Why Every Business Owner Should Know the Red Flags

A client of mine once walked into my office, a little pale and very anxious. She had been running a small catering business for three years and prided herself on staying on top of her finances. But then she received a letter from SARS — and suddenly, her confidence wavered.

“I don’t understand — I do everything I’m supposed to. Why am I on their radar?”

If this sounds familiar, you’re not alone. For many business owners, the idea of being flagged by SARS is like seeing a warning light flash on a car dashboard. You might not know exactly what triggered it, but you know you need to pay attention — and fast.

Being flagged by SARS doesn’t automatically mean wrongdoing. In fact, most small to medium-sized businesses that appear on their radar are simply displaying patterns or behaviours that catch the tax authority’s attention. Understanding these red flags is your first step in avoiding penalties, audits, and unnecessary stress.

Think of SARS’ radar like a lighthouse scanning the waters. Ships (businesses) pass through safely most of the time, but certain lights, movements, or unusual cargo might make the radar blink. Knowing what triggers the light helps you navigate safely and keep your business on course.

This article will explore seven common red flags that could put your business under SARS’ microscope — and more importantly, what you can do to stay clear.

Late or Missing Tax Returns

If there’s one red flag that consistently lands businesses in trouble, it’s late or missing tax returns. It’s the easiest way for SARS to notice your business, and unfortunately, it’s also one of the most common mistakes.

Imagine a friend who keeps promising to pay back a loan but never does. Even if they intend to, repeated delays raise eyebrows. The same goes with tax returns — missing deadlines signals to SARS that there might be an issue, even if it’s just oversight.

Why It Matters

• SARS flags late submissions quickly: whether it’s income tax, VAT, or provisional tax returns.

• Penalties and interest can accumulate fast, even for small delays.

• Compliance history matters: repeated late submissions can increase scrutiny in future audits.

Common Scenarios

• A sole proprietor who’s been so busy with client work that filing provisional tax slips through the cracks.

• A small company that files annual returns late because bookkeeping was not up to date.

How to Avoid It

• Set reminders well before deadlines.

• Use accounting software or engage a professional to ensure submissions are on time.

• Keep a simple calendar of all SARS deadlines, including provisional tax, VAT, and annual returns.

Think of staying ahead of tax deadlines like tending a garden. If you water and prune regularly, the plants thrive. Ignore it for a while, and weeds — in this case, penalties and audits — quickly take over.

Inconsistent or Unusual Income Patterns

Even if your tax returns are on time, unusual income patterns can put your business on SARS’ radar. Sudden spikes, drops, or irregular payments can look suspicious, especially if they don’t match what’s typical for your business type or industry.

Think of it like your bank noticing a sudden large withdrawal or deposit — it’s not inherently wrong, but it raises questions. SARS works the same way: they monitor for patterns that deviate from the norm.

Why It Matters

• SARS uses data analytics to detect unexpected income fluctuations.

• Frequent or large discrepancies can prompt queries or even audits.

• Consistency helps demonstrate that your business is stable and compliant.

Common Scenarios

• A freelance web designer who usually earns R30,000 a month suddenly invoices a client for R200,000.

• A seasonal business, like a landscaping company, that has huge surges during summer but little documentation for those months.

How to Manage It

• Keep detailed records explaining income spikes and dips.

• Provide contracts, invoices, or proof of payments for large transactions.

• Work with your accountant to ensure your financial reporting matches actual business activity.

Real-Life Example

I once worked with a small retail business that received a one-off bulk order from a corporate client. The owner hadn’t documented it properly, and SARS flagged the spike. While there was no wrongdoing, the business had to spend weeks providing proof — time they could have used growing the business instead.

Consistency doesn’t mean your business shouldn’t grow. It means your records should tell a clear story of what’s happening financially. With proper documentation, even unusual income won’t raise unnecessary alarms.

Excessive Deductions or Claims

Deductions are one of the most valuable tools for reducing your taxable income — but claiming too much, or claiming it without proper records, is one of the fastest ways to get SARS’ attention.

