Sometimes the tax office will decide to conduct an audit into an individual’s or business’s tax affairs.
Here’s what you need to know about ATO audits.
What triggers an audit?
Usually an audit springs off from an initial review by the ATO that signals a more in-depth examination is required.
The ATO might decide to do an audit if they think someone is avoiding tax by under-declaring income, such as foreign income, capital gains on a disposable asset and/or by over-declaring on deductions or business expenses.
The tax office may also decide to audit a business if they suspect it might be under-declaring sales to avoid tax. For example, if a business is performing poorly compared to industry benchmarks for that type of business, it could be a red flag that all might not be as it seems.
It’s important to note that audits are not always just about the current financial year. The ATO may decide to look at previous tax returns and assessments as well.
What happens during an audit?
Audits generally go through several stages. This includes:
- Initial stage – usually involves a phone call to set a meeting time, and a letter to outline the key issues.
- Information gathering – during this phase, the ATO may ask the taxpayer certain questions and request backup documents (e.g. receipts for purchases or bank statements).
- Initial findings – this is where the auditors provide a “position paper” that sets out the issues and their initial findings on them. It’s important to note that the position paper is a draft and not the final audit.
- Final decision – at this point the ATO may or may not decide to amend the taxpayer’s current or previous tax assessments.
What else could the ATO look at?
The ATO may also look into a taxpayer’s lifestyle and whether it matches with their declared income. For example, if a person is living lavishly or posting photos on social media of their brand new Mercedes, but has declared a very low income, it’s usually not the best look!
Can you dispute an audit’s findings?
Yes – you can dispute a position paper for example and ask for a review. You also have the option of formally objecting to the ATO’s objection team.
And finally, if all else fails, you can take your case to court, such as the Administrative Appeals Tribunal.
What to do if the ATO calls you about an audit
If you get a call from the ATO about an audit, it’s not an automatic sign you’ve done something illegal, but is essentially a request for you to provide information. The important thing is stay calm and to co-operate with the auditors.
However, if the auditors ask questions you’re not sure about, it’s better to tell them you will speak to your accounting or tax adviser and get back to them later, rather than guessing or providing information that could be incorrect.
The importance of good record keeping
The potential for an audit highlights the need for meticulous and compliant record keeping and frank disclosures.
Partnering with a professional bookkeeping firm in your business ensures your accounts and paperwork are always in order and compliant with the ATO, 52 weeks of the year. Find out more by contacting us.