So you or your accountant has been notified that an ATO review and/or an ATO audit will take place on your tax return. What do you do?
Facing an ATO audit is unwelcome scrutiny that no taxpayers would like to be subjected to. Not only that, they can wind up costing you a significant amount of money both if you were found to owe additional tax or the costs to defend your tax case.
Staying out of trouble in the first place is our number one recommended course of action. But even if you’ve done the right thing, kept records and gone with a reputable tax agent, there can sometimes be unwarranted attention from the ATO if they deem your return an anomaly.
- 1 What can be audited by the ATO?
- 2 I received an ATO warning letter. Am I going to be audited?
- 3 Why did I get audited by the ATO?
- 4 What to expect from the ATO audit process
- 5 What should you do if you are being audited by the ATO?
- 6 During the ATO audit process
- 7 How far back can the ATO audit
- 8 Final stages of an ATO audit process
- 9 ATO audit outcome dispute and complaints
- 10 What types of penalties and interest are imposed?
- 11 ATO Audit Time Limits
- 12 Case Studies
- 13 Key Takeaways
What can be audited by the ATO?
There is any number of areas of your tax return that can be audited by the ATO:
- BAS and GST claims
- Employer obligations such as tax withholding and Superannuation
- Work-related tax deductions
- Motor vehicle tax deductions
- Declared income
- Self-education expenses
I received an ATO warning letter. Am I going to be audited?
An ATO warning letter is not a review nor an audit.
This is simply a discrepancy that’s been noted by the ATO and a prompt for you to check your figures and tax return to ensure you have reported the correct figures with the documentation to substantiate your claim. If you believe you have all your tax affairs in order, then it may pay to get a professional second opinion from an accountant in case you have missed something.
If after this that there’s nothing found to be out of order, then you can elect to ignore this.
If it is found that you have reported an aspect of your tax return incorrectly, then the next action is to amend the return or information with the ATO.
If this is concerning a return that’s more than two years old, then you will need to seek permission to reopen your assessment to be revised. An accountant has access privileges that affords them the ability to amend tax returns to a far earlier date than individuals.
Why did I get audited by the ATO?
Each year, the ATO has progressively increased access to data (such as TPAR) that is used to cross-check your tax assessment against other areas of data. When discrepancies are flagged when conducting these cross-checks, this is when you may be under the microscope.
Each year, the ATO warns of a particular area of focus in tax returns. Recently, there’s been an increased focus on declaring all taxable income (foreign or domestic) as well as targeting excessive work-related deductions. In particular, individuals who take advantage of the concessions available to claim work-related expenses without evidence.
Also, sources such as social media and third-party records of purchases are used to identify whether or not your declared income marries with your lifestyle. There tends to be a concern about whether your declared income can support the type of lifestyle you flaunt.
Finally, there can often be unintentional omissions of “minor” amounts such as small capital gains or interest on bank accounts. What may seem minor for an individual taxpayer, when accumulated amongst millions of them can result in billions of dollars of undeclared taxable income.
The same can be said about business takings where business owners fail to disclose all of their sales to the ATO. The ATO often uses industry benchmarks to assess whether your figures are below expectations to investigate further into your business. Solely cash-based business very often attract close interest as the ATO deems that there is no particular reason for a business to operate as cash-only.
Overall, if you believe that your tax affairs are in order and you have not intentionally skirted the law, then there is generally minimal concern as no one’s tax situation is perfect. Intentionally evading tax is a criminal offence and carries heavy penalties and charges.
Each situation is dealt with differently and it’s important to note that we highly recommend a reputable accountant or tax agent to assist you with this ATO audit process if you did not lodge your tax return with one. An experienced tax agent can navigate the rights and responsibilities of both parties to ensure that a fair audit process is being conducted.
You might also be interested in our Guide to Business Tax Deductions
What to expect from the ATO audit process
If you have received an ATO audit letter to inform you that you will be going through an audit process with the ATO, you can expect to follow a typical process outlined below:
- They will phone to arrange a suitable preliminary meeting
- A written confirmation will be sent to you to outline details of the meeting and its agenda as well as a draft audit management plan
At the meeting:
- An audit scope will be established outlining the periods that are audited
- What they deem as a risk hypothesis i.e. what is under suspicion, and the information they are requesting to assess their hypothesis
- Establish your choice of communication during this process
- How the ATO audit will be conducted including the relevant timeline and guidelines
What should you do if you are being audited by the ATO?
