An overview of the ATO’s auditing process
With information sharing occurring more than ever these days, not only between the Tax Office and other government departments but also banks, financial institutions, online auction sites such as eBay and more, being targeted for a tax audit is a very real possibility.
Each year the Tax Office writes to tens of thousands of individuals asking them to review their claims, and conducts thousands of reviews or audits. Overstated refunds, for example, were identified in a recent financial year as totalling millions of dollars in extra revenue for the government. And just comparing third-party information with returns (known as data matching) reveals hundreds of thousands of discrepancies, and annually nets the Tax Office extra millions (even hundreds of) every year.
Little wonder then that the Tax Office is keen to maintain the role that auditing has in its revenue raising arsenal.
But being tapped on the shoulder for a tax audit needn’t be the game changer that it sounds. First of all, just because the Tax Office gets in contact with you doesn’t automatically mean that an audit is taking place. The first contact can be to merely raise the fact that a discrepancy has been noticed, which may have come up due to cross references and data matching (or rather mis-matching).
Further information or verification may be all that is needed, and an honest mistake can be cleared up painlessly (apart from the pain in the hip-pocket) compared to what may happen should you refuse to co-operate at this first stage.
A review by the Tax Office can be looked at as a preliminary step to a possible audit. If the review reveals evidence that something is not quite right, an audit may follow.
As to what flags or triggers the taxman’s attention, possibilities include where taxes paid do not tally with economic performance and there is no obvious reason why. Or for a business, when an operation consistently makes losses over a number of years, the Tax Office may wonder why a perpetual loss-maker is kept in existence.
The Tax Office also has a set of "industry benchmarks" that set what it sees as a standard of performance for a particular industry or sector. Should a business stray too far from a benchmark, an alarm bell may be set ringing in a tax officer's ear.
If you have actually got something to confess to, sooner rather than later might be the time to do it. Remember the Tax Office, as the revenue collection agency for the government, has the weight of the law behind it.
It's not just the shortfall in tax that they can extract from you. These tax shortfalls also come with an interest component to account for the fact that the extra amount really should have been paid by the original due date – and this interest bill will just grow the longer that you leave the tax amount unpaid. There are also hefty penalties and fines that you may have to come up with as well, depending on the nature and severity of the breach.
Any voluntary disclosure can reduce the penalties levied against you, and the amount of reduction is spelled out in legislation – done before an audit is started lessens a penalty by 80%, but a disclosure made after it has commenced is restricted to a 20% reduction.
Once initiated, an audit can last for weeks or months, and there have even been examples of audits that lasted for years. It is of course better to avoid the experience altogether if you can. Make each claim and transaction as though the Tax Office will scrutinise your every entry, and if in doubt even consider getting a private ruling before entering into a potentially contentious transaction.
Needless to say, good record-keeping will not only help you meet your tax law obligations, but will also make it easier for you to justify your position in the event of a review or audit.
A tax officer may make a less formal request for documents either in person or by calling, but depending on the extent and scope of the request, you may want to get the request in writing, just to make sure there are no misunderstandings.
Apart from the informal approach however, the Tax Office has the power to access and examine, and copy, documents and information. The law allows tax officers to have full and free access to buildings, books and other papers, to make copies of any document, and to issue notices requiring any person to provide information and documents of which they have custody or control.
However records and documents that are in confidence between, say, you and your solicitor (that are under legal or professional privilege) are not necessarily covered under these powers. But information or documents that are requested but not provided can then not be used to later dispute the resulting outcome.
If you're dealing with particularly sensitive information, you may want to check with this office or your legal adviser regarding whether privilege may apply to those documents.
Tax officers at this stage cannot simply seize all documents, and need to make a reasonable effort to distinguish between relevant and irrelevant information. And the common law privilege against self-incrimination has little sway here.
One statutory constraint is that these powers may only be used to enable the Tax Office to administer the tax law. A tax officer should be able to produce authorisation, and without this does not have to be given documents and can be asked to leave.
If a formal notice of audit is served, you will be required to provide access and reasonable facilities if needed for the tax officer. It is also an offence to not indicate where documents are stored or located, you need to open locks or provide means to do so, provide light and power if required, and give access to electronically stored data.
If you need to consult with your representative you should be given a reasonable time to do so. If you feel a need to tape record conversations or interviews, you are within your rights to do so, with the proviso that the Tax Office will need to be given a copy (and if the recording button is in a tax officer’s hand, you can legally ask for a copy as well).
Conclusions made as a result of an audit need to be clearly explained to you, along with the basis for levelling penalties or interest charges. You should also be given the opportunity to explain any circumstances you believe justifies a reduction in penalties, and be told how you can go about having a decision reviewed.
Of course making false or misleading statements, or trying to deceive or mislead a tax officer, can lead to prosecution.
Harper Group Pty Ltd Chartered Accountants Frankston Ph 03 9770 1547
Disclaimer: All information provided in this article is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.