanding Client’s Financial Activities: Ask questions to understand the scope of the client’s income, deductions, credits, and any foreign assets or income.
Clarification of Ambiguous Information: If presented information is unclear or incomplete, seek clarification to ensure accurate reporting.
Inquiry into Unusual or Complex Transactions: For significant, unusual, or complex transactions, delve deeper to understand the nature and tax implications fully.
Consistency Check with Prior Year Returns: Question any significant differences in income, deductions, or credits compared to prior years.
Verification of Information: Where feasible, request additional documentation or third-party verification to corroborate the information provided by the client.
Request Supporting Documents
Requesting and reviewing supporting documents is essential to verify the accuracy of the information provided by the client. This step ensures that all income, deductions, credits, and other tax-related items are substantiated by adequate documentation, which is crucial for compliance and accuracy.
Detailed Checklist
Income Documentation: Ask for all relevant income documents, such as IRP5s, IT3s, foreign income statements, and records of any self-employment income.
Deduction Support: Request certificates, receipts, invoices, and bank statements for deductible expenses, including but not limited to retirement annuities. charitable contributions, medical expenses, business expenses, and mortgage interest.
Allowances: For credits claimed, obtain certificates, receipts, or other proof of eligibility, such as medical aid contributions, travel logbooks or office expenses.
Investment and Sale Transactions: For capital gains or losses, request documentation on the purchase and sale of assets, including dates, amounts, and any related expenses.
Foreign Assets and Income: If applicable, gather records related to foreign bank accounts, investments, and income.
The Bigger the Claim, the Greater the Need for Diligence
Larger or more unusual claims on a tax return naturally attract more scrutiny from tax authorities. Therefore, it's essential to exercise increased diligence when handling significant deductions, credits, or income adjustments. This involves a thorough review and substantiation of the claim, understanding the tax law implications, and ensuring the client is fully aware of the potential for increased audit risk.
Detailed Checklist:
Review Tax Law Applicability: Confirm that the tax laws support the claim, especially for large deductions or unusual credits. This might involve researching current tax laws, SARS notices, and relevant tax court cases.
Substantiate with Adequate Documentation: Ensure that all claims are backed by robust documentation. For large claims, this might mean going beyond basic receipts to include appraisals, legal documents, or written statements from qualified professionals.
Assess Reasonableness: Evaluate whether the size of the claim is reasonable given the client’s circumstances. For instance, unusually large charitable contributions relative to income may require additional substantiation.
Client Consultation: Discuss the potential scrutiny such claims might invite from the SARS and ensure the client is comfortable with the associated risks and documentation requirements.
Contingency Planning: Prepare the client for the possibility of an audit, including discussing the process, potential outcomes, and how documentation will be used to support the claim.
Comply with Special Claims Requirements
Certain tax benefits, such as deductions or allowances, have specific eligibility criteria and documentation requirements. Complying with these special requirements is essential to ensure the legitimacy of the claim and to protect both the taxpayer and tax practitioner from potential penalties or audits.
Detailed Checklist:
Understand the Requirements: Familiarize yourself with the SARS guidance and regulations for each special claim, including eligibility criteria, limits, and required documentation.
Gather Specific Documents: Request and review documents that specifically support the eligibility for the claim. This may include educational expenses, energy-efficient home improvements receipts, or medical expense documentation.
Use SARS Forms and Schedules Appropriately: Certain claims may require specific SARS forms or schedules to be completed and attached to the tax return. Ensure these are accurately filled out and included.
Advise Clients on Qualifications: Clearly communicate to clients the qualifications for each special claim, ensuring they understand the criteria and the need for documentation.
Review Past and Future Eligibility: Assess whether the claim was appropriately made in past tax returns and consider future eligibility, advising the client accordingly.requirements.
Consider Return Information Holistically
When preparing tax returns, it's crucial not just to look at individual data points but to understand and interpret the entire financial picture of a client. This holistic approach helps in identifying inconsistencies, understanding the interplay between various components of the tax return, and making informed decisions about tax positions and strategies.
Detailed Checklist:
Cross-Check Income and Deductions: Review all sources of income and deductions in the context of the client’s overall financial situation and lifestyle. Significant disparities may warrant further discussion or review.
Understand the Client's Financial Goals and Plans: Gain insight into the client’s short-term and long-term financial objectives. This understanding can influence tax planning and decision-making.
Analyze Year-to-Year Variations: Look for significant changes in income, deductions, or credits from the previous year, and ensure there's a reasonable explanation for these variations.
Assess the Impact of Life Events: Consider the tax implications of major life events, such as marriage, divorce, the birth of a child, retirement, or the sale of a significant asset.
Evaluate the Tax Efficiency of Investments: Review the client's investments for tax efficiency, considering the timing of capital gains or losses and the type of accounts holding investments.requirements.
Avoid Casual Tax Advice
Tax advice should be precise, well-considered, and based on a thorough understanding of a client’s specific situation and applicable tax laws. Casual, off-the-cuff tax advice can lead to misunderstandings, inaccurate tax filings, and potential liability issues for both the practitioner and the client. It's essential to ensure that any advice given is documented and based on a comprehensive assessment.
