The 6 Stages Of Dealing With ATO Audits
It’s a phone call many of us dread. The ATO is on the line informing you they’ve decided to audit you. The panic sets in and you lose all sense of rational thought. But just stop and breathe. The chances you’ve done something truly wrong are minimal. Even if you have made a mistake, the remedies to fix them don’t have to be that painful.
In this post, I’ll explain the steps you can take if you get an Australian Taxation Office audit phone call or letter. To further allay your fears, this article also shares some real-life Australian Taxation Office audit success stories. The good news here? You can often get a refund!
The Australian Taxation Office audit process – how it starts
The Australian Taxation Office will often start by calling you and asking you questions. DO NOT ANSWER these questions unless you are absolutely certain of the answer. The ATO write down everything you say and will use this information later on. They place the greatest weight on your earliest statements rather than the ones you make later. If you’ve had time to think, you’ve had time to formulate what you believe is the right answer. It’s not always the whole truth. So if you say the wrong thing initially, it can be very hard to undo without arousing significant suspicion.
During this initial call, rather than answering the ATO’s questions with the first thing that comes into your head, ask them to tell you specifically what they want to know. Then say you will double check with your accountant and/or your records and get back to them. Try to ensure you are in control of the process at all times.
Get everything in order
After the initial contact, get your tax affairs in order and be prepare to answer the ATO’s questions. Some tips:
- Review your tax position and make sure you are happy with the way you’ve done your taxes.
- Make sure you have all the supporting information (such as receipts, invoices etc.) that are required by law.
- Once you’ve done the above, answer the ATO’s questions factually and without emotion.
- Answer the specific questions they’ve asked. Don’t volunteer more information. Just honestly answer the exact questions they’ve asked.
- If you are unsure about any of these steps or need a second opinion, seek out a professional in the legal or tax area. They have years of experience that can make the process a lot easier on you.
Pick and choose what to tell
It is rare for someone’s taxes to be perfect. Even if you have made some minor errors, the Australian Taxation Office may not pick up on them or think they are relevant. That is unless you make a big deal about it.
The ATO do not know your business as well as you do. Take an event you’ve organised as an example, say a big birthday celebration or a wedding. You know the event back to front. You know every little thing that didn’t go to plan. However, your guests probably didn’t bat an eyelid at those things and happily enjoyed their night.
It’s the same with your taxes. You know the ‘ins and outs’. You know the things you wish were better but the ATO doesn’t. In fact, they may not even care. However, if you bring them up then the ATO may be duty bound to look at them in more detail. They are, after all, trying to maintain the integrity of the tax system. If you tell them you’ve done something wrong, it is difficult for them to ignore it or pretend they did not hear you.
Information overload – what to share
Often the ATO will ask for reams of information. It is important for this information to be correct. You should also only give them copies of what they request and keep the originals as they can sometimes lose your papers.
If the information request is significant, don’t read too much into this. Often the ATO will ask for everything and only read what interests them. Don’t assume that just because they have asked for all these documents, they are going to comb through every single detail. There are many documents they won’t read at all.
Another frustrating thing the ATO sometimes does is to ask you for extra information unnecessarily, often at a later date. Don’t read too much into this either. The ATO’s internal timelines require them to complete an audit to a certain stage by a specified date. Sometimes, due to resource constraints, they don’t have enough time to read through your material so they ask for something else from you. This buys them more time to do the work. I mention this here because it’s important to know extra information requests aren’t always a reason to panic. Audits cause a lot of stress and false assumptions can lead to unnecessary worries.
Legally, the Australian Taxation Office has powers to issue you a statutory notice under the Division 353-10 of Schedule 1 to the Taxation Administration Act 1953 which requires you to provide information. If you feel the ATO is using its statutory powers to ask you for more information for no reason, you can ask them to give you their reasons in writing. You can even have the decision reviewed.
Again, if this occurs, your lawyer or accountant is a good person to consult. You can benefit from their years of experience as they are quickly be able to work out the reason behind the ‘further information’ request. They can allay your concerns or advise you if it’s something more serious.
Audit outcome 1 – you know something’s not quite right with your taxes
If you know there is something amiss with your taxes, you will have the opportunity to make a voluntary disclosure to the Australian Taxation Office to say you got it wrong. You can then fix it straight away and ask for reduced penalties and interest too.
Audit outcome 2 – the Australian Taxation Office says you owe more than you think you do
It’s important to know the ATO doesn’t always get it right either. You might get an officer who specialises in GST but still offers their opinion on your income tax or superannuation anyway. As those areas are outside their expertise, they can easily get it wrong. Also, don’t be daunted by how assertive they might be on their position. If you feel you’re right, stick to your guns as there is a good chance the ATO audit officer could be mistaken. Remember, you know your affairs better than they do.
Disputing the ATO’s position on your taxes
If you are still unhappy with a tax ruling, there is plenty of time to dispute it during the audit process. These are the steps you can take to resolve a tax disagreement:
- Australian Taxation Office audit position paper
The ATO will send you an audit position paper. It sets out what they think you owe and why. Read it carefully. Do you agree with their findings? If not, tell them so and the reason why and they will take that into account.
There are times the audit team may change their position upon reading your case. However, don’t read too much into it if they don’t. It’s far more likely the Australian Taxation Office auditor won’t change their position unless you introduce new facts, or they have made a glaring technical error.
- In-house facilitation
The ATO now have an in-house facilitation option. You can use this option to meet the auditors and discuss their findings to see if you can come to a resolution. It’s similar to mediation with an independent person present. It is worth giving this a shot as the audit team will need to justify their position to this third party. There’s always a chance you can shoot down any holes in their arguments during this process and possibly change the ATO’s position on your taxes.
- Formally object
If you are still unhappy, the next step is to object. Realistically, in many cases this is where your tax struggles with the ATO will end. It’s fairly common for audit decisions to be reversed at the objection stage.
During this stage, both sides will look at the facts of the case. You get the chance to explain why you believe you got your taxes right. The ATO objections team are different people to the audit team (fresh pair of eyes) and are usually better with the technical side of tax than auditors. Auditors tend to be more information gatherers.
You may receive legal advice urging you to get to objections stage as quickly as possible. Some legal practitioners feel at this stage you are more likely to deal with a reasonable person! But I don’t believe this strategy is a good one. You can’t object until the auditor has made a ‘decision’ on your tax position. Giving the auditor poor or wrong information to deliberately get to the objections stage is more likely to result in a bad outcome, or at the very least an unnecessarily protracted process.
- Taking it higher – Administrative Appeals Tribunal (AAT) or Federal Court
If the objections team is slow to respond or simply don’t agree with you, then you have the option of going to Court or the AAT. For most taxpayers, the AAT is a good option because it is a ‘no-costs’ jurisdiction. If you lose, you don’t have to pay the ATO’s legal costs. This means the Australian Taxation Office need to be pretty sure of themselves if they are going to fight you. They may try to settle with you so they don’t have to waste money on Court proceedings. For example, if your tax bill is less than $10,000 and it will cost them more than that to fight you in the AAT, they will lean towards settling. Note though – the ATO will usually only settle on technical principles (i.e. based on a reasonable interpretation of the law regarding what your tax liability should be), rather than coming up with a compromise amount of tax.