As we head into tax time, a tax audit is something which can be an extremely intimidating prospect for both you and your business. It can be a stressful and time-consuming process.The Australian Taxation Office (ATO) is responsible to the Government and the community for collecting revenue and ensuring everyone pays the right amount of tax. The ATO will request a tax audit of your tax affairs if they believe a more in-depth examination of a tax issue is required. Factors that trigger an ATO audit include:
- Not paying your employees superannuation,
- Undeclared cash (or other) income,
- Businesses consistently showing losses,
- A poor lodgement and payment history with the ATO,
- Using a tax agent with a history of audit failures, and
- Unexplained wealth or lifestyle.
It’s important for you to know exactly what a tax audit is, how it is conducted and how it may affect you and your business.
What is a Tax Audit?
A tax audit is an examination of your tax affairs to see if you have done what you are required to do under Australian tax laws. In most cases, it involves agreeing on a plan to collect detailed information and undertake analysis on your business. The ATO assumes you are trying to deal honestly with your tax. They have a responsibility to the community to ensure both individuals and businesses comply with taxation laws. For this reason, the ATO will check the accuracy of the information you give to them. The tax office uses a broad range of indicators to help select a business for an audit. This includes:
- Comparing a business against other businesses in their related industry. This is referred to as checking small business benchmarks,
- Allegations of tax evasion from members of the community,
- Sophisticated data matching technology which matches data you report on your tax return against information supplied from Government agencies, banks and trade suppliers,
- Watching business owners who are reporting net income on their tax return that appears to be too low to support their personal living expenses, or
- Random and unannounced visits to your business premises to check your processes and staff numbers.
Tax audits on businesses generally range anywhere from six to 18 months, depending on the number of specific issues they find, the level of complexity and any other circumstances they encounter. If you’ve received a letter from the ATO to subject you to a thorough investigation of your business records, it’s crucial for you to know exactly how it works.
How Does a Tax Audit on Your Business Work?
In a tax audit, the ATO will first call you to arrange a suitable meeting time and follow up with written confirmation. This will include a meeting agenda which outlines the key issues for discussion and a draft audit management plan. During an audit, you need to be open, honest and:
- Tell the ATO about anything that might delay the audit,
- Provide complete and accurate information when requested,
- Allow investigators to take copies or extracts from receipts and documents if needed, and
- Give investigators free access to your premises, documents and records if requested.
After initial contact with the ATO, you will need to get your tax affairs in order and be prepared to answer the ATO’s questions.
- Review your tax position and make sure you are happy with the way you’ve completed your taxes.
- Make sure you have all the supporting documentation (such as receipts and invoices) that are required by law.
- Answer the ATO’s questions honestly and factually.
- If you are unsure about the process or need a second opinion, it’s best to seek professional help immediately.
A tax audit is never easy, but by keeping things organised and following a few simple steps beforehand, you won’t need to panic or worry about a tax audit if the ATO chooses your business.
5 Steps to Audit-Proof Your Business
At the end of the day, tax audits place unnecessary stress on a small business so it’s best if you avoid them altogether.
1. Have accurate, up-to-date books and records to prove your claims.
Poor record keeping is a common problem among small businesses. If you’re having difficulties keeping track of everything manually, you should look at using some easy accounting software instead. Software such as Xero, QuickBooks Online or ZipBooks can help. All you need to do is enter in your information regularly. Keep your documents for at least five years as audits are generally conducted on the previous year’s tax return. They can, however, go further back if they believe you have largely understated your taxable income. As long as you have your documents, you can back up any claims you made.
2. Consider having audit protection insurance.
Audit insurance covers your business in the event it receives a tax audit. It covers the costs of professional fees incurred during the preparation for the audit from accountants, lawyers, bookkeepers and any other advisors required during the audit process. While it will not cover you for any extra tax or penalties, it might be worth it if you have contentious issues.
3. Always double-check before filing your tax return.
The majority of issues the ATO picks up on are from tax returns because of simple mathematical errors. If you’re working on your tax return manually, it’s easy to add up columns incorrectly or apply the wrong percentage. It’s best to seek out a professional accountant to do the job for you, or use software that can help cut down on these kinds of simple errors. Always make sure to look over your figures again to ensure there are no inconsistencies before you send them off.
4. Be very careful what you say to a tax auditor.
It’s best not to engage in idle chatter. The ATO has a different agenda than you. Keep your answers accurate and precise as words matter. Many specialist words within the tax act have special definitions which may differ from every day meanings. The tax auditor can cause issues if you accidentally misinterpret certain words.
5. Engage a good professional advisor and ensure they are the first point of contact.
If you know you have a problem, it’s always better to let your professional advisor aware so they can handle it. Be honest with your advisor as the ATO encourages you to come clean. It will reduce the penalties involved in a tax audit if, at the beginning, you state you have made errors. If the ATO conducts an audit and examines your business activity statements (BAS) or super guarantee charge (SGC) and finds issues, you may risk becoming personally liable for your PAYG or SGC debts under a director penalty notice.
Tax Debt Resolved Can Help With ATO Tax Debt
While the ATO almost has unlimited power if they call you for a tax audit, it’s best if you stay calm and treat them with respect. If you’ve been threatened with an audit and are concerned your business will have a significant tax debt or be insolvent, or if you have already been audited and have a debt you cannot pay, Tax Debt Resolved can help. Get in touch with us today on 1300 628 586 for a free consultation.
For more information on tax debt solutions, check out our tax debt page.