Detailed Checklist:
Documented Consultations: Ensure all tax advice, even informal suggestions, are followed up with written documentation, clarifying the context and the information provided.
Comprehensive Client Information: Before providing advice, make sure you have a complete understanding of the client's tax situation, including income sources, deductions, credits, and life changes that could impact their tax liability.
Clarify Assumptions: When providing advice, clearly state any assumptions made about the client's situation or future tax laws that the advice is based on.
Stay Informed: Keep up to date with the latest tax laws, regulations, and SARS guidance to ensure advice is accurate and relevant.
Professional Limitations: Acknowledge the boundaries of your expertise. If a client's situation requires specialized knowledge (e.g., international tax law), refer them to a specialist.
Inform Clients of Risks and Benefits
Tax practitioners should ensure clients are fully informed about the potential risks and benefits of different tax positions. This includes explaining the likelihood of SARS audits, the potential for penalties and interest on underpayments, and the impact of tax strategies on future tax liabilities. By understanding both the positive outcomes and the possible downsides, clients can make informed decisions that align with their risk tolerance and financial goals.
Detailed Checklist:
Clear Explanation of Options: Present tax-saving strategies or deductions available to the client, along with a clear explanation of the associated risks and benefits.
Audit Risk Communication: If a tax position has a significant risk of audit, inform the client of this risk, the process involved in an audit, and the potential outcomes.
Penalties and Interest: Discuss the implications of underpayment, including penalties and interest, especially for aggressive tax positions that are open to varying interpretations of the tax law.
Document Client Decisions: After discussing the risks and benefits, document the client’s decisions, including their understanding and acceptance of potential risks.
Review Changes in Tax Law: Inform clients about recent changes in tax law that may affect their tax situation, including any new opportunities for savings or additional compliance requirements.
Do not assume the Law
Tax laws and regulations are complex and subject to change. Assuming knowledge of the law without verification can lead to errors in tax preparation and advice. Tax practitioners must always verify the current state of the law and SARS guidance before making decisions or providing advice. This ensures accuracy and compliance, reducing the risk of penalties and interest for both the practitioner and the client.
Detailed Checklist:
Regularly Update Tax Knowledge: Stay informed about new tax laws, regulations, and SARS guidance through continuing education, tax seminars, and professional publications.
Verify Before Advising: Before providing advice on a tax matter, check the most recent tax law and SARS publications to ensure the advice is based on the current legal framework.
Use Authoritative Sources: Rely on authoritative sources for tax information, such as Tax laws, Treasury Regulations, SARS guidance and notices, and tax court decisions.
Document Source of Law: When providing advice or making a decision based on tax law, document the specific sources referenced, including statutes, regulations, or SARS guidance, to support the position taken.
Communicate Uncertainties: If the application of the law is uncertain or subject to interpretation, clearly communicate this to the client, including the potential for different interpretations by the SARS or tax courts.
Ensure Competence
Tax practitioners must ensure they are competent in the areas in which they provide services. This means having the necessary knowledge, skills, and experience to offer accurate and reliable tax advice and preparation services. If a practitioner encounters a tax issue beyond their expertise, it's imperative to seek additional information, consult with experts, or refer the client to a specialist. This commitment to competence protects clients from inaccurate advice and helps maintain the integrity of the tax profession.
Detailed Checklist:
Assess Your Expertise: Regularly evaluate your areas of expertise and the limits of your tax knowledge. Be aware of when a client's needs exceed your capabilities.
Continuing Education: Participate in continuing professional education (CPE) to stay current with tax laws, regulations, and best practices.
Consult with Specialists: When faced with complex tax issues outside your expertise, consult with specialists or refer your client to a qualified expert.
Use Reliable Resources: For unfamiliar issues, rely on credible and authoritative tax research tools and databases to inform your advice and decisions.
Document Consultations and References: Keep a record of any consultations with specialists or research conducted to address complex tax issues. This documentation should include the nature of the inquiry, the advice received, and the decision-making process.requirements.
Terminate Risky Client Relationships
In the practice of tax preparation and advisory, tax practitioners may encounter situations where continuing a client relationship poses significant ethical or legal risks. This can occur if a client insists on taking aggressive tax positions without sufficient legal basis, refuses to provide necessary documentation, or engages in behavior suggestive of fraud or evasion. In such cases, it may be necessary to terminate the relationship to protect the practitioner’s professional integrity and comply with legal and ethical standards.
Detailed Checklist:
Identify Red Flags: Be vigilant for signs of non-compliance or unethical behavior, such as reluctance to provide complete information, insistence on questionable tax deductions, or evidence of unreported income.
Document Concerns and Communications: Keep a detailed record of all communications with the client regarding concerns about their behavior or the information they have provided.
Professional Consultation: If uncertain about the ethical implications of a client's request, consult with a colleague, supervisor, or legal counsel for advice.