Speak to an accountant or seek legal counsel – we cannot stress this enough. Navigating this process alone can be treacherous and if not handled properly, can be a very expensive affair.
During the initial call, it’s important to note that you should request as much information about the scope of the audit process from the ATO officer. We recommend that you refrain from making any statements during this phone call other than to specifically answer the questions asked, as it can be used against you. In addition, do not volunteer additional information.
Responding by advising them that you will check with your accountant and your records before getting back to them is a good response to use.
While the ATO can legally request information under Division 353-10 of Schedule 1 to the Taxation Administration Act 1953, there needs to be a substantial reason for this. Holding the ATO to account by ensuring they stick to the scope of the ATO audit and having this request made in writing will ensure that you are protected appropriately.
Another important thing to note is that the ATO is an external auditor and will not know the ins and outs of your business as well as you do. They do not always get things right due to the complexity of tax laws and the tax systems. Therefore, don’t be daunted by their position and if you genuinely believe that you have not intentionally made an effort to evade tax, then the outcome generally is very favourable.
During the ATO audit process
It is expected that the ATO keeps you informed throughout the audit process. Once an audit management plan has been established, you or your accountant will be given the contact information of a case officer who you can liaise any communication with.
Often, an ATO audit may begin with a specific risk hypothesis in mind but may also expand to a much larger scope as the investigation evolves. Again, having an accountant or experienced tax agent can help immensely with whether you should provide additional information or not in such circumstances.
How far back can the ATO audit
Generally, you must keep written records and evidence of how you arrived at a certain number in your tax return for five years from the date you lodge your tax return. These can be kept in either paper or digital formats in a true and clear copy of the original.
Final stages of an ATO audit process
The latter stages of the audit process will usually mean that a position paper is sent to you or your accountant outlining the ATO’s final decision on the matter. This will generally outline:
- Available facts and information
- The issue (risk hypothesis)
- Your contention/disagreement
- Relevant applicable laws within the scope of this audit
- Proposed assessment revisions as a result of this audit
- Any applicable penalties and interest that are proposed
- Contact details of the relevant ATO officer to discuss the matter further
This is an opportunity for any comments or disagreements to be voiced before a final decision is made. An independent review can often be raised requested to ensure that the decision is impartial.
The final outcome is usually sent to you 7 days from the time the decision is made.
ATO audit outcome dispute and complaints
If an outcome or decision as a result of an ATO audit does not result in your favour and you do not agree with this decision, there are options to dispute this.
In cases where direct contact with the ATO does not make any progress, an alternative dispute resolution (ADR) is an option that can be taken that involves a third party to assist in resolving the dispute. Settlements are a consideration during an ADR process if the ATO considers the decision to settle consistently with good management of the tax system. As the ATO generally has time constraints and a budget to work within, a settlement can sometimes be the better alternative than a prolonged litigation case.
In-house facilitation is another option where an impartial ATO facilitator meets with both parties to mediate the issue in dispute and develops options for alternative resolution. All individuals and businesses have a right to object some decisions made by the ATO including assessments, rulings and penalties enforced. All objections are to be submitted in writing to the ATO where it is reviewed by a review officer from the Review and Dispute Resolution department which operates independently and objectively from the audit department.
You might also be interested in our article on How to Remit Your Failure to Lodge Penalties
What types of penalties and interest are imposed?
According to tax laws, interest is calculated and enforced from the date a tax liability was accrued while penalties are imposed if the ATO deems that there was an unsubstantiated claim or omission on your tax return.
Just like bank interest charges, if there is an amendment that needs to be made on your assessment that results in a tax shortfall, then interest will also be applicable from the date of the original assessment that was due to be paid.
This is generally to discourage individuals and businesses from taking advantage of this situation. However, if you have made reasonable care with your tax return and you can prove that you have done so, the ATO can remit interest charges in certain circumstances.
