Why are audits necessary

In the eyes of the ATO, a tax audit is a necessary tool to encourage taxpayers to do the right thing but the reality is that they are a painful scrutiny of your affairs and can take up to 18 months to complete. In a world where it is impossible to be perfect, the ATO can find problems with even the most fastidious accounts. Industries, where cash payments occur, are at a high risk of being audited.

Although the ATO have recently claimed to have adopted a warmer approach to working with taxpayers it should not be mistaken for thinking that the ATO will not exploit each mistake they find. Ultimately, they will seek to justify a result for the time, effort and resources committed to an audit to ensure there is full compliance. It should be remembered that the taxpayer carries the burden of proof. 

Voluntarily disclosing information during an audit can be a sensible way of reducing the time, effort and resources that the ATO expends during an audit but there is a danger of inadvertently admitting to problems that you did not know existed. Obtaining guidance and assistance from a tax lawyer can fend off the ATO so that you can get back to business.

What are the key indicators of an at-risk business

Over declaring deductions or under-declaring income can lead to heavy penalties, and in some cases criminal prosecution. The ATO are well versed in detecting problems at all levels of business and rarely if ever, are fooled by businesses standard attempts to conceal their wrongdoing. Common indicators for the ATO are things such as the financial performance of the business compared to similar businesses in that area (called the benchmark range), compliance with superannuation and PAYG obligations, variances between tax returns and BAS, and constant losses or other anomalies which often point to problems.

What are the penalties for a tax audit problem

The Tax Administration Act 1953 prescribes the penalties for tax audits, which can be up to 75% of the tax owing. In addition, a further 20% uplift is added in certain circumstances – totalling 90%. Finally, interest at high rates are applied (and backdated) meaning it can easily result in more money being owed in penalties and interest than what is owed in tax! In serious cases, taxpayers can be referred for criminal prosecution.

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