SARS wins eFiling case against taxpayer

SARS has won a court case against a taxpayer who claimed that someone else used their eFiling credentials to submit fraudulent tax returns of R1.38 million.

The case, MLC v Commissioner for the South African Revenue Service (SARS), involved revised income tax returns for the 2020 and 2021 years of assessment.

The taxpayer had submitted returns that included fabricated farming assets and expenses and inflated their IRP5 and PAYE credits. This resulted in SARS issuing an improper refund of R1.38 million to the taxpayer.

The taxpayer later disputed responsibility for the fraudulent returns, claiming that an unidentified SARS official had used their eFiling credentials.

However, the Tax Court rejected this explanation and upheld a 150% understatement penalty for intentional tax evasion.

The taxpayer was a salaried individual with no genuine farming business, which did not match the information contained in the revised returns.

After receiving the R1.38 million refund, the taxpayer admitted that their eFiling credentials had been used.

However, they argued that an unknown SARS official had submitted the fraudulent returns. The court found several problems with this explanation.

There were no bank records or police reports supporting the taxpayer’s allegation. The taxpayer’s versions also changed during the proceedings, with the fraud allegation only emerging on appeal.

SARS was required to prove the facts supporting the understatement penalty under section 102(2) of the Tax Administration Act. The court found that SARS had met this burden on a balance of probabilities.

A key part of the case was the revenue service’s eFiling Rules, which govern the use of taxpayer credentials.

The rules require taxpayers to protect their login details and make the registered user responsible for transactions performed through the account.

The court considered section 235(2) of the Tax Administration Act, which provides an evidential presumption regarding false statements in tax documents.

The combination of the eFiling records and the taxpayer’s own conduct provided evidence against the taxpayer.

How SARS can prove tax evasion

Importantly, the case does not necessarily mean that possession of eFiling credentials automatically proves that a taxpayer personally submitted every disputed return.

This is according to Shepstone & Wylie Attorneys’ Joint Managing Partner, Anton Lockem, and Senior Associate, Daniel Robb.

They explained that section 235(2) should operate only once it has been established that the taxpayer made, caused, or allowed the false statement.

In this case, there was additional evidence beyond the eFiling credentials. The taxpayer received and retained the R1.38 million refund.

They also provided shifting explanations and failed to provide any evidence that anyone else had submitted the returns. These facts persuaded the court that the conduct amounted to intentional tax evasion.

The finding of intentional tax evasion resulted in a 150% understatement penalty. SARS’s understatement penalty framework applies different percentages depending on the taxpayer’s behaviour.

Intentional tax evasion attracts the highest percentage under the standard understatement penalty table, Lockem and Robb noted.

SARS guidance explains that the regime is intended to encourage voluntary compliance and deter behaviour such as tax evasion. As such, the court upheld the 150% penalty and ordered the taxpayer to pay costs.

The judgment also considered whether the court had the discretion to reduce the penalty. Paragraph 27 of the judgment suggested that the court’s discretion to reduce the penalty was “very limited, if it exists at all”.

However, Lockem and Robb pointed out that section 129(3) of the Tax Administration Act allows a court to confirm, reduce or increase an assessment.

The Supreme Court of Appeal’s decision in Purlish Holdings v SARS [2019] ZASCA 4 also supports this interpretation. However, in the MLC case, the taxpayer did not provide a proper basis for reducing the penalty.

“The bottom line is that the MLC case is valuable as an evidence case,” they said. “The court was right on liability and the 150% understatement penalty.”

“But section 235 of the TAA must not become a shortcut to deeming the intention of a party, and paragraph 27, dealing with the court’s ability to reduce, confirm or increase an understatement penalty, should be read narrowly.”