Does panic set in the moment you receive a call from the ATO or your Accountant telling you that you are about to have your taxes audited? If it does, and you lose your sense of control & begin stressing, the first thing to do is just stop and breathe. Many times, its not what you think it is and you may have a few options on the table should you undergo an audit anyway.
The process generally starts with the ATO asking you some questions. Often times, it would be better not to rush into answering the questions unless you are absolutely certain about your responses without referring to your records or consulting your Accountant.
Only after you have understood the questions properly, would you start getting everything in order to answer all the ATO’s questions. To begin with, it would be advised that you start by understanding the difference between a ‘Review’ and an ‘Audit’:
Reviews assess if there is a risk that you are not complying with your obligations. The ATO checks for errors in your taxes that may need correction and if there is any evidence during the review that you have not met your obligations, it may decide to conduct an audit or correct those errors.
If the ATO believes that there may be errors or significant issues requiring further exploration, they will conduct an audit. ATO may adjust the discrepancies which means you may owe ATO the money or they owe it to you. In this case penalties may apply as well.
The ATO prefers to work with you and obtain the information cooperatively. They will collect and analyse the information and they will try to help you understand the issues and explain the purpose of the examination. Further reading on the approach taken by the ATO can be found HERE
How to prepare for an audit
You could consider taking the following steps:
- Review your tax position, making sure you are happy with the way you’ve done your taxes.
- Make sure you have all the supporting information (such as receipts, invoices etc.) that are required by law.
- Once you’ve done the above, answer the ATO’s questions factually and without emotion.
- Remember to answer honestly the specific questions they’ve asked and not volunteer more information than is necessary.
- If you are unsure about any of these steps or need a second opinion, talk to your Accountants as they have years of experience that can make the process a lot easier on you.
Information overload – what to share
Often the ATO will ask for heaps of information. It is important for this information to be correct. You should also only provide copies of what is requested and keep the originals as documents may at times become misplaced with the ATO.
If the information request is significant, don’t get overwhelmed as often, the ATO will ask for everything and only read what interests them. Many a time it is not the case that just because they ask for many documents, they actually comb through every single detail. You may be shocked to hear that they may not read some of the documents at all.
Another frustrating thing can be when the ATO unnecessarily asks for further information at a later date. You shouldn’t read too much into this. The ATO’s internal timelines require them to complete an audit to a certain stage by a specified date. Sometimes, due to resource constraints, they don’t have enough time to read through your material, so they ask for something else from you. This is often a good strategy to buy more time to do the work. This is good to remember as it’s important to know that extra information requests aren’t always a reason to panic.
The ATO has statutory powers to issue you a notice under the Division 353-10 of Schedule 1 to the Taxation Administration Act 1953 which requires you to provide information. If you feel the ATO is using its statutory powers to ask you for more information for no reason, you can ask them to give you their reasons in writing. You can even have the decision reviewed.
Again, if this occurs, you may want to consult your lawyer or accountant. You can benefit from their years of experience as they are quickly be able to work out the reason behind the ‘further information’ request. They can allay your concerns or advise you if it’s something more serious.
If you come across something wrong with your books/taxes, you will have the opportunity to make a voluntary disclosure to the ATO and fix the error straight away. You may also be able to ask for reduced penalties and interest.
ATO finds the error:
The ATO may say that you owe more than you think you do but it doesn’t mean that ATO is 100% correct. There may be a case officer who doesn’t specialise in the area but is still assigned to the case and provides an opinion. Since this could be outside their expertise area, they can easily get it wrong. So, don’t be daunted by their assertive position if you are confident about your case.
Disputing the ATO’s position as a result of the audit
If you are not happy with the outcome, there is plenty of time to dispute it during the audit process. The following options and steps you can take to resolve a tax dispute are available should you need to make use of them:
- ATO Audit position paper
- In-house facilitation
- Formal Objection
- Taking it higher to Administrative Appeals Tribunal or Federal Court
How to avoid an audit by ATO in the first place
Industry Targets and Benchmarking
Each year the ATO targets a different range of industries to focus their attention based on certain risk profile. These could be café’s, restaurants or certain trades like electricians, builders etc. You should talk to your accountant if your industry is one of the Benchmarks published by ATO. If so, make sure you are within a range of profitability as expected by the ATO or have a strong valid argument if you fall outside that range.
Business Record Keeping
Ensure you have maintained your books and records properly and accurately and is kept up to date. Also, make sure you are filing all your Activity Statements and Tax Returns in time and if you are not able to pay your taxes in time, get in touch with the ATO to make a payment arrangement.
Separate your private financial affairs from Business affairs
Try to keep your personal transactions separate from the business transactions. If this challenging to do, one strategy to adopt to achieve this could be using separate bank accounts and credit cards for personal and business use.
Tax Audit Insurance
If you are unfortunate enough to be audited, it could be an expensive exercise to deal with if you have to get your accountant or tax agent involved. It is therefore recommended to have tax audit insurance so that all professional fees are covered, and you are able to deal with the audit professionally without having to worry about the costs involved.
The team of experts at Fortuna Advisory Group can help you to achieve a good and cost effective solution. The principals have decades of experience in dealing successfully with ATO disputes, objections and appeals.