What Happens in an Audit? Insights into How the ATO Audits Individuals

Tax audits prompt fear and loathing the world over. In Australia, getting something wrong on your tax return often means little more than a frustrating delay with your refund. However, around 2 million people a year aren’t that lucky. Instead, they face an audit covering up to five years of their tax affairs. If you want to know what happens next, read on for a full explanation of the ATO audit process.  

Filling out a tax return might seem simple, but one wrong figure could alert the ATO that something is amiss with your tax affairs. The ATO assesses individual tax returns using high-tech cross-checking systems that detect inaccurate and fraudulent deductions. Designed to pick up every style of questionable claim, the system catches exaggerated deductions, inaccurate assessable income figures, and more. And it’s not just one series of checks your tax return must pass.

Every Australian tax return goes through 20 computer checks, and when the system picks up inaccurate data, it notifies an auditor and triggers a review. These already intense processes grow more sophisticated every year. Indeed, it’s never been easier for the ATO to pick up discrepancies. 

Are Tax Audits Random in Australia?

Each year, the Australian Tax Office chooses specific areas to focus on, and tax returns that meet these criteria may be selected at random for audit. For example, in 2022, the ATO announced that record-keeping and work-related expenses would be focus areas. Capital gains from crypto, shares, and property were also priority areas and potential audit triggers that year.

The other main issue that can trigger an ATO audit is tax return fraud. This style of fraud involves claiming a tax or superannuation refund by providing false information to the ATO. Examples of tax refund fraud include:

  • Providing fictitious payment summary or income statement details;
  • Filing fictitious claims or tax offsets;
  • Providing false information in statements to the ATO;
  • Lodging a fraudulent tax return using a fake or stolen identity;
  • Claiming GST through fraudulent business activities;
  • Accessing a Superannuation fund through the use of fraudulent documents.

What Happens if the ATO Audits You?

Audits range from quick examinations of source documents to a more extensive analysis of complex transactions and deductions. They can also cover anywhere from one financial year up to five. The ATO will usually start with a phone call during which they will set a time for a visit. The auditor should provide written confirmation, including the agenda for the meeting and key issues they plan to cover. At this stage, you should also get a draft audit management plan.

Most audits go through a review process, but the ATO may skip straight to the audit for less complex issues. Note that suspected fraud, tax evasion, and certain high-risk factors can also cause an audit to be escalated. Regardless of how you get to the audit, the ATO will want to see your documents to verify the accuracy of your claims and judge the integrity of your systems.

Tips You Should Do If You're Audited from the ATO

Doing Your Own Tax Return: Are You Sure You’ve Got It Right?

For some people, audits can be triggered by a simple error – putting the wrong figure in the wrong allocation, for example. Though DIY online tax returns can be cost-effective, unless you know what you’re doing, it’s easy to make a mistake. And once you’re on the ATO’s radar, they could ask to view all of your records to justify your claims.

Tax returns, Business Activity Statements (BAS), and other information must be lodged with the ATO by certain dates. However, if you realise you’ve made a mistake on a tax return or document that’s already been lodged, you can request an amendment to correct it. If your amendment reduces the tax you owe, the ATO will give you a tax refund. If it increases the tax you owe, the ATO will treat it as a voluntary disclosure. This means you’ll still have to pay the tax, but you’ll likely receive concessions for penalties and interest charges.

What Are the Most Common Tax Return Mistakes?

To complete your tax return accurately, you need a certain level of mathematical knowledge coupled with the ability to perform calculations and understand tax laws. Getting the numbers right, and entering them into the correct categories, can be a tough task, even for the experts.

The most common mistakes people make on their individual tax returns include:

  • Incorrect calculations – It’s easy to miscarry a number or miss a calculation entirely when you’re adding up rows and rows of figures. It pays to double-check your calculations using software that logs and calculates expenses as you go.
  • Forgetting a claimable deduction – There are many deductions you can use to minimise your tax. The ATO isn’t obligated to find all your claimable deductions. So, to get the best tax refund possible, it’s a good idea to have a tax agent work them all out before you lodge your tax return. Otherwise, you could be missing out on hundreds, if not thousands, of legal claims every year.
  • Not reporting your full income – The ATO looks at your full income, which may include bank interest, dividends, trust distributions, and other sources. You need to account for all of your income on your tax return, not just your salary or wage. Fail to do so, and you could trigger an audit.
  • Lying on your taxes – Claiming more deductions than you’re entitled to or hiding income will be traced. That is illegal behaviour, and you can expect it to have consequences. At worst, you could be tried criminally if you’ve evaded your taxes by lying on your tax return.

Download this article: BLOG How The ATO Audits Individuals

What Evidence Do You Need to Provide in a Tax Audit?

Even if you’ve provided receipts, the ATO might want to see documentation to prove you’re the individual who incurred the costs you reported on your tax return. During the audit process, they might ask for bank statements and written confirmation from employers to back up your claims. Auditors are not shy about tracking information down. The ATO has been known to call previous employers for information relating to claims made. This is a good reminder of how important it is to maintain a good filing system and back up all your records electronically. Following these steps is the best way to stay organised and deliver proof of your claims. And remember, you must keep your tax records for five years.

What Are Legitimate Work-Related Expenses?

Your claims for work-related expenses must satisfy three criteria:

  1. The claims must be directly related to earning your income and not be private at all in nature;
  2. You must have already incurred the expense and not have been reimbursed for it;
  3. You must be able to prove your claims.

Of course, honest mistakes can and do happen on tax returns, but you can avoid the stress of these by having an accountant complete or check your return before you submit it. Otherwise, the best advice is to be organised and truthful always. Keep up with your finances throughout the year, store your receipts, and track income and expenses as you go. Professional software programs can help you streamline all this record-keeping. Finally, be patient and don’t file your tax return until all of your income and expenses information has been finalised for the year. These steps should result in a smooth tax return that’s unlikely to trigger an audit.

How Can You Avoid Getting Audited By the ATO?

If you’re unsure about any aspect of your tax return, ask a tax accountant to review the information for you and re-lodge it on your behalf. This is the safest method, and even if you are audited for that financial year, you’ll have your accountant to guide you through. Indeed, most Australians prefer to have a tax professional take over the task altogether. Using an ITP Tax Accountant is the easy, affordable, and 100% legal way to minimise your tax obligations and maximise your refund. Our fees are fully deductible on your next year’s tax return, giving you excellent value for money and complete peace of mind.

As Australia’s Income Tax Professionals, ITP’s accountants have been helping Australian individuals and businesses with their taxes for 50 years and counting. Call an ITP Tax Accountant on 1800 367 487 or find your closest ITP office and make an appointment online today.