How Do ATO Tax Audits in Australia Work?

The idea of getting an ATO tax audit is scary for most. Incorrect accounting or a small discrepancy can throw up obstacles to receiving your rightful return. Because of the randomized nature of who gets audited, the possibility tends to loom over all businesses. Even the most financially thoughtful and fiscally diligent can fall victim to the tax man.

Completing a tax declaration need not be an overly complex task. But if you make a mistake, you can bank on the ATO finding out about it. The ATO relies on sophisticated data-matching analytics when it conducts millions of reviews of tax returns in Australia. Identifying wherein lies fraud or inaccuracy is now generally an automated process carried out by programmed algorithms (arguably machine learning or artificial intelligence). The algorithms will detect deduction claims that are larger than usual or altogether false, and may also pick up on unaccounted assessable income.

These computer systems continue running checks for every tax return with a number of scripts set up for anomaly detection. Auditors are notified when there is any kind of inaccuracy or red flag and from there, they can pull up the file and delve deeper into the nuts and bolts of the tax return.

What is the primary purpose of ATO Tax Audits?

In a nutshell, the goal is to expose any individual or legal trading entity that falsely claimed tax and superannuation refunds. Not every instance of tax return fraud is intentional. Some false claims are completely innocuous while others involve deliberately falsified documentation of business expenses.

What forms can tax fraud take?

ATO tax audits seek to pull back the curtain on different kinds of fraud, including:

  • Superannuation release or access without meeting requisite criteria
  • Fudging your payment summaries or income statements
  • GST claims from fraudulent business enterprise
  • Making tax declarations through identity theft or manipulation
  • Giving the ATO false statements of information
  • Making up offsets and claims to yield a bigger tax return

In a post-Covid environment, it becomes easy to imagine ATO tax audits growing in volume over the coming years.

What does an ATO tax audit involve?

There is a range of actions that the ATO takes to carry out its auditing functions. Anything from examining source documents to more comprehensive actions like investigating a company’s history of deductions and transactions come within the purview of the ATO. In appropriate cases, an account manager will ring a company to schedule a visit to the premises. The ATO will typically arrange an agenda canvassing the different items and “issues” to cover in an ATO tax audit management plan.

The majority of ATO tax audits elevate to another level of investigation after the review. In some cases, the initial review will lead straight into a full-blown audit, especially when it appears to involve fraud, tax evasion or a higher level of risk. In making an assessment as to whether there is any wrongdoing, intention or otherwise, the ATO reviews any relevant documentation to ascertain whether you rightfully or wrongfully claimed a refund or tax deductions.

How confidently do you fill your (or your clients’) tax returns?

If you do your tax returns without an accountant, mistakes are common. Online self-serve tax returns are ubiquitous among salary earners and small business owners because it supposedly saves costs on professional fees. Ironically, this approach often leads to errors when you’re not sure how to answer each question. These raise alarm bells and spark investigations by the ATO into your claims. 

The ATO expects timely lodgement of tax returns and business activity statements. However, the ATO can be forgiving if you’ve inadvertently erred or left out important tax information. The process involves requesting an amendment to your lodgement which either results in more tax owing or more tax payable. If you end up owing more to the ATO, typically these penalties and interest charges will be waived or reduced to encourage ongoing accurate reporting.

What are the most commonly made errors when lodging a tax return?

In reality, not everyone has the literacy and numeracy skills to understand tax requirements and tax law – surprise, surprise. Accountants and tax lawyers exist for this exact reason. Even the professionals need to be on top of their game to avoid making mistakes in dealing with complex tax scenarios and how they play out in even more complex business structures.

Should I lodge my tax return without an accountant?

As expected, it depends on the complexity and your own confidence and knowledge. Here is what could go wrong:

  1. Getting the numbers wrong
    • If you are juggling numbers in your head or not using an accounting system or software to keep track of all your numbers, in all likelihood you will eventually make a mistake!
  2. Leaving out relevant deductions
    • There are lots of items to claim as deductions and the ATO has no duty to inform you of all of your tax entitlements. An accountant will pick up on things you may overlook or fail to consider.
  3. Misreporting your assessable income
    • Salary and wage do not always cover all of your taxable income. Consider any dividends, earnings from investments, interest from banks, trust payments, to mention but a few.

Dealing with ATO tax audits with the right evidence

If the spotlight is on you and your business, the ATO may demand all relevant documents to support your claims. Receipts will be a good starting point, with the ATO able to request further information to prove the expenses you claim were in fact paid by you and not another tax-paying entity. Among other actions, the ATO has powers to contact previous employers in their information-collection process. For this reason, businesses maintain sharp and tidy records for at least five years in preparation for a potential ATO tax audit.

What work-related expenses can you include?

When assessing what to legally claim, consider the following three questions:

  1. Is this expense directly related to my work? Yes
  2. Have I been reimbursed for this expense before? No
  3. Can I prove that I spent this money? Yes

What if I did nothing wrong? Will tax audit insurance protect me?

Dodgy tax declarations do not always trigger ATO tax audits. In fact, sometimes an ATO tax audit is somewhat randomized in nature. The ATO also audits companies with nothing to hide, and it happens a lot.

When this occurs, these organizations take advantage of their accountant and any other professionals needed to respond to the ATO’s varied requests for information and documentation. These fees catch business owners by surprise and tax audit insurance is one way accountants and clients can manage the risk of time and money needed in dealing with an audit from the ATO.