Attila Kadikoy, Managing Partner at Levantine & Co, warns wealthy individuals that tax authorities are increasingly adopting AI to help identify tax evasion.

Many investors consider tax as a major contributor to wealth erosion – and rightly so. My advice has been (and always will be) that it’s far better to address this with tax efficiency in a transparent manner than banking on the likes of the South African Revenue Service (SARS) or other revenue service bodies not spotting or not taking action on tax evasion.

Tax avoidance is a cat-and-mouse game that has become increasingly risky as tax authorities have started investing more in technology and now use sophisticated AI tools and global data-sharing to identify anomalies in individuals’ tax returns.

SARS’s establishment of a specialised cryptocurrency unit, relying on AI, international cooperation and automatic information sharing to detect tax evasion, is the next step in an increasingly sophisticated global endeavour to detect tax fraud.

Common Reporting Standard

The OECD’s Common Reporting Standard (CRS), implemented in 2014, transformed international tax transparency. With the 120 participating countries now automatically sharing financial account information, the system facilitated data exchange on 123 million bank accounts worth EUR 12-trillion by 2022, according to the latest OECD data.

SARS has had access to CRS data for over 10 years, but in the past was not equipped to analyse the immense amount of data that has accumulated. It is clear that this situation is changing. Tax authorities are now using AI to process the vast amounts of data that previously overwhelmed them, and this is providing them with a powerful mechanism to detect fraud.

Many investors still believe that SARS won’t touch their offshore wealth, but this is not the case. The era of AI-powered tax enforcement is here, leaving taxpayers with nowhere to hide. SARS processes over 1.2 billion records annually, and is now using AI to analyse patterns in wealthy individuals’ financial data and third-party information.

Considering this, taxpayers are well-advised to shift their focus to minimising taxes rather than avoiding them. Taxpayers who fall foul of the regulations stand to have severe penalties imposed when submitting fraudulent returns.

AI models generating positive results for tax authorities

While it has understandably taken tax authorities time to mine the vast troves of data generated by CRS and other reporting mechanisms, their investments in AI to detect fraudulent tax behaviour are paying off.

Australia’s tax authority has used AI models to prevent $2.5-billion in fraudulent claims, while Italy’s AI system identified over 1 million high-risk cases last year, according to VAT calculation tax expert Richard Asquith.

The effectiveness of these systems is enhanced by the expanding scope of CRS, which will include crypto-asset exchanges from 2027, closing another potential avenue for wealth concealment.

It’s worth noting that the system is particularly effective at identifying common high-net-worth audit triggers. These include complex income streams, large charitable contributions, foreign bank accounts, and lifestyle expenditures that don’t align with declared income.

AI algorithms can now rapidly identify discrepancies between lifestyle indicators and reported wealth, making it increasingly difficult for wealthy people to hide assets or income.

The technological revolution in tax collection is evident worldwide. France employs AI to analyse satellite imagery for signs of undeclared wealth, such as multiple vehicles or swimming pools at residences under investigation.

The UK’s HMRC reported a 22% increase in voluntary disclosures of offshore assets in 2023-24, driven by AI-powered analysis of CRS data and targeted “nudge letters” to potential evaders.

Penalties for non-compliance

SARS Commissioner Edward Kieswetter emphasises their focus on making compliance easier for honest taxpayers while maintaining “a credible threat for non-compliance.”

Legitimate tax planning to minimise tax due when investing offshore remains possible. However, before investing offshore, you should always engage with an independent tax adviser with the necessary global expertise.

Tax systems are constantly improving. You cannot afford to rely on past experiences because the consequences of non-compliance are severe. Penalties reach up to 200% of unpaid tax, and taxpayers may face potential criminal charges in serious cases. If you don’t disclose previously unreported money to the authorities, you will be fined at maximum rates.

While it’s understandable that nobody wants to pay unnecessary taxes, investors should familiarise themselves with the available structured solutions that ensure compliance and that can help them avoid unnecessary consequences.

It’s also crucial for taxpayers to understand that the future of wealth management lies in prioritising tax efficiency over avoidance. It’s an approach that I advocate, and one that I firmly believe will pay off in the end.

Wealthy individuals can no longer act like ostriches, burying their heads in the sand. Today’s reality demands a different approach.

This post was based on a press release issued on behalf of Levantine & Co.