Top 10 Reasons Why Small Businesses Get Audited by SARS

For South African small business owners, few words strike more fear than “SARS audit.” The South African Revenue Service (SARS) has increased its audit activities in recent years, particularly as it seeks to close tax gaps, ensure compliance, and generate much-needed revenue for the state. While an audit doesn't automatically mean wrongdoing, it can be time-consuming, stressful, and, if unprepared, financially damaging.

Understanding why SARS selects certain businesses for audits can help small businesses proactively manage their finances and minimize risk. In this article, we’ll explore the top 10 reasons small businesses get audited in South Africa, what triggers these audits, and — most importantly — how working with a trusted financial partner like MMT Financial Services can keep you safe, compliant, and audit-ready.

What is a SARS Audit?

A SARS audit is an official examination of a taxpayer’s financial records to verify the accuracy of tax returns and ensure compliance with South African tax law. SARS may audit:

• Income Tax

• VAT

• PAYE

• Customs & Excise

• Provisional Tax

• Corporate Tax

Audits can be random or targeted. In most cases, they are triggered by red flags in a taxpayer’s submission or anomalies identified through SARS’s automated risk engine.

1️⃣ Discrepancies in Income Reporting

One of the most common audit triggers is a mismatch between the income reported on a business’s tax return and the information SARS already has access to. With increased digital integration, SARS receives third-party data from:

• Banks (interest income)

• Suppliers

• Employers

• Investment platforms

If your reported income does not match these external data points, SARS may flag your return for audit.

Example:

• A small consulting business underreports its turnover by failing to include certain bank deposits.

• SARS picks up the discrepancy via bank data feeds.

2️⃣ VAT Refund Claims That Appear Excessive

VAT refunds are high-risk areas for SARS. If a business frequently claims large VAT refunds or claims seem inconsistent with the business’s size and industry, it may trigger scrutiny.

Red flags include:

• High input VAT claims relative to output VAT

• Regular negative VAT submissions

• VAT claims that don’t align with financial performance

3️⃣ Large Fluctuations in Expenses or Profits

SARS’s risk engine monitors patterns over time. If your expenses or profits fluctuate drastically from year to year, this may trigger an audit — especially if SARS suspects income shifting, aggressive expense deductions, or tax avoidance schemes.

Example:

• A business that made R3 million profit last year suddenly reports a R200,000 loss this year.

• SARS wants to know why.

4️⃣ Unsubstantiated or Unusually High Business Expenses

While businesses are entitled to deduct legitimate business expenses, SARS often audits businesses that submit:

• Large entertainment expenses

• Excessive travel costs

• Personal expenses disguised as business deductions

• High repairs & maintenance claims

Proper documentation is key. Invoices, receipts, and clear business purpose explanations must always back deductions.

Real-World Problem:

Many SMEs fail to maintain supporting documents, making them vulnerable when SARS asks for proof during an audit.

5️⃣ Consistently Late Filings or Non-Compliance History

SARS profiles taxpayers based on past compliance behavior. Businesses that regularly submit late returns, miss payments, or have previously been penalized are more likely to be audited.

SARS interprets this behavior as:

• Disorganization

• Poor recordkeeping

• Potential tax avoidance

6️⃣ Payroll & PAYE Discrepancies

Payroll audits are increasingly common, particularly when:

• PAYE submissions don’t match employee IRP5 certificates.

• Directors are improperly classified as “consultants” to avoid PAYE.

• Salaries and wages don’t match financial statements.

SARS cross-checks data submitted via EMP501 reconciliations with actual payroll payments and director remuneration declarations.

7️⃣ Cash Businesses or Industries with High Fraud Risk

Certain industries naturally attract more SARS attention due to high levels of cash transactions, informal trade, or underreporting risks. These include:

• Restaurants

• Spaza shops

• Hospitality & accommodation

• Construction

• Beauty salons

• Car dealerships

Why?

Cash-based businesses are harder to verify, making them prime audit candidates.

