What Every Small Business Should Know About SARS Audits

Introduction

Imagine this: It’s a regular Wednesday morning. You’ve just poured yourself a cup of coffee and sat down to catch up on emails when one particular subject line jumps out — “Notice of Audit from SARS.”

For many small business owners in South Africa, this kind of message can trigger a mix of panic and confusion. What does it mean? What did I do wrong? Will I owe money?

But here’s the truth — a SARS audit doesn’t always mean you’ve done something wrong. In fact, in many cases, it’s just part of SARS’ routine checks to ensure businesses are playing by the rules. Much like a traffic stop doesn’t always end in a ticket, an audit is not necessarily a punishment — it’s a process.

And that’s where many business owners get stuck. Without clear guidance, the process can feel like navigating a maze blindfolded. As professional accountants working with SMEs across South Africa, we’ve seen how preparation, understanding, and calm action can turn an intimidating audit into a manageable (even insightful) experience.

In this guide, we’ll walk you through what SARS audits are all about — in plain English. We’ll show you why they happen, how to prepare, and what to expect if your business gets selected. More importantly, we’ll help you feel equipped — not overwhelmed.

What is a SARS Audit?

Think of a SARS audit like a financial health check. Just as you’d go to a doctor for a routine check-up, SARS selects individuals and businesses to ensure that the information submitted in their tax returns is accurate and complete. The aim isn’t always to catch wrongdoers — it’s to maintain trust in the system.

There are generally two types of SARS audits:

• Verification: This is a more basic review where SARS asks for supporting documents to verify something in your return. Think of it as a “double-check.”
  
  
• Full Audit: A deeper, more comprehensive investigation where SARS might examine multiple aspects of your tax affairs, often spanning several years.
  
  

Why SARS Might Audit Your Business

There’s a common misconception that audits are random, but more often, SARS uses red flags or risk profiling. Here are a few triggers we’ve seen among our SME clients:

• Large VAT refunds claimed repeatedly
  
  
• High expense claims that don’t align with reported income
  
  
• Irregularities between your IRP5s, IT3s, and tax returns
  
  
• Operating in a high-risk industry (like cash-based businesses or construction)
  
  

A Real Example:

We once worked with a family-run hardware store in Gauteng. They had been claiming VAT refunds for imported stock — all legitimate, but filed inconsistently. One year, a sudden spike in refund amounts raised a flag. SARS initiated a verification request. Because they kept most documents digitally organised, we helped them respond within three days — and the issue was resolved without a penalty.

That experience taught the owner a valuable lesson: audits aren’t about blame — they’re about clarity. And being organised is your best defence.

In the next section, we’ll explore why small businesses like yours are often targeted — and what you can do to lower your risk.

Why Small Businesses Are Often Targeted

You might be thinking, “Why me? I’m just a small player — shouldn’t SARS focus on the big corporations?” It’s a fair question. But in reality, small to medium-sized businesses are often more likely to be audited, not less.

Here’s why:

1. Smaller Teams, Bigger Risks

Most SMEs don’t have full-time finance teams or in-house tax specialists. Many rely on part-time bookkeepers or handle compliance themselves. And while that’s understandable, it often leads to honest mistakes — misclassified expenses, forgotten declarations, or late submissions. These slip-ups may seem small, but they can raise red flags during SARS’ data screenings.

2. Cash-Based or High-Risk Industries

If your business deals with a lot of cash, fluctuating invoices, or operates in a high-risk sector — such as hospitality, retail, or construction — SARS is more likely to scrutinise your returns. It’s not personal; these industries historically show higher levels of non-compliance.

3. Inconsistencies Across Returns

SARS cross-references your income tax return with other submissions — like VAT, PAYE, or third-party IRP5s. If there are mismatches (say, your VAT claims don’t align with your declared income), it might prompt a review. One of our clients, a freelance graphic designer, was selected for audit after under-declaring income that was already reported by a corporate client on an IRP5.

4. Random Selection

Sometimes, SARS does audit businesses randomly as part of quality checks. It’s rare, but possible. That’s why audit readiness should be a regular part of your financial hygiene — like checking your oil before a road trip.

A Business Owner’s Perspective

We worked with a husband-and-wife landscaping business in Durban that was flagged after SARS noticed inconsistent VAT filings over three quarters. They weren’t trying to hide anything — they’d simply rushed through submissions after a busy season. Once we reviewed and corrected the records, they were able to resolve the audit without any penalties. But the stress? Avoidable.

Their advice to other business owners: “Don’t let SARS catch you off guard. Know your numbers — or work with someone who does.”

What to Do If You’re Selected for an Audit

Receiving a notice from SARS can feel like a punch to the gut — but take a breath. An audit isn’t a judgment; it’s a process. And like any process, it can be managed with the right steps.

Here’s what to do next:

1. Don’t Panic — Read the Letter Carefully

The first thing to do is read the SARS notification thoroughly. It will outline:

• The type of audit (verification or full audit)
  
  
• What information or documents are required
  
  
• The deadline for submission
  
  

Look for specifics — are they asking for proof of one transaction or several months of documentation? Understanding the scope helps you respond accurately and avoid further complications.

2. Start Gathering Your Documentation

SARS may request:

• Invoices, receipts, and bank statements
  
  
• VAT calculations and supporting schedules
  
  
• Payroll records (if you employ staff)
  
  
• Supplier or customer contracts
  
  
• Financial statements and ledger summaries
  
  

If your records are digital and well-organised, this process is quick. If not, it may take time — but don’t rush and submit partial or incorrect information.

