Tax audit and review notices are sent out to thousands of companies each year. If your business receives one, do not panic. Call your tax professional and cooperate with the Tax Office. It may just be a request for additional information or verification. If an audit does result, and if there is a reason to worry, consider a voluntary disclosure. That can help reduce penalties. Here’s an inside view of what to expect if the Australian Taxation Office calls you.
Even if you are a conscientious, trustworthy taxpayer with nothing to hide, you may break out into a sweat if you receive notice from the Australian Taxation Office (ATO) that it plans to review your claims or a listed transaction on one or more of your income tax returns. Thousands of companies receive such letters or telephone calls each year and Tax Office reviews and audits yield hundreds of thousands of dollars. The ATO routinely matches information on returns against information provided by banks and other third-party institutions. In one year alone this procedure resulted in an additional $259.9 million for the Tax Office. In that same year, audits of returns lodged by small to medium entities (SME) yielded an extra $560 million. Disallowing claims for current year and carried forward losses added $1.1 billion to the Treasury’s coffers. With financial gains like those, tax audits remain a constant possibility. But being contacted by the ATO need not set your teeth on edge, particularly if your business practices good record-keeping. That will help you meet tax law obligations and make it easier to justify your position. A letter or telephone call from the ATO doesn’t mean you are being audited. The Tax Office may simply have noticed a discrepancy need some additional information or verification. In cases where there has been an honest mistake, the issue can usually be cleared up relatively easily. But the first step is to get in touch with your tax professional. Of course a review can lead to an audit if something appears not quite right. Among the red flags that can trigger an audit are:
- Taxes paid that seem out of sync with economic performance for no obvious explanation;
- Consistent business losses over several years while the loss-making business is kept operating; and
- Straying too far from industry benchmarks that set what is viewed as the standard of performance for an industry or sector
If you do find that you are being audited, first find out what kind of audit and its scope. Then consult your tax adviser. Depending on the information requested, your adviser may recommend that you get the request in writing to ensure you completely understand what the Tax Office is looking for.
This helps your adviser identify any areas of weakness and prepare to present either arguments to support your positions or a voluntary disclosure. It is critical to be prepared to counter any proposed reassessments before the ATO takes action. Areas likely to be subject to scrutiny include:
- Fringe Benefits Tax (FBT)
- Goods and Services Tax (GST)
- Capital Gains Tax (CGT)
- Superannuation Guarantee Contributions
If an audit is in order, the law allows tax officers to gain full and complete access to buildings, all books and any other documents they wish to scrutinise. The officers must make a reasonable effort to distinguish between information that is relevant and irrelevant to the issue in dispute. They may use their powers only to administer the tax law and for no other purpose. They may copy any material and issue notices requiring any person or company to provide information and records they control. Documents under legal or professional privilege are not necessarily covered by the powers granted to the ATO. An example would be communications between you and your solicitor. Consult with your adviser to determine if privilege applies to any of your documents. An audit can be costly and time-consuming, lasting for weeks, months or, in extreme cases, years. Generally it is better to avoid the process. When providing information to your tax agent, take the perspective that the ATO likely will scrutinise each entry on your returns. If you have any doubts, you may want to consider requesting a private ruling from the Tax Office. For a company that has breached tax laws or regulation, the best policy is generally to admit to it. And in these cases, sooner is better than later. The Tax Office not only can demand payment of taxes that were not paid, it can impose interest and penalties that will start from the day the unpaid tax should have been submitted. The fines and penalties will depend on the nature and severity of the breach. Interest continues to accumulate until the money is paid. Voluntary disclosures can reduce the penalties. If the disclosure is made before an audit, the penalty is reduced by 80 percent. If the disclosure comes after the audit begins, the reduction is limited to 20 percent. False or misleading statements, or trying to deceive or mislead a tax officer, can lead to prosecution and a prison sentence. Consult with your adviser immediately if the ATO contacts you about a return. Time may be of the essence.