An analysis of the role of tax practitioners in the understatement penalty regime

Abstract

This study examined how South Africa's tax practitioner regulation interacts with its behaviour-based understatement penalty regime and benchmarked it against the laws and regulations in the United States of America and Australia. A literature and comparative review were adopted to answer the research question, which considered whether South Africa's penalty system is fair, especially when taxpayers reasonably rely on the advice from tax practitioners. It was found that South Africa has the most severe and complex penalty regime, ranging from 10% to 200% penalties according to five behaviours, with SARS bearing the onus to prove both an understatement and prejudice to SARS and the fiscus. Courts have also confirmed relief from understatement penalties where a bona fide inadvertent error occurred or where a taxpayer relied on an independent opinion from a registered tax practitioner. According to the Draft Tax Administration Laws Amendment Bill (B29 of 2025), issued on 12 November 2025, the legislature proposes to limit the term bona fide inadvertent error only to substantial understatement. Compared to benchmarked countries, the United States of America applies a simpler accuracy-related penalty, generally 20% and a higher 40% in some cases, with a fact-specific reasonable cause and good faith defence. However, taxpayers are still liable for penalties caused by the negligence of their tax advisors. Australia uses a behaviour-based shortfall penalties system ranging from 25% to 75% but includes a statutory safe harbour to safeguard taxpayers from these penalties where a registered tax agent made the error, the taxpayer supplied full facts, and the agent was not reckless. In each country, tax advisors are subject to regulation and must comply with prescribed qualifications and professional rules to serve taxpayers. Although tax advisors are regulated, using their services can limit and even prevent penalty risk; yet the responsibility for any penalties, including those stemming from tax advisor mistakes, rests with the taxpayer. Overall, South Africa could improve fairness and predictability by providing better guidelines for the understatement behavioural categories and aligning guidance with the courts on bona fide inadvertent error, introducing a safe-harbour when a registered tax practitioner errs despite full disclosure by taxpayers. These steps would keep deterrence intact while strengthening practitioner accountability through uniform oversight and giving compliant taxpayers clearer, more reliable protection against understatement penalties.