Surviving a Tax Audit
What Small Business Owners Should Know
Ross Wadeson FCPA 1 September, 2014
Yet another Small Business Audit by the Australian Tax Office (ATO). Yet another successful outcome for our Client. However, it still disrupted their daily business routine, required going through boxes of receipts and information, several discussions and reviews with us and meetings with the ATO. Successful in that the ATO decided there was nothing wrong or requiring further investigation.
This went well for the Client and confirmed their records can stand the test, although there was still a cost in time and anxiety. Fortunately, they also had Audit Insurance so our fees were not a cost to them.
An audit is never easy, but having the appropriate systems in place, keeping things organised and communicating well with us (your accountants) can help you through the process with a bit more confidence.
The ATO start audits based on a range of different triggers. One of the most common is the Business Owner was 'dobbed in' by a disgruntled, usually ex-partner (business or personal); also possibly disgruntled employees, neighbours and the like. Another growing and common trigger is that your financials have, rightly or wrongly, statistically deviated from the norm for your industry. The ATO computers are now getting more and more accurate in predicting what sort of Income you should have declared!
So – what should you do to minimise the impact:
- - Firstly consider the merits of Tax Audit Insurance; more relevant to some.
- - Secondly, see that the bookkeeping and accounting records are kept up to date and are accurate, including whether you:
- are declaring all the income you received
- Are entitled to deductions, credits or tax offsets you claim
- Correctly withheld and reported PAYG(W) amounts
- Correctly calculated and reported other tax-related obligations
You can minimise your worry about a tax audit if you follow a few simple tips beforehand:
Keep accurate, up-to-date records
Poor record keeping is a common problem amongst small business owners. It's a good idea to get your hands on some simple bookkeeping software to take care of your records. The program should be up to date with all tax regulations to ensure your compliance. All you need to do is enter your information regularly. It is helpful to speak with your accountant often. Keep in mind that you are responsible for any mistakes or omissions, so it really does pay to be up to date.
Always double check before signing your tax return
Always look over your figures again, to ensure there are no discrepancies before you send them off. Look to see they make sense to you as nobody knows your business like you do.
Keep documents for at least 5 years
Most audits are conducted on the previous year's tax return, but auditors can go back to previous tax returns if they believe you have largely understated your taxable income. By keeping all your documentation from the last five years you are able to back up any claims you have made. If you have a scanner, you may choose to scan them.
If you notice an error correct it straight away
If you realise there is a mistake, come clean about it and talk to your accountants (us) about it. If you do state you have made errors at the start of the audit, the ATO will reduce any penalties you may incur.
What to do if you are audited
If you have received word that you are going to be audited here are a few hints that will help you through the process:
- If you are going to be audited you will receive a letter from the ATO outlining the scope of the audit. Don't do anything until you have spoken with us as your Accountants.
- We will be able to explain clearly what the ATO is asking for and what they want to look at.
- Specify one person only to be the contact point with the ATO. This should probably be your accountant.
- Take notes at every meeting. Obtain a copy of any ATO recording if one is made.
- Watch what you say. Be courteous and respectful when you are dealing with auditors. It's also best to limit what you say instead of engaging in too much idle chit chat.
The computer systems the ATO have been investing in can reveal irregularities and unusual transactions very easily. The ATO is trying to make the message clear – if you are not paying the right amount of tax, there is a high probability you are going to be caught.
If you have any questions; talk to Ross Wadeson Accountants - 03 9580 9866