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GOSS PRESENTATION

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GOSS PRESENTATION Powered By Docstoc
					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
SARS Audit Architecture
              +




                                                                                             Investigations
                                                                                                                                                               Enforcement
                                                                            Escalations                                                                       Investigations
                                                                            Compliance                                                        Conviction
                                              + Surveys



                                                                                risk
                                                     +




                                                                                                                                             Prosecution
                                                                              Hot line
                                                                                                                                                                   Media
                                                                                                                   Criminal
                                                                                                                                                                 leverage
                                       + Research




                                                                                                                    Illicit

                                                                                                              Improved compliance
                             + Focus Groups




                                                                                                                                                              Enforcement
                     Enforcement Program




                                                                             Escalation                                                                          Audit
                                                                                                                                                               (incl. Customs)
                                                          Case Generation




                                                                            from small e
           + Research and Segmentation




                                                                            Compliance
                                                                                             Audit
                                                                                                                Low volumes                 Investigative:
                                                                                risk
                                                                                                                High impact                   Assurance        Specialised
                        +Walk ins




                                                                            Administrative
                                                                              resources                           High skill                 Generic risk        Audits
                                                                              Refunds                            Risk based                  Specific risk
                                                                              (Nat61)                             High ROI
                                                                                                                                                               (incl. LBC Audit
                                                                                                                                                                  Customs)

                                                                                                              Improved compliance
             + Media




                                                                                                                High volumes                                      BEADS
                                                                                                                                                                (Compliance
                                                                                             Small e




                                                                                                               Productionised                Inspections
                                                                                                               Administrative                                     centres)
                                                                            Deregistration                                                 Correspondence
                                                                             Risk engines                        compliance                   Telephone
                                                                                                              Light intervention                audits
Informants
+ Analysis




                                                                                                                  Low ROI                  Low risk refunds      Customs
                                                                                                                                                              (PCI inspections)
SAR’s




                                                                                                                               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

                              20,000                                                                                                                27%

  Total VAT Vendors         Sanitation
                           Investigation
                                                                         98%                                                    73%
                                                                                                               76%



                                                  COMPANY/CC                                                   ESTATE/TRUST          INDIVIDUALS




Discussion:
• Of the estimated 740” VAT vendors on register, 20” VAT vendor cases were investigated as part of the
   VAT Register Sanitation initiative                                                                                           WHOLESALE AND RETAIL TRADE;
                                                                                                                                 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 CASES

          2004 – 2010: R0.034 Billion
VALUES*
REFUND


                                                                                       R2,671 Billion                                           R10,836 Billion
          2008 - 2010: R0.019 Billion                                                  R1,414 Billion                                           R4,566 Billion

                                15%         15%                                           9%                                                       8%
                                                                                                      21%
                                                                                 11%                                                       11%                     25%

                                                   12%
                        18%
                                                                                                             9%
                                                                                                                                                                         7%
                                     40%
                                                                                                                                                    49%
                                                                                       50%


     FINANCIAL INTERMEDIATION, INSURANCE, REAL ESTATE AND BUSINESS SERVICES

     CONSTRUCTION

     AGRICULTURE, HUNTING, FORESTRY AND FISHING                                                                                                12544
    WHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES,
    MOTOR CYCLES AND PERSONAL AND HOUSEHOLD GOODS;
    HOTELS AND RESTAURANTS                                                             7922
    OTHER                                                                                                                                 9813

                                               199
                                            CI & AUDIT CASES                        DEREGISTRATION CASES                       FIELD 14 - PAR 8.2 CASES



                                    ACTIVE        ADDRESS UNKNOWN             DEREGISTERED         ESTATE/INSOLVENT           SUSPENDED          UNKNOWN


          Note: The CI and audit cases are based on preliminary investigations. These cases need to be finalised through further cons ultation w ith 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
                                                                         Must follow a
                                                                          separate
        Match to SARS                         Unmatched                  Enforcement
    Value Added Tax (VAT)                     Transactions                 process
                                                Continue With
                                             Matched Transactions             Only
                                                                            Suspicious
                                                                              Cases
Scope of the analysis:
• Investigation of payments made.              Exclude:
  The turnover of all VAT vendors linking to a
                                               • Bus Transport (Incl. Taxis)
  matched bank account is compared to the
                                               • Property Letting: Residential Acc
  payment amount.                              • Government Departments
• An investigation of the compliance of all • Provisional Administrators
  matched VAT vendors                          • Regional & Local Authorities
                                               • Primary, Secondary & Special Education
                                                 Schools
                                               • Welfare Organisations

				
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