Tax Audits are on the increase are you prepared?

We are noticing an increase in tax office audit activity over the last 6 months.

The area’s most likely to be audited are:

  • Cash economy businesses
  • Businesses with continued losses
  • People who have things missing, such as;
    • Documents lodged that are incomplete
    • Non-lodgement of documents
    • Non-remittance of payments
  • Super funds that continuously report breaches when audited.
  • Mismatches between reported data and third party data.

The ATO uses benchmarking and data matching when determining which business are to be audited.

Benchmarks such as key financial ratios are used to compare businesses against each other. They are updated annually and are a method of risk assessment for audit selection.  The benchmarking results are published on the tax department website.

The ATO uses data matching to identify any anomalies. Such data matching includes merchant data, motor vehicles (expensive cars vs affordability based on disclosed income), real estate, PayPal/eBay, gambling (government organisation reports) and offshore transfers.

The ATO does recognises that audits can be very expensive and disruptive for a client this however does not necessarily mean that you will not be audited. The costs generally blow out if your paper work is not easily accessible or ties back to key issues. In our experience they also impose tight timeframes to forward requested information back to them.

There are two types of audits:

  • Desk audits
  • Field audit

Desk audits are of a limited scope and short turnaround time, generally dealing with lodgement risks. We generally see these with BAS lodgements and a refund or payment is generated that is outside the normal  BAS reported. These audits are often conducted by compliance staff who generally follow set procedures.

Field audits are more complex, whereby the organisation will receive a questionnaire for completion prior to a meeting. It is recommended that both clients and their accountants be proactive and deal with any issues they identify following completion of the questionnaire. An interim report is generally issued following a field audit which provides an opportunity for the client to raise issues with conclusions reached by the ATO. These issues are considered and a final report is issued.

How to prevent an audit:

  • Make sure you are not attractive audit candidates
  • We will advise you if we believe your business is outside of benchmarks / business norms
  • Maintain proper records

How to prepare for an audit:

  • Have consistent processing for handling your records
  • Proper documentation – instill good habits in your business
  • Businesses are individual – there are often explanations for how each business is run, so make sure that these are documented
  • Keep on top of lodgements and debt
  • Should you receive an audit letter don’t ignore hoping it will go away – it won’t.  Much better to be proactive rather than reactive.

The proper management of audits can significantly reduce the long term financial impact on clients.

Should we receive an audit notification we will help you deal with the tax department in a proactive manner and try to identify any areas of risk on a year by year basis as we prepare your financials and tax returns to ensure you have the documentation to support the position taken.

I encourage you to read more about our Benchmarking Services.

Please view the ATO Small Business Benchmarks