8️⃣ Large Director Loans or Related Party Transactions

When directors borrow money from the business or related party transactions (with subsidiaries, spouses, or trusts) occur frequently, SARS may suspect tax structuring or disguised income distribution.

Common red flags:

• Interest-free director loans

• Unusual intercompany charges

• Excessive management fees between related entities

9️⃣ Random Selections (Risk Profiling)

Not every audit is triggered by a mistake. SARS sometimes selects taxpayers randomly to test its risk profiling systems or to audit certain sectors as part of compliance campaigns.

In recent years, SARS has publicly stated that it uses advanced artificial intelligence (AI), big data, and automated risk scoring to select audits — which means even compliant businesses can be reviewed periodically.

10️⃣ Third-Party Reports & Whistleblowing

SARS also receives anonymous tips or third-party reports, including:

• Disgruntled ex-employees

• Competitors

• Divorce proceedings

• Fraud investigations

Even allegations, if credible, can trigger an audit.

The Impact of a SARS Audit

If your business is selected for audit, expect:

• Requests for bank statements, invoices, receipts, and contracts

• Interviews or written questions

• Temporary withholding of refunds

• Potential SARS penalties or interest if underpayments are discovered

• Professional fees for representation if external consultants are needed

If discrepancies are significant, SARS may pursue:

• Administrative penalties

• Re-assessments for prior years

• Criminal charges for tax evasion (in severe cases)

How to Minimize Your SARS Audit Risk

Here’s where MMT Financial Services plays a crucial role for small businesses:

✅ Accurate Recordkeeping

We ensure your books are always current, accurate, and ready for review at any time.

✅ Professional Bookkeeping

Our expert team minimizes errors and ensures compliance with accounting standards.

✅ Timely Submissions

MMT manages all SARS submissions — VAT, PAYE, Income Tax — reducing the risk of late filings or missed deadlines.

✅ Audit-Ready Files

Should SARS request an audit, we have your supporting documentation organized, accessible, and ready.

✅ Proactive Tax Planning

We help you make legal, compliant tax decisions that minimize your tax burden without crossing into risky or aggressive schemes.

✅ SARS Representation

If audited, MMT’s experts can represent your business, handle SARS queries, and guide you through the audit process with minimal disruption.

Real Client Success Story

A small marketing agency engaged MMT after receiving a VAT audit letter from SARS. While they had been handling their own VAT filings, several claims were unsupported by proper documentation. Our team immediately organized missing receipts, provided explanations for SARS queries, and successfully defended the client’s VAT positions — avoiding penalties and safeguarding their SARS profile.

What SARS Expects During an Audit

To successfully navigate a SARS audit, businesses should always have:

• Accurate financial statements

• Source documents (invoices, receipts, contracts)

• Payroll records

• SARS correspondence

• Up-to-date bank reconciliations

• VAT and PAYE calculations

With MMT as your financial partner, these records are systematically maintained year-round — not only when SARS comes knocking.

Common Myths About SARS Audits

❌ “If I fly under the radar, SARS won’t notice me.”

SARS’s digital systems profile even the smallest taxpayers.

❌ “As long as I’m honest, I won’t get audited.”

Even honest mistakes or anomalies can trigger audits.

❌ “Only big companies get audited.”

In fact, SARS heavily audits SMEs due to their higher non-compliance rates.

❌ “SARS audits are rare.”

SARS is increasing audits yearly, especially on SMEs.

How MMT Financial Services Can Help

At MMT Financial Services, we believe that compliance isn’t just about avoiding audits — it’s about building confidence and stability in your business. Our full-service approach includes:

• Professional bookkeeping & payroll services

• Tax submissions & SARS representation

• CIPC compliance

• Real-time financial reporting

• Proactive tax advisory services

• Peace of mind knowing you are always audit-ready

A SARS audit can be daunting, but with the right preparation and expert support, it doesn’t have to be. The key is proactive, accurate, and professional financial management — exactly what MMT Financial Services delivers to every client.

If you’re serious about protecting your business from costly SARS audits, don’t wait for the audit letter to arrive. Partner with MMT Financial Services today — your compliance experts, your financial partner.