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Tax audits by the Australian Taxation Office (ATO) can be daunting for taxpayers. Understanding how they work is crucial for compliance and peace of mind. In this guide, we’ll delve into how ATO tax audits work and how the help of an accounting professionals, such as tax consultants, can help any businesses or individuals navigate them effectively.


Why does the ATO choose to audit?

The ATO may choose to complete an audit on an individual or business for various reasons. Firstly, they conduct random audits to ensure compliance across a diverse range of taxpayers and industries. Discrepancies between information provided by taxpayers and data obtained from third-party sources such as an employer, financial institution or government agency may trigger an audit. Certain industries or sectors may also be subject to heightened scrutiny due to specific compliance risks or patterns of non-compliance. Furthermore, unusual, or suspicious transactions, significant fluctuations in reported income or expenses, or other anomalies in tax returns may raise red flags and prompt further investigation.

Primarily, the ATO is concerned with cases of fraudulent documentation and tax evasion. If you have kept appropriate records of your tax documents, (such as expenses, deductibles, and capital gains), and filed your taxes on time and honestly, you should be fine during an audit. However, it can be challenging to keep track of all the appropriate documentation and navigate the stress of the audit more generally. This is where the support and assistance of tax consultants can become handy.


Initiation of an ATO Tax Audit:

An ATO tax audit typically begins with a formal notification sent to the taxpayer. This will involve a phone call where the tax office auditor will organise a meeting to ask questions and begin the audit process. The phone call will be followed up with a written confirmation describing the meeting agenda and issues for discussion.

In the meeting, the auditor will discuss the records that are under review, what documentation timeframe is being reviewed, and their general expectations when providing information. This time is suitable to ask any questions to the auditor if you don’t understand anything.


Information Gathering & review:

During a tax audit, the ATO requests documents and information from the taxpayer to verify the accuracy of their tax return. It’s crucial for taxpayers to cooperate fully with ATO officers and provide the requested information within the specified timeframe. Maintaining accurate records is key to streamlining this process. This means keeping documentation, digital, or physical (such as tax invoice receipts) that have been used to make tax deduction claims during the specific audited years.

The ATO conducts a thorough review and analysis of the information provided by the taxpayer. This involves cross-referencing the taxpayer’s records with third-party data sources to verify compliance with tax laws. Any discrepancies or irregularities identified during this process may lead to further scrutiny.

The ATO has the power of ‘formal access’ during their review. This gives them free access to places, books and documents during their audit, and require that ‘reasonable assistance’ is provided to their officers.


Assessment and Findings:

Based on their review, the ATO assesses the taxpayer’s compliance with tax laws and makes any necessary adjustments to their tax return. This may include applying penalties for non-compliance. Penalties can range from simply paying the tax that the auditor believes you owe. Or, additional 25-75% charges on top of that if your behaviour is regarded under the following:
‘failure to take reasonable care’ – 25% of the shortfall
‘Recklessness’ – 50% of the shortfall
‘Intentional disregard’ – 75% of the shortfall.
These penalties are doubled for ‘significant global entities’

It’s essential for taxpayers to understand the implications of these findings and take appropriate action.


Resolution and Dispute Resolution:

If the taxpayer or business disagrees with the ATO’s decisions, they have the option to dispute them through formal dispute resolution processes. Seeking professional advice from tax consultants can be invaluable in navigating this stage.

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