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What Triggers ATO Audits, and What to Do When You Get One

When you think of ATO audits, what do you envision? Is it a stern-looking auditor questioning your every expense, or is it an intimidating letter in the mail demanding compliance? In an attempt to encourage tax compliance.

The Australian Tax Office (ATO) uses a variety of strategies to identify and audit taxpayers. Knowing what triggers audits and knowing how to handle them can help you protect yourself should you find yourself in one.

An ATO audit is a comprehensive review of all the tax returns filed by an individual or company. This is done to ensure that they are in compliance with Australian Taxation law.  The ATO will then determine if any adjustments need to be made.  Here are some common reasons why your tax affairs might be under scrutiny:

1. If You are Working or Running an ATO Target Industry

A business that handles more cash transactions than any other form has a higher chance of being audited by the ATO. If this sounds like your company, then you might be in line for an audit soon.

The reason for this has to do with how easy evasion is when using money instead of digital alternatives. The Australian Tax Office releases a target list every year focusing on the most high-risk tax evasive industry sectors.

2. Anonymous Tax Evasion Allegations

Any member in good standing can call the ATO to report an anonymous tax evasion allegation against you. This allows for potential tax evasion cases, which officials will investigate and impose penalties if found guilty.

3. Failing to Declare Individual Income

The Australian Tax Office (ATO) has a sophisticated data matching system to detect undeclared income, and if they find it, there’s no way out. Not declaring can trigger an audit and result in hefty fines or even imprisonment for several years.

It’s not just about the company’s income; yours matters as well. Whether you have income locally or overseas from Airbnb rentals, share dividends, or work as a freelancer, you must declare this income.

Don’t forget the interest you get from your bank deposit. If you think that the interest on your bank account is too small to be considered as income, it might just come as a surprise when an ATO audit arrives. 

4. If Your Business is Making Much Less Than Competitors

You might be making less than what the competition in your industry makes, and that could mean it’s worth conducting an investigation.

If the ATO system finds discrepancies with your incoming or outgoing funds as compared to other companies in similar lines of work, they’ll come looking for evidence before handing down any penalties or even shutting things down completely.

5. When You Seem to Be Spending More Than You Supposedly Make

It has been reported that the ATO audits people who live a luxurious lifestyle but do not have as much declared income. The ATO will often trawl through social media accounts for evidence of hidden wealth or lavish spending habits and could then initiate an audit process where they scrutinize every cent coming into your bank account.

6. Not Paying Your Employees’ Superannuation

If you don’t pay your employees’ superannuation, the Australian Tax Office will come calling. It’s a harsh reality that many businesses and entrepreneurs employ staff but do not make sure the 9.5% of their salary is going into a retirement fund. This can lead to ATO audits which would likely result in hefty fines if detected.

7. If You File Your Taxes Late

You might receive an ATO audit if you are always late to file your returns or pay the appropriate tax amounts on time. Make sure that all of this paperwork is submitted and paid by its due date, as any missing deadlines may lead to scrutiny from auditors (and potential fines).

Missing ATO  deadlines can have serious consequences. If you’re struggling to keep up with the deadlines for submitting your tax-related paperwork or payments, ensure that is communicated clearly before it becomes an issue.

8. Claiming Deductions You’re Not Entitled To

When you’re claiming deductions, make sure that they are for work-related expenses. It may seem simple to claim private costs like the daily commute, but this can lead to an ATO audit if discovered.

The ATO is always looking for those who take their work-related deductions too far. This includes people who claim deductions for money they haven’t spent and those who claim deductions for private costs.  You’ll be required to provide supporting documents in the form of invoices and receipts for all the deductions you file.

What to Do When You Receive an ATO Audit Notification

Remain Calm

You might be feeling a lot of emotions when you get a letter from the ATO. Stay calm and remember that they just need documents to support your returns. If everything is okay, you have nothing to worry about.

Review Your Return Documents

If you receive a letter from the ATO, it could mean they found some errors on your return, so be prepared. They might ask for source documents to help verify claims made during filing.

Review the document to ensure that everything on their end was correct and accurate and prepare for any questions or concerns regarding the audit process ahead of time.

Be careful not to make mistakes such as failing to declare income, miscalculating it, and claiming deductions that you do not qualify for under Australian law.

Be Honest

When answering questions, be honest. Your answers should be limited only as necessary so that they can properly assess your company’s situation with what little information has been given. Make sure any mistakes or errors in judgment are edited out before submitting anything back.

What Can You Do to Avoid ATO Audits

If you are a business owner, it’s important to ensure all of your tax obligations are met. That means hiring the best professionals and completing returns correctly to not warrant an audit from the ATO.

Firms like Pherrus Financial can take care of everything needed with their experience in audits, no matter how complicated anything might seem.

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