Report to the FIC: When tax practitioners work with clients, they must report any transactions to the FIC if they suspect money laundering or terrorist financing. This includes transactions that seem unusual or raise doubts. They should assess the overall situation, considering industry norms. Often, a combination of minor details may signal something suspicious. The decision to report should consider the specific context of each client and business. Guidance Note 4B from the FIC provides detailed instructions on how to report these suspicions.
Communicate Clearly with the Client: If considering termination, communicate your concerns with the client, explaining the potential legal and ethical ramifications of their actions and your professional obligations.
Formal Termination Process: Follow a formal process for terminating the client relationship, including a written notice specifying the reasons for termination, ensuring all legal and ethical guidelines are followed.
Referral to Another Practitioner: If appropriate, and without breaching confidentiality or implying approval of the client’s behavior, suggest the client seek advice from another tax practitioner.
How to improve the tax system
The Internal Revenue Service (IRS) in the USA mandates that tax practitioners adhere to specific due diligence practices when assisting clients, including the completion of a due diligence checklist. This systematic approach ensures comprehensive compliance and accuracy in tax preparation. Similarly, adopting a mandated due diligence checklist for tax practitioners by SARS could significantly enhance the integrity and efficiency of South Africa's tax services, aligning with best practices observed internationally.
IRS Due Diligence Requirements
The IRS has established specific due diligence requirements, especially for tax preparers involved in preparing returns that claim certain tax credits and the Head of Household filing status. Under the IRS rules (which include sections like IRC Section 6695(g) related to the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), American Opportunity Tax Credit (AOTC), and others), due diligence requirements include:
Completion of Form 8867: The Preparer's Due Diligence Checklist must be completed, ensuring that the preparer asked the right questions to determine eligibility for specific credits and filing status.
Computation Records: Keeping records of how credits and deductions were calculated and substantiated.
Knowledge: The preparer must not know or have reason to believe that any information used in determining the taxpayer's eligibility for, or the amount of, the EITC, CTC/AOTC, and HOH filing status is incorrect, inconsistent, or incomplete.
Retention of Records: The preparer must retain records for three years from the latest of the dates on which the original tax return was filed or the due diligence requirements were met.
Why CIBA’s Tax Standards Should be the Norm for all Tax Practitioners
The CIBA Tax Standards (STS), are designed to guide CIBA members, who has obtained the CIBA license as Tax Compilers (NQF5) and Tax Advisors (NQF7), in maintaining the highest professional and ethical standards in their tax practice.
The standards cover a wide range of areas from ethics, personal competencies, and dealing with non-compliance, to the intricacies of client engagement, quality deliverables, and interactions with third parties. Here’s a summary of key standards and their implications for due diligence:
Ethics and Ethical Constraints (STS 110): Members must act ethically in all tax services, recognizing their obligations under the system of self-assessment and laws like the Tax Administration Act.
Personal Competencies and Skillset (STS 120): Practitioners are expected to maintain and update their professional knowledge and skills to provide competent services.
Non-compliance with Laws & Regulations (STS 130): Members must adhere to laws and regulations and address any client non-compliance, aligning with the NOCLAR standard for reporting.
Client/Engagement Acceptance and Continuation (STS 210): Standards for accepting new clients and continuing engagements emphasize assessing client integrity and the practitioner's capacity to deliver the required services.
Quality Deliverables (STS 220): Tax return positions and advice must be of high quality, supported by evidence, and consider reporting, disclosure standards, and potential penalties.
Form & Content of Advice to Taxpayers (STS 230): Advice should be clear, based on facts, and inform clients about changes in legislation that might affect their tax positions.
Engagement Hand Over to Successor Tax Professional (STS 240): When handing over engagements, members should ensure transparency, maintain professional records, and respect client confidentiality.
Interaction with Third Parties (STS 310): Confidentiality must be preserved when dealing with third parties, requiring written client consent for any information disclosure.
Evaluation Need for Involvement of External Specialist (STS 410): Members should involve or refer to external specialists when faced with issues beyond their expertise to maintain the quality of service.
These standards highlight CIBA’s commitment to upholding professionalism and ethical conduct among its members, ensuring they are well-equipped to navigate the complexities of tax practice while fulfilling their due diligence obligations. Members are encouraged to familiarize themselves with these standards and apply them diligently in their practices to enhance the quality of tax services and maintain public trust.
Become a Tax Practitioner
Recognised controlling body
On 27 May 2021, SARS officially recognized CIBA as a Recognised Controlling Body (RCB) under Section 240A(2) of the Tax Administration Act. This significant development allows CIBA members to directly obtain their tax practitioner status through CIBA registration.
CIBA is dedicated to ensuring its members, especially those providing tax services, uphold the highest standards of professionalism. This includes being competent in delivering superior services, accountable for their work, dedicated to continuing professional development (CPD) in taxation, and fully aware of their obligations to both clients and society.
The Licensed Tax Practitioner credential by CIBA is designed to embody these ideals, setting a benchmark for excellence in the tax profession.