Navigating the complexities of tax is no easy feat, especially for businesses striving to remain compliant whilst minimising their tax liabilities and maximising their benefits. One crucial aspect of this process is understanding the Australian Taxation Office (ATO) audits. We reveal why the ATO carries out audits, what might trigger an audit, and what the audit process entails so you can feel confident should your business ever undergo an audit.
Why Does the ATO Conduct Audits?
The ATO plays a pivotal role in ensuring that everyone pays their fair share of taxes, thereby, maintaining the integrity of the tax system. Audits are a crucial tool in achieving this goal. They help the ATO identify errors, discrepancies, and potential instances of non-compliance. By conducting audits, the ATO aims to:
Promote Compliance: Audits discourage tax evasion and encourage individuals and businesses to comply with tax laws.
Ensure Accuracy: Audits help verify the accuracy of tax returns and financial statements, preventing unintentional errors from leading to unintended consequences.
Enhance Equity: Audits contribute to a level playing field by ensuring that everyone is paying their appropriate tax amount.
Triggers for ATO Audits
An important question many of our clients ask is, “What might trigger an ATO audit?” While audits can occur randomly, several factors can increase the likelihood of being selected for one:
Unusual Fluctuations: Significant fluctuations in income, deductions, or tax payable can raise red flags and prompt the ATO to investigate further.
Industry Benchmarks: If your business’ financials diverge substantially from industry benchmarks, it could catch the ATO’s attention.
Information Mismatch: If the information provided in your tax return doesn’t match data obtained from third parties such as employers and financial institutions, an audit might be triggered.
Large Deductions: Claiming large deductions that are out of line with your income and occupation could result in closer scrutiny.
International Transactions: Businesses engaged in international transactions or offshore dealings may face increased audit risk due to complexities in cross-border tax regulations.
As your tax accountant, our role is to ensure that you limit the likelihood of an audit by keeping your tax obligations in order, allowing you to go about your business without the threat of an audit looming over your shoulders. But should an audit be conducted, we will assist in the process to make sure all relevant financial documents, statements, and records are accessible.
The ATO Audit Process
ATO audits typically come in two phases: a risk review and the main audit. A risk review determines whether there are any compliance issues with your taxes. Typically, this doesn’t go very deep – the ATO understands that most cases are honest mistakes and will help you correct them. But if the review flags particular errors, issues, or discrepancies, a full audit may be triggered.
Audits are a more comprehensive investigation, intended to unveil underpayments and non-compliance. But don’t worry, it isn’t just about trying to uncover instances of tax evasion; the ATO audit can also be conducted to identify and clear up cases where you’re paying too much tax.
Generally, an audit will be conducted in the following order:
Notification: If your tax return is selected for an audit, the ATO will notify you in writing. This notice will outline the scope of the audit and the specific records they require.
Preparation: Your accounting firm will play a vital role in assisting you with preparing the necessary documentation. This may include financial statements, receipts, invoices, and other relevant records.
Meeting the ATO: Typically, an initial meeting is scheduled to discuss the audit’s scope, the documents required, and any concerns you might have.
Review and Analysis: The ATO will meticulously review the documents provided and assess their accuracy. They might request additional information or clarification during this stage.
Findings and Discussions: Once the review is complete, the ATO will share their findings with you. If discrepancies are identified, discussions will focus on resolving them, clarifying misunderstandings, and reaching a resolution.
Adjustments and Outcomes: Depending on the audit’s findings, adjustments may be made to your tax liability. If necessary, you can appeal the ATO’s decision through formal channels.
Future Compliance: After the audit, it’s important to implement any recommendations made by the ATO to ensure future compliance and minimise the risk of future audits.
ATO audits might seem intimidating, but with the right knowledge and assistance, they can be navigated smoothly. Have questions about the ATO audits? Contact our tax specialists today at PCR Accounting & Advisory on 03 9847 7516.
Owner of PCR Accounting & Advisory, Peter Marmara-Stewart is a top-tier accountant and financial advisor dedicated to helping clients reach their business goals and achieve financial freedom. Peter is highly regarded for his client-focused approach and entrepreneurial spirit, catering to a diverse range of professionals across a wide scope of industries all across the country. Peter’s expertise can help you plan effectively, set goals, maximise profits and protect your assets. Get in touch today on (03) 9847 7516.