In recent years, the Australian Taxation Office (ATO) has announced its intention to clamp down on SMEs and individuals who may be shirking their tax responsibilities.
Early notification can reduce any penalties the agency applies by up to 80 per cent.
The organisation appears to have ramped up audits on small business owners, after the ATO revealed collecting more than $1 billion worth of settlements from micro firms and SMEs in 2016-17.
So what should you do if you find yourself in the ATO's crosshairs? Here is our step-by-step guide on how to deal with a tax audit.
1. Confirm you are being audited
The ATO often contacts taxpayers to clarify any inconsistencies with their tax returns. This initial step is called a review and is not the same as an audit. Cooperate fully at the review stage by providing all the necessary information, which may include:
- Financial statements.
- Tax reconciliations.
If the ATO is dissatisfied with the outcomes of the review, it may choose to conduct an audit. The ATO can also skip reviews entirely if the organisation suspects fraud or tax evasion.
2. Bring in a professional
You should always enlist the services of a professional accountant to support you through an ATO audit. They will not only be familiar with the process, but they can also act as an important buffer between you and the agency.
Dealing with an audit is a stressful experience, but bringing in an expert ensures you can leave the process in the hands of someone trustworthy, allowing you to focus on running your business.
3. Review your records beforehand
The ATO provides SMEs with the opportunity to review their records and self-declare errors or omissions before the official audit begins. Early notification can reduce any penalties the agency applies by up to 80 per cent, which may be a considerable amount if mistakes have been made on your tax returns.
The more information you can gather early, the more transparent and helpful you will be to the ATO. This is also a good opportunity to implement a new bookkeeping system if you haven't been disciplined enough in the past.
4. Learn the ATO audit process
An experienced accountant can handle the specifics of the audit, but you should still familiarise yourself with the basic process. A typical audit will involve:
- A phone call to organise an initial meeting.
- Written confirmation of the meeting agenda and a draft audit management plan.
- The meeting itself, where the scope of the audit is discussed.
- The audit, which involves information gathering and requests.
- A position paper that sets out the ATO's findings before the audit is finalised.
- A written affirmation of the final decision.
Every audit is different and some may end quickly after the ATO has examined certain source documents, while others may require intensive and complex analysis.
Quick poll to see how you're tracking! Have you lodged your 2017–18 #TaxReturn?
— ato.gov.au (@ato_gov_au) October 2, 2018
5. Cooperate as much as possible
The ATO favours a cooperative (AP says so?) approach, so don't make life difficult for yourself by failing to maintain a cordial relationship with the agency's officers. You should address any concerns the ATO has in a clear and simple manner.
If you are being uncooperative, the organisation has formal notice powers to compel you to provide information, attend meetings, give evidence and produce documents. The ATO also has powers to access any necessary places, books and documents to conduct an audit.
Missed out on deductions due to lost or faded receipts? Make next #TaxTime easier – start using myDeductions in our #ATOapp to track expenses on the go! See https://t.co/WxbC5Uy40o pic.twitter.com/tFOl8kgSKn
— ato.gov.au (@ato_gov_au) September 18, 2018
6. Choose whether to dispute or settle
ATO audits that uncover discrepancies on tax returns could lead to penalties for your business. You will need to decide whether to dispute the agency's findings or agree a settlement.
Now is an excellent time to ensure your bookkeeping and tax records are in good shape.
SMEs were responsible for only 12 per cent of settlements in 2016-17, according to ATO statistics, but they paid out more than $850 million. Ultimately, you'll need to weigh up whether disputing the decision is worth the time, budget and resources it will cost to pursue.
7. Prevent future audits
An ATO audit can be nerve-racking, so you'll no doubt want to avoid another assessment in the future. We've already discussed strengthening your bookkeeping system, but the ATO has also provided a handy checklist of what attracts its attention:
- Aggressive tax planning.
- Tax performance which isn't comparable to similar businesses.
- Large, one-off or unusual transactions.
- A personal lifestyle not supported by after-tax income.
- Poor corporate governance and risk systems.
A full list of the ATO's red flags are available on the organisation's website.
Are you concerned about ATO audits?
The ATO seems to be setting its sights on small business owners in Australia, which means now is an excellent time to ensure your bookkeeping and tax records are in good shape.
At WMC Accounting, we provide comprehensive tax and audit services to help your organisation remain compliant, or – if necessary – resolve an ATO audit without disrupting your day-to-day business. Contact us today to learn more.