The ATO conducts an audit to verify compliance with your tax obligations and determine if you owe any taxes. The ATO has the power to audit any taxpayer, and they undertake most audits using information matching as part of their compliance activities.

The ATO will compare the information you provide with information from data-matching third-party sources. They may select you or your business for an audit if there are discrepancies.

Being selected for an audit by the ATO can seem like a daunting experience. Still, it’s important to remember that even if the ATO selects you for an audit, it doesn’t necessarily mean there are problems with your tax return.

In most cases, audits simply involve providing additional information or documentation to the ATO for review.

So, there is no need to panic. The best way to prepare for ATO audits is to know what to expect.

Here’s the rundown.

What is an ATO Audit?

An ATO audit is a process conducted by the Australian Tax Office (ATO) to assess a taxpayer’s compliance with taxation laws. The ATO may audit individuals, businesses, or both. ATO audits aim to ensure that taxpayers correctly report their income and pay the accurate amount of tax.

You can trigger tax audits in several different ways, including discrepancies between a taxpayer’s declared income and expenditure or changes in a taxpayer’s circumstances. Compliance risks, such as non-adherence to new tax legislation and policies, can also trigger audits and lead to significant consequences like non-recoverable debts and reputational harm.

During tax audits, the ATO will request documents and information from the taxpayer about their declared income.

Once the ATO has completed its review, it will issue a report outlining its findings. If the ATO finds that taxpayers have underpaid their taxes (such as on their capital gains), they may be required to pay back taxes, interest, and penalties.

In some cases, where the ATO finds a taxpayer evading tax, the ATO may initiate criminal proceedings.

The good news is that as long as you are confident that you’ve submitted your tax return online, your affairs are in order, and you haven’t intentionally skirted the law, you should not be concerned.

While no one’s tax situation is perfect, the ATO is typically more concerned with cases of fraud or evasion.

The ATO realises honest mistakes can happen, so as long as you are transparent and keep good records, you should be able to sleep soundly through the audit.

What can be audited by the ATO?

There are any number of areas of your tax return that the ATO can audit:

• 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
• JobKeeper
• Cashflow Boost

I received an ATO warning letter. Am I going to be audited?

What can be audited by the ATO?

There are any number of areas of your tax return that the ATO can audit:

• 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
• JobKeeper
• Cashflow Boost

The ATO faces specific risks associated with its reliance on IT systems, particularly concerning data governance, cyber resilience, and taxpayer privacy.

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 noted by the ATO and a prompt for you to check your figures and income tax return to ensure you have reported the correct figures with the documentation to substantiate your claim. However, if discrepancies are found, individuals or businesses may be subject to further scrutiny.

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 on your BAS statements or other financial records.

If nothing is found to be out of order after this, then you can 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 involves a return over two years old, you will need to seek permission to reopen your assessment to be revised. Accountants have access privileges that allow them to amend tax returns far earlier than individuals.

Why did I get audited by the ATO?

Each year, the ATO has progressively increased access to data (such as TPAR) used to cross-check your tax assessment against other data areas. 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. In particular, individuals who take advantage of the concessions available can 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 up with your lifestyle. There tends to be a concern about whether your declared income can support the lifestyle you lead.

Finally, unintentional omissions of “minor” amounts can often be unintentional, such as small capital gains or interest on bank accounts. When accumulated amongst millions, what may seem minor for an individual taxpayer can result in billions of dollars of undeclared taxable income.

The same can be said about business takings, where business owners must disclose all of their sales to the ATO. 

The ATO often uses industry benchmarks to assess whether your figures are below expectations to investigate your business further. 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, 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 Does the Tax Audit Process Entail?

Before the ATO instigates a full audit, they’ll generally conduct a risk review of any flagged taxpayers. A risk review is a process whereby the ATO assesses a taxpayer’s compliance risk, allowing the ATO to determine if any issues with their tax return or business activity statements (BAS) warrant a full audit. This initial step is part of the broader compliance activities to ensure adherence to tax regulations.

The risk review process often identifies areas of non-compliance that you can quickly and easily resolve without needing a full audit. This saves both the taxpayer and the ATO time and resources.