Think of it like stretching a story a little too far. A small exaggeration might go unnoticed, but repeated or extreme claims eventually make people question your credibility. SARS operates the same way — unusual or disproportionately high deductions act like a flashing red light on their radar.

Why It Matters

• Claims that appear unusually high compared to income can trigger audits.

• Commonly flagged areas include travel, home office expenses, business entertainment, and vehicle costs.

• Even legitimate deductions can attract attention if not supported with proper documentation.

Common Scenarios

• A small consulting firm claiming 50% of personal vehicle costs without mileage logs.

• A freelance business claiming full travel and entertainment costs that exceed revenue for a month.

How to Avoid It

• Keep detailed receipts, invoices, and logs for all deductions.

• Ensure deductions are proportionate to actual business activity.

• Review deduction patterns annually with an accountant to verify reasonableness.

Real-Life Example

One client, a digital marketing freelancer, claimed home office and travel expenses that nearly matched her total income. While all claims were legitimate, SARS requested detailed documentation, causing weeks of stress and lost time. After implementing simple mileage logs and expense categorisation, future claims passed smoothly without extra scrutiny.

Takeaway

Deductions are your friend, but like any friend, they need boundaries. Clear records and proportional claims keep your business compliant while maximising benefits.

Cash Transactions and Deposits

For many small businesses, cash is a daily part of operations — whether it’s retail sales, client payments, or informal transactions. While cash isn’t inherently problematic, large or frequent cash deposits can attract SARS’ attention if they aren’t clearly documented.

Think of cash deposits like ripples in a pond. A small stone causes minor ripples, but large stones — or a lot of small stones thrown in rapidly — create waves that everyone notices. SARS monitors these “waves” to ensure they match declared income.

Why It Matters

• Large or frequent cash deposits can be flagged as unexplained income.

• SARS may query cash-intensive businesses like retail stores, restaurants, and small contractors.

• Proper documentation and reconciliation demonstrate transparency and reduce audit risk.

Common Scenarios

• A small coffee shop depositing thousands in cash daily without proper till records.

• A construction contractor receiving multiple large cash payments from clients without issuing invoices.

How to Manage It

• Reconcile all cash deposits with invoices or sales records.

• Keep a daily cash log, showing sources and amounts.

• Deposit cash promptly and systematically, avoiding lump-sum deposits that raise questions.

Real-Life Example

I once helped a boutique retail owner who ran her store primarily on cash. Deposits were inconsistent and sometimes bundled together. SARS flagged a large deposit that seemed out of pattern. With proper till reports, sales records, and bank reconciliations, the issue was resolved quickly — but only because the documentation existed. Without it, the situation could have escalated into a lengthy audit.

Takeaway

Cash itself isn’t the enemy. Poor record-keeping is. Treat every cash transaction like a puzzle piece — each one must fit neatly into your financial picture.

Related-Party Transactions or Complex Structures

Transacting with family members, friends, or affiliated businesses is common in small to medium enterprises. While these arrangements are often perfectly legal, they can catch SARS’ attention if not handled transparently.

Think of it like traffic signals. When everything moves predictably, traffic flows smoothly. But when cars start zigzagging or taking shortcuts, it creates suspicion. Similarly, unusual or complex business structures can make SARS pause and look closer.

Why It Matters

• Transactions with related parties can appear as attempts to avoid tax if not properly documented.

• Complex company structures or multiple affiliated entities can raise questions.

• Transparency and accurate reporting are key to avoiding unnecessary scrutiny.

Common Scenarios

• A director transferring funds between personal and company accounts without clear purpose.

• Family-owned businesses charging each other for services without proper contracts or documentation.

• Businesses with multiple entities claiming inter-company expenses without explanation.

How to Manage It

• Maintain written contracts or agreements for all related-party transactions.

• Document the business purpose for transfers and shared expenses.

• Work with an accountant to ensure compliance and clarity across all company structures.

Real-Life Example

I once assisted a family-run consulting firm where services were shared between two entities owned by the same family. While all transactions were legitimate, SARS flagged certain payments. Proper contracts and clear documentation resolved the queries without penalty, but the lesson was clear: transparency prevents alarms before they happen.