If reasonable care is taken but resulted in false or misleading statements, you may not be liable for administrative penalties. However, culpable behaviour that intentionally violates tax law can result in significant penalties. The extent to the amount of the penalty is determined by the circumstances of the case.
Take note that if there is no arguable position despite taking reasonable care, you may still be liable for penalties.
Voluntary disclosures before or during the audit review can result in significant reductions in the penalty amounts. In any case, by presenting your reasons and evidence, the ATO can review your case and advise on a decision as to whether they will remit or reduce your penalties.
Tax laws are not limited to civil matters but can also involve criminal offences that carry significant sanctions if taxpayers do not meet their obligations. Some examples include:
- Intentionally making false or misleading statements (including withholding information for a tax matter)
- Keeping false or inaccurate records
- Refuse or fail to complete a tax return
- Failing or refusing to attend before a tax officer or answer questions
- Hindering or obstructing a tax officer who is exercising their access powers
These offences are referred to the Commonwealth Officer of Director Public Prosecutions and other law enforcement agencies for serious criminal breaches.
ATO Audit Time Limits
As the Australian tax system is a self-assessment system, later reviews and audits have time limits in which the ATO can backtrack:
- For simple income tax assessments – 2 years from the date an assessment is issued
- For more complex tax assessments – 4 years from the date an assessment is issued
In cases where there is likely fraud or tax evasion, the Commissioner has no time limits for amending an assessment.
Below we set out some of our experiences with ATO audits and how this was handled. This objective of showing you these case studies is to show you that the ATO does not always get it right. What’s important to note is that preparation for a potential audit is always necessary and keeping records is good standard practice to avoid disruption and expensive issues later down the track.
Case Study #1
One of our clients had been incorrectly assessed by an ATO auditor as the client did not provide them with the correct information at the time of the audit process.
As they did not engage an accountant at the start of the process, there was a dispute that needed to be lodged by Box Advisory Services with a request for additional time to provide further information. As a result, the ATO was happy to reassess the case and extend the completion date of the audit which we were able to successfully complete with favourable results.
Case Study #2
We had an existing client in the construction industry who had claimed significantly higher than industry standard deductions for their tax return. An ATO review was made and as we had educated our client in the need to maintain evidence to substantiate claims, they were able to produce all necessary documentation to prove their expense claims.
As a tax agent, we were able to liaise between our client and the ATO to mediate this issue. The ATO subsequently contacted our client’s employer to verify the expenses against their job description. The result was that we were able to successfully defend against this review and the ATO allowed for the claim and made no further amendments to the tax return.
Case Study #3
Our client was contacted by the ATO in regards to their employer obligations. They requested to review their superannuation obligations across a 6 month period including ATO super choice forms, proof of payment of superannuation, payroll calculations and superannuation calculations during this period.
By helping setup our clients with the right processes, educating them on their employer obligations and having the right tools in place to efficiently meet their payroll and superannuation responsibilities, they were able to produce all requested documentation and were cleared at the end of the audit process. An ATO finalisation letter was issued and no further action was required of our client.
The stressful process of going through an audit with the ATO can be mitigated if you are informed and know your rights and responsibilities. While the ATO’s job is to maintain the integrity of the taxation system in Australia, they do not always get it right. Auditors are generally information gatherers and most certainly do not know your own tax affairs as well as you do. Therefore, you need to understand that they can potentially get it wrong if you believe you have all your tax affairs in order to the best of your abilities.
More importantly, there can be circumstances where you have all your tax affairs completed with no ill intentions of breaking the law, but still, result in audits or face penalties. We highly recommend engaging a trusted accountant or legal counsel to help guide you through this process so that you can achieve the best outcome possible.
At Box Advisory Services, our experienced and reputable Chartered Accountants are experienced in dealing with auditing processes with over 13 years of taxation law experience. Given our longstanding, positive reputation with the ATO, our clients have had minimal instances of an audit. Our ability to also backtrack and amend assessments beyond what an individual can do can also ensure that your assessments are all correctly lodged and in order. If you are about to go through an audit process or you simply would like for us to review your tax assessments, you can book in a free consultation with us or call us to discuss your matter further.
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.