It’s also worth noting that the ATO uses the review process to identify whether or not you’re paying too much tax. So, it’s not all about non-compliance – they also ensure you’re not getting the short end of the stick.

If, after the review, the ATO believes they have sufficient information to warrant a full audit, you or your tax agent will receive a letter to inform you of their intentions to proceed with the audit. The assigned ATO tax agent will complete a few stages throughout the process before issuing the final report.

Stage 1: The Phone Call

The first stage of the process is a phone call from the auditor to arrange a preliminary meeting. During this call, the auditor will let you know what type of records they need to see and what dates they cover. They will also give you an idea of what they look for during the audit and how they intend to draft audit management plan details for your case.

Stage 2: Written Confirmation

Following the phone call, you will receive written confirmation of the details of the preliminary meeting, including what records they will require and the date range they will cover.

Stage 3: Meeting With ATO Officer 

At the meeting, the ATO officer will review the audit’s scope. They will also outline how they plan on conducting the audit. This is your opportunity to ask questions and get clarification on anything you don’t understand. This meeting may be done remotely or face-to-face. 

Stage 4: Investigation of Business or Personal Records

Once the meeting is over, it’s time for the ATO officer to investigate your records. This may involve looking at your business bank accounts and tax records if you’re a business owner or your personal records if you’re an individual taxpayer.

During the investigation, the ATO faces specific risks associated with its reliance on IT systems, particularly concerning data governance, cyber resilience, and taxpayer privacy.

The ATO should inform you and/or your tax professional or accountant throughout this process.

Stage 5: Conclusion and Explanation of Results 

After conducting their investigation, the ATO officer will explain their findings. If they find any discrepancies, they will explain how you can rectify them. 

In some cases, this may involve paying additional taxes or interest charges. If they find you’ve paid too much tax, you will receive a tax refund. If the ATO didn’t pick up any discrepancies, then you’re in luck—the audit is complete.

What should you do if the ATO is auditing you?

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.

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 specifically answering the questions, 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 making this request 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 only sometimes 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 is generally very favourable.

Addressing Complaints or Disputes After the Outcome

The ATO has several options available if you disagree with the outcome of your audit. If you believe they have made a mistake, you can dispute the outcome through alternative dispute resolution (ADR) or in-house facilitation with an ATO facilitator. 

ADR is a process where both parties agree to use a neutral third party to help them resolve their differences. The third-party does this through mediation, conciliation, or arbitration. In-house facilitation is where the company and the ATO meet with a facilitator to agree.

You can visit the ATO’s website for more information and details on resolving disputes after the audit. Alternatively, if you want to proceed with lodging a complaint or objection, click here.
                                                     

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.

Interest Charges

Just like bank interest charges, if an amendment needs to be made to your assessment that results in a tax shortfall, then interest will also be applicable from the date of the original assessment due to be paid.

This generally discourages individuals and businesses from taking advantage of this situation. However, if you have made reasonable care with your tax return and can prove that you have done so, the ATO can remit interest charges in certain circumstances.

Administrative Penalties

If reasonable care is taken but results 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 circumstances of the case determine the extent of the penalty amount. 

Additionally, various compliance risks linked to the administration of tax legislation and new policies can lead to non-recoverable debts, reputational harm, and the impact of workforce skills shortages on maintaining adherence to ethical frameworks.

Note that you may still be liable for penalties if there is no arguable position despite taking reasonable care.

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.

Prosecutions

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.

It’s important to note that, if you are found guilty of evading or similar offences, a voluntary disclosure may reduce the penalty put against you.

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.

Let’s Look at Some Examples

Below, we describe some of our experiences with ATO audits and how these were handled. The objective of showing you these case studies is that the ATO sometimes needs to get it right. 

It’s important to note that preparation for a potential audit is always necessary, and keeping records is good standard practice to avoid disruption and expensive issues later on.

Case Study #1

One of our clients had been incorrectly assessed by an ATO auditor as the client needed to 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 audit’s completion date, which we successfully completed 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 on 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 could mediate this issue with our client and the ATO. The ATO subsequently contacted our client’s employer to verify the expenses against their job description. The result was that we were able to defend against this review, and the ATO successfully allowed for the claim and made no further amendments to the tax return.

