While you might submit honest and detailed declarations, taxpayers can still be selected for a tax audit or review from the ATO. Even a quick audit can take around 28 days. In the worst-case scenario it can take 3-4 years to complete a complex audit. The audit process can involve face to face meetings as well as requests for financial records up to 5 years from the date of lodgement. Further, the costs of an audit can be significant, running into the tens of thousands of dollars, even if all your lodgements are correct.
So today we are going to discuss what can trigger an ATO tax audit. While some audits trigger randomly by anonymous tip-offs, you may also be in an industry or sector that the ATO is focusing on. Here are some things that can trigger an ATO tax audit.
You Run a Cash Business
If you receive cash payments for services and products but do not declare those incomes, your expenses may look abnormally high. Industries that have a higher exposure to this type of audit include:
- Grocery stores
- Takeaway shops
- Small service providers
If you operate any of these businesses, where you are regularly paid in cash, you are more likely to be scrutinised by the ATO. If you do not declare cash received, products sold, or services rendered, your expenses will look too high and may trigger an audit.
Being Above or Below Your Industry Benchmarks
The ATO keeps comprehensive records of business activities in Australia. As a result, they have developed benchmarks for the average income and key expense ratios for most industries. The ATO scans BAS and tax returns lodged, to see if your business is consistent with your industry peers. If there are inconsistencies, this can be an indicator of tax issues including transfer pricing, unreported income, and more. Further, this can be seen as an indication of tax compliance issues by the ATO and trigger an audit.
Also known as anonymous tip-offs, employees who complain to the ATO regarding their employers regarding issues (including super not paid correctly) will attract the ATO’s attention immediately. What might start as a review of superannuation can turn into an audit of GST, FBT, and income tax.
The ATO takes complaints from employees regarding incorrect payments of superannuation very seriously. Suppliers can also register a complaint with the ATO if they are dissatisfied.
Discrepancies Between Lodgements
If there is a large variance between the information lodged with the ATO, you are likely to trigger an audit. In fact, this is one of the most common triggers for an ATO audit or review. Discrepancies include:
- BAS and payment summaries on gross wages and PAYG withholding
- An income tax return and FBT return on employee benefit contributions
- Income tax return and BAS on total sales and expenses
You can avoid data discrepancies by conducting a thorough reconciliation process for all returns.
If You Make the News
Unfortunately, if you make the news for a disagreement or other newsworthy transaction (such as the sale of large assets) this can bring your business into the spotlight. This can even include winning an award or negative social media attention on Twitter, Facebook, and Instagram. Even positive national recognition can garner a meeting with the ATO.
An international transaction is of particular interest to the ATO. They will analyse how many times and which overseas locations you make transactions. Two reasons the ATO would look very closely at your business would be material fund transfers and business transactions with entities in tax havens.
If you need to do international, financial transactions, you need to lodge an international dealing schedule and have the appropriate documentation, including transfer pricing agreements. This can be difficult to manage, which is why it is important you work with an experienced accountant, like those at Siragusa.
Other Audit Triggers
There are a variety of other triggers that can cause and ATO audit. These include:
- Late lodgements
- Consistently reporting operating losses
- Failing to lodge FBT returns when the business owns vehicles
- Unusual fluctuations of trading performance between years
This is why many accountants will recommend audit insurance. It is on par with public liability and professional indemnity insurance and covers professional fees incurred as a result of tax audits.
One of the best ways to protect your business from audits is to work with a professional accountant and financial advisor, like those from Siragusa. We are here to help businesses big and small to ensure you remain ATO compliant. Contact us today for more information on our services and how we can start helping you, today!