A sure-fire technique for Sars to determine whether or not something is wrong is to examine someone's lifestyle.

During a recent panel discussion at the 2021 South African Institute of Taxation (SAIT) Tax Indaba, crypto assets and their taxation came up as a touchy subject for industry professionals once again. Mark Kingon (former acting Sars Commissioner), Keith Engel (CEO of SAIT), Creag Sudding (Associate Director at KPMG), Jacques van Wyk (CEO of JGL Forensic Services), and Jerry Botha were the five people present for the virtual debate (Managing Partner at Tax Consulting SA).

When discussing the complexities of investigating tax evaders through lifestyle audits, Jacques van Wyk was quick to point out that the introduction of crypto assets has complicated the investigative process on a forensic level, as it challenges tax jurisdictions, which is akin to policing a borderless world.

While Van Wyk is in favour of crypto taxes, he believes that the public is ignoring Sars' warnings. He asked Sars to leverage their data and set the appropriate precedents, nudge those who are purposefully non-compliant to reconsider their stance on the topic.

The advantages and disadvantages of data collection

The advent of the digital age demonstrated that we now live in a data-rich environment. While anything can be tracked, information may also easily vanish. Tax evaders and career criminals have worked tirelessly to devise methods of evading revenue agents.

With access to a wealth of third-party data, Sars can monitor the yacht and aircraft fleet, as well as credit card activities and overseas assets. They can acquire access to an individual's offshore transactions through mutual information sharing agreements with other governments.

However, crypto asset analysis goes beyond the investigation of third-party data. The digital data surrounding cryptography is thick and sophisticated, requiring a great deal of personnel to review and rework. Sars is cognisant of demand and the resulting manpower shortage in order to sift through all of the data.

Sars has embarked on a large recruitment drive, with a particular emphasis on hiring forensic auditors and veterans who can aid in ups-killing the younger specialists, according to Mark Kingon.

Technology is a tremendous enabler because it enables financial investigators to collect massive amounts of data, create profiles or patterns, and then focus in on the outliers, the things that are unexplained. Even social media is a goldmine of information, which means it's not a good idea to flaunt your new sports vehicle (or crypto riches) while still owing money to Sars.

If you are one of the enigmatic crypto millionaires who profited from the global crypto wave, you may want to reevaluate the security of your hiding place. A sure-fire technique for Sars to determine if something is wrong is to examine someone's lifestyle and determine whether their expenditure matches their income. Ultimately, the burden of proof rests with the taxpayer to justify any discrepancies.

Recognise Sars' motivation for pursuing crypto tax compliance

During the conversation, Kingon referred to Sars' Strategic Intent Presentation for 2020–2024, in which Commissioner Edward Kieswetter articulated nine strategic objectives from the standpoint of the taxpayer experience. Kingon emphasised aim 5, which specifies that Sars will:

"Expand and enhance data utilisation within a complete knowledge management framework to maintain data integrity, promote insight, and improve outcomes."

Sars pledges in their official presentation that they will initially pursue voluntary compliance. Where procedures may be simplified through data, analytics, and artificial intelligence, Sars will use its complete knowledge management system to identify and police non-compliance.

Local investors are frequently resistant to voluntary compliance, according to Thomas Lobban, Head of Crypto Asset Taxation at Crypto Tax Consulting. He warns traders who brag about their crypto winnings on social media platforms that they risk getting into trouble if Sars monitors their feeds.

"Non-compliance is still a problem in the crypto asset area for South Africans," Lobban notes. "This is partly due to a misunderstanding of the appropriate tax regulations, compounded by the widespread belief that Sars is not entitled to tax them on their gains. Sars's decision to conduct a compliance enforcement exercise is understandable. When a taxpayer is unable to demonstrate the source of revenue utilised to support their lifestyles, Sars is forced to delve deeper."

In a post-event interview, Engel highlighted additional concern about taxpayers who believe they are playing a game with Sars by determining how long they can avoid paying their taxes.

"Whatever earnings you earn, you are legally required to report them. If you do not declare them, you are committing tax evasion," Engel emphasised.

"Sars is dedicated on obtaining third-party data from the most popular cryptocurrency trading platforms. While Sars is accomplishing this, individuals believe they can continue to get away with it, but they will be apprehended two or three years from now. Sars can go back in time indefinitely if those persons did not declare the money.

"When they apprehend you, they will demand payment of the tax, interest, and penalties. Then you're in serious trouble."

The results of a lifestyle audit may have a negative influence on your relationship with Sars if anomalies are discovered. If you believe you may be in violation of the law, it is prudent to reveal your profits and, if required, seek redress through the Voluntary Disclosure Programme (VDP).  If Sars decides to audit your lifestyle, the VDP window becomes unavailable - even if you have been alerted of a potential audit.

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