✅ Tip: Keep a folder labelled “Audit Ready” where you save your monthly records — this makes future audits far less stressful.

3. Consult Your Accountant or Tax Practitioner

Now’s the time to loop in a professional — ideally someone who understands your business history. They can help:

• Review your SARS notice and documents
  
  
• Check for inconsistencies or errors
  
  
• Draft a clear, professional response to SARS
  
  

Even if you feel confident, an expert’s second set of eyes can be the difference between smooth resolution and drawn-out penalties.

4. Respond On Time — and Completely

Missing a deadline or submitting incomplete info can lead to further penalties or even tax assessments based on SARS’ assumptions — not your actual numbers. If you genuinely need more time, your accountant can request an extension on your behalf.

Real-Life Snapshot: The Prepared Entrepreneur

One of our clients — a digital marketing consultant in Cape Town — received a SARS verification notice for a recent VAT refund. Because she had a monthly habit of reconciling receipts and income with her accountant, she was able to submit everything within 48 hours. SARS closed the case without further queries.

Her words? “I didn’t lose a single night’s sleep — just stayed calm and emailed the file over.”

How to Prepare in Advance and Avoid Issues

Preparing for a SARS audit before it happens might feel like extra admin, but it’s one of the smartest habits any business owner can adopt. Think of it like installing a fire extinguisher — you hope you never need it, but you’ll be grateful it’s there when things get hot.

Here’s how to build audit-readiness into your regular business routine:

1. Keep Your Records Clear, Consistent, and Accessible

Messy books are a magnet for SARS audits. Whether you’re still using spreadsheets or have moved to cloud software, you should be able to easily locate and verify:

• Invoices and receipts (for income and expenses)
  
  
• Bank statements that match your declared figures
  
  
• Employee payroll reports and payslips
  
  
• VAT, PAYE, and provisional tax submissions
  
  

Tip: Scan or save your paperwork in a secure cloud folder organised by month and category. Apps like Google Drive or Dropbox can help — especially for businesses that still rely on paper records.

2. Reconcile Monthly Instead of Annually

Many small business owners only think about their books during tax season — by then, errors are harder to spot and fix. A better approach? Monthly reconciliation. This means checking that:

• Your expenses are correctly categorised
  
  
• Your income aligns with bank deposits
  
  
• Your VAT and PAYE filings are accurate
  
  

This way, you’re fixing small issues in real-time — not scrambling a year later.

3. Use the Right Tools and Software

Cloud-based accounting platforms like Xero, Sage, or QuickBooks simplify compliance by automating many tasks:

• Generating VAT reports
  
  
• Keeping audit trails
  
  
• Categorising transactions
  
  
• Storing supporting documents
  
  

They also make it easier for your accountant to access your data — especially during an audit.

4. Stay Updated on SARS Changes

SARS regularly updates its systems, rules, and thresholds — from eFiling processes to provisional tax deadlines. Subscribe to their newsletter or check in with your accountant quarterly. Knowing what’s coming helps you stay a step ahead.

Penalties, Red Flags, and How to Avoid Them

SARS may not knock on your door often, but when it does, it pays to be prepared — because the consequences of non-compliance can be both financial and reputational. Understanding what’s at stake helps you prioritise proactive bookkeeping over reactive scrambling.

1. The Penalties You Could Face

If SARS finds that your tax submissions were inaccurate, late, or misleading — even unintentionally — you could face:

• Administrative penalties: R250 to R16,000 per month depending on turnover, often for late submissions.
  
  
• Interest on unpaid taxes: Currently around 10.5% annually.
  
  
• Additional tax: Up to 200% of the tax shortfall in cases of gross negligence or fraud.
  
  
• Criminal charges: In extreme cases, such as falsified invoices or undeclared income.
  
  

Note: Even honest mistakes can attract penalties. SARS doesn’t require intent to apply certain fines.

2. Common Red Flags That Trigger Audits

Avoiding unnecessary scrutiny starts with understanding what raises eyebrows. These are some typical triggers for audits we’ve seen with SME clients:

• VAT refunds that appear frequently or are unusually high
  
  
• Expense claims that don’t match income levels
  
  
• Rapid fluctuations in reported revenue
  
  
• Mismatches between PAYE or IRP5s and tax returns
  
  
• Late or inconsistent filing of tax returns
  

Think of it this way: If something in your financials looks out of place to you, it probably will to SARS too.

3. Voluntary Disclosure Can Save You

If you discover past mistakes before SARS does — like under-declared income or missed returns — consider using the Voluntary Disclosure Programme (VDP). This allows you to come clean, correct your tax affairs, and potentially avoid harsh penalties or prosecution.

We’ve assisted several clients through this process successfully, especially those who were unaware of past tax obligations from dormant companies or side ventures.

Conclusion: Be Ready, Not Reactive

Facing a SARS audit might never be on your business bucket list — but it doesn’t have to be a nightmare either. The difference between stress and confidence often comes down to preparation.

Let’s recap:

• SARS audits are part of routine compliance — they’re not always a sign of wrongdoing.
  
  
• SMEs are often targeted due to limited resources, cash-heavy operations, or simple filing errors.
  
  
• If you’re selected, responding quickly, completely, and calmly makes all the difference.
  
  
• Staying prepared year-round — through proper recordkeeping and monthly reconciliations — is the best defence.
  
  
• Avoid red flags and penalties by understanding what SARS looks for, and using tools and professionals who help you stay compliant.
  
  

At the heart of it all is this: you don’t need to fear SARS. You need to know your numbers, understand the process, and get the right support when needed.

Because the more proactive you are today, the less reactive you’ll have to be tomorrow.