No one would wish to go through an audit. However, it is a part of doing business.
It is not uncommon to make mistakes on your tax return. Sometimes, these mistakes are honest, and other times, they are not. In both cases, it might cause some issues.
The ATO (Australian Taxation Office) assesses individual tax returns using its high-tech cross-checking systems, which detect inaccurate and fraudulent deductions. Since such systems are specifically designed to pick up every type of questionable claim, they catch inaccurate assessable income figures, exaggerated deductions and more.
Once the systems pick up inaccurate data, the auditor is notified, and a review is triggered. Those who primarily deal in cash or experience large fluctuations in their income have higher chances of attracting the attention of the ATO. But, it does not mean that others can’t be contacted by them. So it’s better to be always prepared.
This guide aims to help you know what triggers an ATO audit, along with other things you need to know about it.
What Is A Tax Audit?
A tax audit or ATO audit is a process that the ATO conducts with the purpose of assessing the taxpayers’ compliance with taxation laws. An individual, business or both can be audited by the ATO.
To ensure that everything stays on track, the Australian Taxation Office (ATO) contacts over 2 million taxpayers every year to review their returns. However, not all of these taxpayers will be subjected to a full audit.
The main aim of ATO audits is to make sure that all taxpayers are correctly reporting their income and paying the accurate amount of tax. There are a plethora of ways that can trigger tax audits, such as changes in a taxpayer’s circumstances or differences between a taxpayer’s declared income and expenditure.
During tax audits, taxpayers will be requested by the ATO to provide documents and information about their declared income.
The ATO issues a report that outlines its findings after it has completed its review. If the ATO finds out that the taxpayer has underpaid their taxes, they may need to pay back not only taxes but also interest and penalties.
In some cases, if the ATO finds a taxpayer evading tax, the Australian Taxation Office may initiate criminal proceedings.
However, as long as you are honest and have kept good records of the relevant information, you have nothing to worry about. If you want some added certainty, consider seeking professional advice.
Are Tax Audits Random?
Every year, the ATO chooses certain areas to focus on. Tax returns that meet the specific criteria may be selected at random for audit. In the year 2022, the ATO announced that the focus area would be record-keeping and work-related expenses. Along with this, the capital gains from property, shares, and crypto were also potential audit triggers in the same year.
Another issue that can trigger a tax audit is tax refund fraud. Such a kind of fraud involves claiming a superannuation or tax refund by giving false information to the ATO. The following are some examples of tax refund fraud.
- Filing false claims or tax offsets;
- Providing fake payment summary or income statement details;
- Lodging a fabricated tax refund using a fake or stolen identity;
- Accessing a Superannuation fund through the use of fake documents;
- Providing fake information in statements to the ATO;
- Claiming GST through fake business activities.
What Happens When The ATO Audits Someone?
Audits can range from quick examinations of source documents to an extensive analysis of complex transactions and deductions. Along with this, an audit may cover a period ranging from one financial year to five. The following is how the tax audit process works:
The Phone Call
First, you will receive a phone call from the auditor to arrange a preliminary meeting. The purpose of this call is to let you know what type of records the auditor will need to see, along with the dates they cover. You will also be notified about what they are looking for during the audit, which can help you be prepared.
After the phone call, you receive written confirmation of the details of the preliminary meeting. It will include the records the ATO will require, along with the date range they will cover.
Meeting With The ATO Officer
In this meeting, the ATO officer will explain the scope of the audit and also outline how the audit will be conducted. This meeting may be done face-to-face or remotely. At this time, you can ask questions and get clarification on the things you don’t understand.
Investigation Of Business Or Personal Records
Since the meeting with the ATO office is over, it is time for them to investigate your records. It may involve looking at your personal records (if you are an individual taxpayer) or your business bank accounts and tax records (if you are a business owner).
You and your accountant will be informed throughout this process by the ATO.
Conclusion And Explanation Of Results
Now is the time for the ATO to explain their findings.
In case any differences or variations are found, the ATO will explain how they can be rectified. Sometimes, this may include paying additional taxes or interest charges. In case they find out you have paid too much tax, you receive a tax refund.
When the ATO does not pick up any deviations, the audit is complete.
What If I Disagree With The Outcome Of The Audit?
The ATO has multiple options available in case someone agrees with the outcomes of the audit.
If you think they have made a mistake, you have the option to dispute the outcome through ADR (Alternative Dispute Resolution) or in-house facilitation with an ATO facilitator.
But what is ADR? It is a process in which both parties agree to use a neutral third party that can help them resolve their differences. Mediation, arbitration and conciliation are the ways through which the third party does this.
In-house facilitation, on the other hand, is where the ATO and the company meet with a facilitator to try to reach an agreement.
Some Of The Most Common Tax Return Mistakes
One major reason for triggering an audit is making mistakes on your tax return. So, let’s look at some of the most common mistakes that people usually make on their tax returns.
It is common for people to make calculation errors or miscarry numbers when dealing with numerous figures. Although it may seem like a little mistake, it may end up costing you a lot.
Not reporting your full income
A lot of people only add their salary or wage. However, the ATO looks at the full income of an individual, including dividends, trust distribution, bank interest and other sources.
Lying on your taxes
If you are claiming more deductions than you are entitled to, you will have to bear its consequences as well. It is an illegal behaviour, and it will be traced. In the most severe scenario, engaging in tax evasion by providing false information on your tax return could lead to criminal charges.
Evidence Needed To Provide In A Tax Audit
During an Audit, you may be asked for bank statements and written confirmation from your employers to back up your claims. It is surprising to know that the ATO has been well known to call previous employers to get information related to the claims made.
Thus, make sure that you have a good filing system. It is always a good idea to back up all your records electronically as well since you have to keep your tax records for 5 years.
How do you avoid getting audited by the ATO?
Although being selected for an audit may sound like a daunting experience, you need to understand that being selected for it does not exactly mean that there is something wrong with your tax return. A lot of the time, audits involve providing additional documents or information to the ATO for them to review.
Still, if you have any doubts about your tax return, you can ask a tax accountant to review the information for you. Or, you can always take their services to re-lodge it on your behalf. Along with this, having an accountant by your side during an audit process can make things easier for you.
Contact Clear Tax Accountants today to optimize your tax obligations and maximize your potential refund.
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