Tax Audit Red Flags

Tax audits have increased markedly over the past financial year, with the Australian Taxation Office (ATO) inspecting business transactions across the board.

With its enhanced data matching software, the ATO also takes advantage of the latest technological developments. When processing tax returns, the ATO can cross-reference declared data with records collected from relevant organizations. Banks and financial institutions are among these, as well as government departments such as the Department of Transport, Centrelink, Workcover, and Superannuation Funds.

It is still possible for the ATO to select you for a Tax Audit even if your tax return is transparent and thorough. According to our experience, a "quick" audit takes approximately 28 days. It can take up to four years for a complex audit to be resolved. You may be required to present financial records going back five years from the date of the return during face-to-face meetings with the ATO.

It may just be a matter of random selection or your business just happens to operate in an industry or sector that the ATO is currently focusing on, but there are certain red flags that may attract the unwanted attention of the ATO. We've compiled a list of some triggers you should be aware of in order to help you avoid a stressful, time-consuming, and costly Tax Audit.

"Cash" businesses that are well known

You're more likely to get scrutinized if you run a restaurant, takeaway, grocery store, small service provider, or similar type of business where you're regularly paid in cash. Your expenses (in terms of percentage of revenue) will register as abnormally high if you do not declare cash received for products sold or services rendered.

Employees' phone calls or letters

Any complaint from an employee regarding the incorrect payment of their superannuation fund - regardless of whether it is anonymous or not - is taken very seriously by the ATO. ATO interest is bound to be piqued by such complaints. And what may start as a review of your superannuation guarantee obligations can escalate into a full-scale audit, including a review of your income tax, GST and fringe benefits tax (FBT). Be aware that suppliers can also register a complaint should they be dissatisfied.

Benchmarking against your peers

The ATO has compiled a comprehensive database of business activities in Australia over the years. As a result, it has been able to create benchmarks that list the average income and key expense ratios across many industries and sectors. The ATO's cross-referencing software automatically scans your tax return when it is filed. The ATO can view your return as inconsistent with those of your peers if it registers as inconsistent.

Discrepancies in data

The most common trigger for a tax audit or review is significant differences in the information you provided on your return. Data variances include (but are not limited to):

• Your businesses’ income tax return and the FBT return detailing employee benefit contributions;
• BAS and Payment Summaries detailing gross wages and PAYG withholding;
• Your businesses’ income tax return and the BAS detailing total sales and expenses.

Data discrepancies can be avoided by conducting a thorough reconciliation process for all returns filed.

Making Headlines – Good or Bad…

The "spotlight" is likely to be placed on your business if you or your business are making headlines because of a disagreement or newsworthy transaction. Even winning an award or garnering too much negative attention on social media platforms can make the ATO sit up and take notice of you or your business.

Are you always late? Some other Triggers

A business that has a history of overdue returns, fails to file FBT returns if it lists vehicles as one of its assets, consistently declares operating losses, and exhibits marked fluctuations in trading performance may also raise the ATO's attention.

TAS Tailored Accounting Solutions recommends every business owner to take out Audit Insurance. It is just as important as your professional indemnity or public liability insurance. Your Audit Insurance will cover any professional fees incurred due to an audit or review for a nominal annual premium.

Want to get proactive about ensuring your business tax returns and/or practices won’t trigger an unwelcome call from the ATO? Contact TAS Tailored Accounting Solutions today to make certain your business is fully tax compliant.