Takeaway

Related-party dealings aren’t inherently risky, but unclear documentation or overly complex structures can put your business under scrutiny. Keep things simple, logical, and well-documented.

Claiming Losses Year After Year

It’s not uncommon for small businesses to experience losses during their early years. However, consistently reporting losses year after year can trigger SARS’ radar, even if the losses are genuine.

Think of it like a smoke detector — one small puff of smoke is fine, but repeated alarms signal something might be wrong. Similarly, repeated losses without clear explanations can raise questions about the sustainability or legitimacy of a business.

Why It Matters

• Consistent losses may prompt SARS to investigate whether the business is genuinely commercial.

• They may check if losses are being claimed to reduce taxable income unfairly.

• Proper justification and documentation are essential to avoid misunderstandings.

Common Scenarios

• A startup showing losses for several consecutive years without a clear growth plan.

• Small retail businesses that claim expenses exceeding income annually.

• Companies in the same industry consistently showing results significantly below peers.

How to Manage It

• Keep accurate records showing all business activities and expenses.

• Document your business strategy and reasons for losses (e.g., reinvestment, seasonal factors, startup costs).

• Consult an accountant to ensure losses are reasonable, justified, and clearly recorded.

Real-Life Example

I worked with a small online retail store that had three consecutive years of losses due to inventory expansion and marketing costs. SARS initially flagged the returns, but detailed records, financial statements, and a clear growth strategy demonstrated that the losses were legitimate and part of a structured plan. The business avoided penalties, and the owner gained confidence in proactive reporting.

Takeaway

Losses are natural in business, but chronic losses without explanation can put your business on SARS’ radar. Clear documentation and a strategic approach are key to maintaining compliance and credibility.

Inaccurate or Incomplete Documentation

Even the most honest business owners can raise red flags if their records are sloppy or inconsistent. SARS relies heavily on accurate documentation to verify income, expenses, and deductions. Missing, incomplete, or mismatched documents make it look like something is amiss — even if everything is above board.

Think of it like building a house. If your foundation is shaky or your measurements are off, the structure becomes unstable. Your financial records are the foundation of your business credibility. Without solid, accurate documentation, everything else can appear questionable.

Why It Matters

• Discrepancies between bank statements, invoices, and accounting records can trigger audits.

• Incomplete supporting documents make it difficult to justify deductions or claims.

• Poor bookkeeping can slow down audits and even increase the likelihood of penalties.

Common Scenarios

• A small business owner misplacing receipts or failing to match expenses with invoices.

• Bank statements that don’t align with accounting software records.

• Incorrectly categorised transactions leading to apparent discrepancies in profit and loss statements.

How to Manage It

• Keep all receipts, invoices, and financial statements in an organised manner.

• Reconcile accounting software with bank statements regularly.

• Consider cloud-based systems or digital backups to avoid lost documents.

• Review records with an accountant periodically to catch mistakes early.

Real-Life Example

One client, a freelance graphic designer, had expenses scattered across email, paper receipts, and bank statements. When SARS questioned a deduction, she had to spend days reconstructing records. After implementing a simple digital bookkeeping system and weekly reconciliation, her records became clean, accurate, and audit-ready — and she never had a repeat scare.

Takeaway

Accurate and complete documentation isn’t just about compliance — it protects your business, saves time, and gives peace of mind. Well-organised records ensure that even if SARS looks closer, you have nothing to worry about.

Conclusion: Staying Off SARS’ Radar Starts With Awareness

Being flagged by SARS doesn’t automatically mean wrongdoing — it often signals patterns, behaviours, or simple mistakes. From late tax returns to incomplete records, most red flags are preventable with awareness and good practices.

The key takeaway for every business owner is this: proactive accounting is your best defence. By staying organised, maintaining clear records, and understanding common triggers, you move from reacting to SARS to managing your business with confidence.

Remember, it’s not about avoiding taxes — it’s about staying compliant while running your business efficiently. Every step you take today reduces stress tomorrow and safeguards the reputation and financial health of your business.