Welcome to the club! The first thing you should do is not panic – being targeted doesn’t mean that you’ve done something bad, it just means that the ATO needs to verify details of your tax return submission to make sure you haven’t claimed incorrectly.
In fact, you are far from alone. The ATO has new data matching powers meaning it can analyse and verify details of your tax return, your payslips and other sources of information. This year there has been an increase in “please explain” letters from the ATO, asking individuals to explain some of their claims.
What will happen to me in a tax audit?
The first thing that will happen is that the ATO will contact you and set a time to meet. They will provide an agenda for the meeting, outlining what they want to discuss. You will also be told what evidence or information you need to provide in order to answer their questions.
The ATO will be open and transparent during the audit process to make sure you know exactly what is required and how to proceed. They will discuss timelines, ways of providing information, milestones and deadlines, expectations and access powers.
How should I prepare?
Keep records of everything! Firstly you should understand what is legally tax deductible and what is not. It pays to be aware of this from the outset and not after the fact. The ATO is looking at tax returns from the last 2 years, so you need to plan ahead.
In addition to understanding the requirements, you absolutely need to keep good records. Generally you need to store records for 5 years after lodging your return, so you need a good system for doing this.
The old showbox method is not really ideal, and there are some electronic systems that can really help you keep track of your records. One example is the Garis Group app which our clients use to keep track of a whole range of expenses and activities, helping them to prepare for a tax return or audit if it comes to that.
How should I act?
Be open and honest! Don’t try to get one over on the ATO, as they have far reaching powers, even looking at social media to judge lifestyle choices. If you claim to have $10,000 income for the last 5 years, but are constantly travelling overseas, then questions will be asked!!!
Work with your accountant to make sure what you claim is actually tax deductible, and that you are claiming the correct amounts. For example vehicles, phones and other items used partially for work purposes need to be accurately calculated. Other expenses must be directly related to work activities, and not just for general use.
What if I get caught out?
Don’t try to cheat in the first place! Most issues that raise red flags at the Tax Office are due to simple errors or lack of understanding. In minor cases like these you won’t be treated as a criminal, but you can expect the ATO to adjust your claim, and you may need to pay back the shortfall – plus some interest.
In more serious cases of negligent or wilful behaviour the ATO may use its formal powers to bring punishment against you. Significant penalties can be imposed, and increase in line with the severity of the offence.
The best protection against an audit is to avoid creating the situation in the first place. Begin with good intentions, keep records and use a trusted accountant to advise you. If you get stuck or just need to get a second opinion, we’re happy to have a chat about your needs.