Getting audited by the ATO is a stressful and intimidating process. The best way to mitigate this problem is to take appropriate measures to prevent it from happening in the first place.
When the ATO recognises you or your business as a compliance risk, you will get notified of a tax review. The purpose of a tax review is to determine if any compliance issues need to be examined further. A tax review is usually conducted over the phone or in the office to clarify a few things. You’ll get the chance to resolve any issues and avoid escalating the matter to a full tax audit.
If the compliance risk is found to be significant, the outcome of a tax review can lead to a full tax audit where the ATO will further scrutinise your tax affairs.
During a tax audit, detailed information about your income and business will be collected for intensive analysis. Tax auditors may examine your records, processes, and interview key staff.
An audit is a time consuming process that can take anywhere between 3 to 18 months to complete. It disrupts business operations, and you could also face penalties for non-compliance. Even if the tax audit is for your business, expect to have your personal tax returns examined in the process.
What triggers a tax audit?
Below are some triggers that can increase the likelihood of being audited by the ATO:
- Income mismatch. This will include things like capital gains, dividends, foreign income, and cash transactions. The ATO uses sophisticated data matching systems that can identify discrepancies in your income reporting. They also cross check your tax return against information provided by businesses and financial institutions you’ve transacted with.
- Claiming for deductions you are not entitled to and poor record keeping. Deductions can only be claimed on work expenses. Excessive work-related deductions will raise concerns with the ATO. Ensure you keep good records to prove your expenses.
- Inconsistency between your lifestyle and your reported income. The ATO can assess your assets and work out how much income you need to maintain your current lifestyle.
- Not lodging your tax returns on time. You may be perceived as not taking compliance obligations seriously.
- Being an outlier against your industry benchmark.
- International transactions with tax havens.
While there is no guarantee you won’t get audited, you can minimise the possibility of getting audited. The ATO targets businesses that make a lot of cash transactions because they are perceived to be at a higher risk of not declaring all of their income. If your business operates in cash based industries like retail or food, be prudent with documenting all your cash transactions. Get into the habit of keeping good records of all your work-related expenses. This will enable you to claim the tax deductions you are entitled to, and you will be able to substantiate your claims if the ATO makes enquiries. Keep your personal and business expenditure separate to reduce the likelihood of claiming a personal expense as a business expense.
Another way to draw unwanted attention is having big changes in your annual income. If you suddenly earn much more or less than previous financial years, the ATO may be interested in finding out the reason behind these fluctuations.
Build a positive image for you and your business by lodging your tax returns, BAS, and FBT on time. Ensure you pay your staff’s superannuation correctly and promptly. The ATO takes superannuation obligations very seriously. If an employee complains, it will result in further investigations.
Always check your figures before submitting your tax returns and BAS because discrepancies will raise concerns. If in doubt, get professional help to ensure your tax reporting are done correctly to prevent any issues later on.
Managing a tax audit
Ideally, you should have tax audit insurance. If you don’t, consider purchasing a policy. Engaging in tax advisors to help you navigate the audit process is expensive. Having audit insurance will ease the financial pressure so you can focus on what’s important.
It always helps to speak the truth and own up to your mistakes. Your cooperation with the ATO during an audit will be looked upon favourably.
At the end of the audit, the ATO may find that you owe them money. If you do, you will be required to pay this amount, plus interest. The ATO may also impose a fine or prosecute taxpayers for offences such as keeping false records and tax evasion.
The best way to handle tax audit matters is to seek professional assistance. Let Moiler provide you with the guidance you need to manage your tax affairs and reduce your risk of getting audited by the ATO.
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This document has been prepared by Moiler Partners, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 8 July 2019.