Case Study #3

The ATO contacted our client regarding their employer obligations. They requested to review their superannuation obligations across six months, including ATO super choice forms, proof of payment of superannuation, payroll calculations and superannuation calculations during this period.

They could produce all requested documentation by helping set up our clients with the right processes, educating them on their employer obligations, and having the right tools to meet their payroll and superannuation responsibilities efficiently. They were cleared at the end of the audit process. An ATO finalisation letter was issued, and our client was not required to take further action.

Key Takeaways

While no one likes to go through an audit, it’s important to remember that it’s just a part of doing business (or paying taxes). 

The best way to prepare for ATO audits is to ensure that your tax returns are accurate and up-to-date before submission. Keeping good records throughout the year will also make providing the ATO with any information or documentation they request during an audit easier. 

With careful planning and execution, you can get through ATO audits with minimal stress and disruption to your business.

And don’t hesitate to seek professional advice if you need it.

Box Advisory Services has a team of experienced tax professionals who are well-versed in the tax audit process. We understand that this can be a stressful and confusing time for our clients, so we offer a free consultation to discuss your situation. 

FAQs

1. What is an ATO Audit?

An ATO audit is a process conducted by the Australian Tax Office (ATO) to assess a taxpayer’s compliance with taxation laws. It aims to ensure that taxpayers are correctly reporting their income and paying the accurate amount of tax.

2. What Triggers an ATO Audit?

Common Triggers: Audits can be triggered by discrepancies between a taxpayer’s declared income and expenditure, changes in a taxpayer’s circumstances, or specific areas targeted by the ATO, such as working from home expenses, motor vehicle expenses, and cryptocurrency earnings. Compliance risks, such as non-adherence to tax legislation and new policies, can also trigger an audit.

Data Matching: The ATO uses sophisticated data matching capabilities to identify potential non-compliance, including cross-checking tax returns against information provided by businesses and financial institutions.

3. What is the ATO Audit Process?

The process typically includes a phone call to arrange a preliminary meeting, written confirmation of the meeting details, a meeting with an ATO officer to discuss the audit scope and process, an investigation of business or personal records, and a conclusion with an explanation of the findings.

The ATO may request records, receipts, and documents, and conduct interviews to clarify specific matters related to tax affairs.

4. How Far Back Can the ATO Go on an Audit?

For most taxpayers, the ATO can audit records going back two years. For larger businesses, the period is generally four years. However, there is no time limit if the ATO suspects tax fraud or evasion.

5. What Happens if the ATO Finds Discrepancies?

• Adjustments and Penalties: If discrepancies are found, the ATO may propose adjustments to tax liabilities, which could include paying additional tax, interest on the tax debt, and penalties depending on the nature of non-compliance.
• Dispute Resolution: Taxpayers can dispute ATO findings, but this may involve additional costs and potentially losing favourable treatment if the dispute is not resolved in their favour.

6. How Can I Prepare for an ATO Audit?

• Good Record Keeping: Keeping accurate and detailed records, including financial statements, schedules, contracts, and tax reconciliations, is crucial for demonstrating compliance with tax obligations.
• Professional Advice: Seeking advice from a tax professional or accountant can help ensure that all necessary documentation is in order and that any issues are addressed promptly.

7. Can I Dispute the ATO’s Audit Findings?

Taxpayers can dispute the ATO’s findings by providing factual responses to specific questions, correcting any errors or mistakes, and seeking legal advice if necessary.

The ATO offers alternative dispute resolution processes, such as in-house facilitation, to help resolve disputes without legal action.

8. What is the Purpose of an ATO Audit?

• Compliance: The primary purpose of an ATO audit is to ensure that taxpayers are in compliance with Australian tax laws and that the information provided in tax returns is accurate.
• Fairness: Audits aim to ensure fairness and integrity in the tax system by identifying and addressing non-compliance.

9. How Long Does an ATO Audit Take?

The duration of an ATO audit can vary widely, with some audits taking several months to complete. The ATO will inform taxpayers of the audit’s progress and any changes in scope.

10. Can I Get Insurance for an ATO Audit?

Audit insurance is available to provide financial protection in the event of an audit, covering the expense of seeking professional assistance. This can be particularly useful for businesses with complex tax obligations or those in industries frequently targeted for audits.