Exploring key considerations when determining bona fide inadvertent errors resulting in understatements
De Villiers, Chrizanne
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Chapter 16 of the Tax Administration Act (28 of 2011) (the TA Act) deals with understatement penalties, which replaced the penalty provisions included under section 76 of the Income Tax Act (58 of 1962) and section 60 of the Value-Added Tax Act (89 of 1991). In the event of an 'understatement‘, in terms of Section 222 of the TA Act, a taxpayer must pay an understatement penalty as determined by the understatement penalty table which is contained in Section 223 of the TA Act, unless the understatement results from a bona fide inadvertent error."In the Draft Response Document presented by National Treasury and SARS to the Committee on Finance (SCOF) on 11 September 2013, it was stated that SARS would develop guidance in this regard for the use of taxpayers and SARS officials (SARS, 2013d:42). The determining of a bona fide inadvertent error on taxpayers‘ returns as stipulated in Section 222 of the TA Act, as amended in 2013, is a totally new concept in the tax fraternity. It is of utmost importance that this section is applied correctly based on sound evaluation principles and not on professional judgement when determining if the error was indeed the result of a bona fide inadvertent error. This research study focuses on exploring key considerations when determining bona fide inadvertent errors resulting in understatements. The role and importance of tax penalty provisions is explored and the meaning of the different components in the term 'bona fide inadvertent error‘ critically analysed with the purpose to find a possible definition for the term 'bona fide inadvertent error‘. The study also compares the provisions of other tax jurisdictions with regards to errors made resulting in tax understatements in order to find possible guidelines on the application of bona fide inadvertent errors as contained in Section 222 of the TA Act. The term 'bona fide inadvertent error‘ is evaluated by comparing the term with the characteristics of a good tax system and improvements for the practical execution of the new amendment to the TA Act are suggested. A literature review is used to gain an in-depth understanding of the role and importance of tax penalty provisions. Doctrinal research is also carried out to perform a critical analysis on the meaning of the different components in the term 'bona fide inadvertent error‘. A comparative analysis between different countries regarding errors being made when dealing with understatements is performed and a normative research approach is followed to critically evaluate the term 'bona fide inadvertent error‘. The findings of the research study revealed that the term 'bona fide inadvertent error‘ contained in Section 222 of the TA Act should be defined urgently and that guidelines must be provided by SARS on the application of the new amendment. SARS should also clarify the application of a bona fide inadvertent error in light of the behaviours contained in Section 223 of the TA Act to avoid any confusion.