In a court of law you are 'innocent until proven guilty'? However, when it comes to an ATO audit, it's the reverse. The ATO do not have to prove you are in the wrong… effectively you are guilty until you prove yourself innocent.
Stage 1: Warning Letter
This is the most common letter - the ATO will send more than 1,000,000 of these this year. The ATO uses poweful data matching software, and automatically compares your deductions to other people in your industry … and it will notice if your deductions seem rather high. If so, they’ll send you one of these letters, warning you to keep an eye on your deductions, and that they have an eye on you. So what should you do?
Don’t panic – you could have good reasons for having higher deductions (e.g. you have two cars). Discuss this letter with your accountant, and go back and review your tax return in question. You’ll want to confirm what records and receipts you need to keep for next year, in case the ATO decides to take things further. Also, it’s worth double-checking your current tax return to make sure there are no errors you need to amend.
Stage 2: Amended Assessment
Sometimes the ATO will actually step in and amend your tax return. This might happen when you’ve forgotten to declare some income and a third party has notified the ATO … or your spouse’s tax return contradicts yours. We have seen this happen when capital gains are omitted from a tax return. First step is to review your tax return and double check the assessment. If the ATO is wrong, we can advise the ATO why they are incorrect, and reverse the amended assessment. As discussed earlier, the burden of proof is on you.
Stage 3: Official ATO Review / Audit
In rare cases, the ATO might ask to formally review your affairs. It usually begins with a letter from the ATO asking you specific questions … and sometimes, these reviews can progress to a full audit, if the ATO suspects your tax return is incorrect. If this happens to you, here’s what you’ll need to do:
- First, check out the Taxpayers’ Charter on the ATO website to understand the process. Consult with your accountant, as anything you say now could be used against you in future. Do NOT give the ATO any information over the phone – ask for all queries to be sent in writing for your accountant to formally reply. This gives you a paper trail to back you up. If you do find that you’ve made an error, voluntarily amend your tax return as soon as possible, to limit your exposure to any penalties. But if you’re confident you’re right, again, the burden of proof will be on you. You might even be required to submit supporting documentation to the ATO – though usually only if things progress to an audit.
What happens if you’re found guilty? You will usually have to pay a penalty, in addition to repaying any tax shortfall. The penalties get worse depending on whether you overpaid or underpaid tax (a shortfall), and whether it was carelessness, recklessness or wilful disregard. They range from an additional 25% to 75% of the shortfall amount, plus administrative penalties between $4,200 to $12,600.
You may also have to pay interest on top of these penalties. And remember …The best thing to do to prepare for an audit is to keep proper records (preferably using cloud software and apps).
Please feel free to contact our team to discuss how to prepare yourself.