ATO Audits and Risk Reviews: What to expect if you get audited

Australian Taxation Office (ATO) audits can happen at any time, so it's important to understand what to expect and how to prepare.

The ATO will often conduct a risk review initially to determine whether there are compliance issues that warrant a full audit. In many cases, this allows questions or discrepancies to be resolved without a more detailed investigation.

Being audited by the ATO doesn't necessarily mean you've done anything wrong. However, understanding the audit process, maintaining accurate financial records and seeking professional advice early can help make the experience easier to manage.

What is an ATO audit?

A tax audit is a detailed examination of financial records and tax returns conducted by the Australian Taxation Office (ATO) to check whether the information reported is accurate and complies with Australian tax laws.

Tax audits can involve individuals, companies, trusts and superannuation funds. For businesses, an investigation may focus on income reporting, tax deductions, GST, employee superannuation or particular financial transactions.

The audit process can involve requests for supporting documents, interviews, on-site visits and examination of bank accounts, financial statements and business activity statements (BAS).

Unlike a general enquiry, an audit involves more detailed verification of the taxpayer's financial affairs.

If non-compliance is identified, the outcome may include additional tax payable, interest charges or penalties.

What's the difference between an ATO risk review and a full audit?

The ATO may conduct a risk review before deciding whether further investigation is necessary.

A risk review generally involves examining specific transactions, reported figures or potential compliance issues. The tax office may request information or ask questions to understand the circumstances.

If the information provided adequately addresses the concerns, the matter may be resolved without further action.

A full audit involves more detailed investigation of financial records, transactions and supporting evidence. It may require additional documentation and take longer to complete.

Why does the ATO audit businesses?

The ATO conducts tax audits to identify errors, investigate potential non-compliance and ensure taxpayers are meeting their tax obligations.

It uses data-matching technology, industry benchmarks and risk assessments to identify discrepancies in reported income, deductions and other information.

Common reasons for ATO scrutiny include:

Inconsistencies in reported income

The ATO can cross-check income declared in tax returns against information from banks, employers, government agencies and other third parties.

For example, if the income reported in a company's tax return differs significantly from its business activity statements, the discrepancy may prompt further investigation.

Unusually high deductions or expenses

Claiming legitimate deductions is a normal part of preparing tax returns. However, unusually high expenses, exaggerated deductions or claims that differ significantly from comparable taxpayers may attract attention.

This can include claiming personal purchases as business expenses or making deductions without sufficient supporting evidence.

Poor record keeping

Missing receipts, incomplete accounting records or unexplained transactions can make it difficult to verify whether income and expenses have been reported correctly.

Businesses that handle significant cash transactions or have overlapping personal and commercial finances may face additional questions about their records.

Data matching and industry benchmarks

The tax office uses information from third parties and industry benchmarks to identify reporting patterns that may warrant investigation.

For example, a company reporting unusually low profit margins compared with similar operators may be asked to explain the difference.

A difference from industry benchmarks doesn't automatically indicate wrongdoing, but supporting evidence may be required.

Common tax return mistakes

Tax audits can also arise from reporting mistakes, including:

• Failing to declare all income, including bank interest or capital gains
• Incorrectly reporting GST in business activity statements
• Claiming work related expenses without sufficient evidence
• Claiming more deductions than permitted
• Incorrectly calculating tax offsets or other entitlements
• Providing inaccurate assessable income figures
• Errors involving employee superannuation

For an individual taxpayer, this might involve incorrectly claiming work expenses such as vehicle use or home office costs.

For a company, it could involve discrepancies between reported revenue, tax returns and accounting records.

Not every questionable claim leads to an audit. The ATO considers available information and identified risks when deciding whether further investigation is necessary.

How do you know if the ATO is auditing you?

If you're selected for an audit, the tax office will generally contact you or your registered tax agent to explain the investigation.

If your business uses a registered tax or BAS agent, the ATO may liaise with them about matters within their authority.

Initial contact may occur by phone or in writing. An ATO officer will generally explain the scope of the investigation and what information is required.

You may receive written confirmation outlining:

• The tax issues or transactions being examined
• The financial years or periods covered
• The records and supporting documents required
• The contact details of your case officer
• Expected timelines and next steps

A preliminary meeting may also be arranged to discuss the investigation.

If you're contacted unexpectedly, verify that the communication is genuinely from the ATO before sharing sensitive information.

What happens during an ATO audit?

Although every investigation is different, the audit process generally follows several stages.

1. Initial contact and preliminary meeting

The ATO will explain why the taxpayer has been selected for investigation and outline the areas being examined.

During the preliminary meeting, the case officer may discuss relevant transactions, accounting systems and the information required.

They should also explain what to expect during the process, including opportunities to make voluntary disclosures, raise concerns or dispute findings.

2. Investigation of financial records

The ATO will examine relevant documents to verify the information reported in tax returns and other lodgments.

Depending on the investigation, it may request:

• Financial statements and accounting records
• Business bank accounts and transaction histories
• Invoices, receipts and supporting documents
• Contracts, agreements and finance arrangements
• Payroll and employee superannuation records
• Asset purchase and disposal records
• Business activity statements and tax returns

Personal records may also be requested where relevant, particularly if there are concerns about undeclared income or transactions involving personal bank accounts.

Having detailed records available can help the investigation progress more efficiently.

3. Further enquiries and information requests

As the ATO examines the documents, additional questions may arise.

For example, an officer might ask why a significant expense was claimed, how a transaction was treated for GST or why bank deposits differ from reported business income.

If new compliance risks are identified, the scope of the investigation may be expanded.

It's important to respond accurately and within agreed timeframes. If information isn't available, discuss this with your accountant rather than providing incomplete or potentially misleading answers.

4. Preliminary findings

Before reaching a final decision, the ATO will generally discuss its findings and provide an opportunity to respond.

Depending on the circumstances, it may issue a position paper outlining the proposed adjustments and supporting reasons.

This gives the taxpayer an opportunity to provide further evidence, correct misunderstandings or explain why they disagree with the findings.

5. Final audit outcome

Once the investigation is complete, the ATO will communicate its findings.

The outcome may involve no changes, an amended assessment, additional taxes, interest charges or penalties.

If you disagree with the findings, there are processes available to challenge eligible decisions.

How long does an ATO audit take?

There is no fixed timeframe for completing tax audits.

Some straightforward investigations may be resolved within weeks, while more complex matters can take several months or longer.

The duration depends on:

• The number of issues or financial years being examined
• The complexity of the transactions involved
• The availability and quality of financial records
• Whether additional information is required
• Disagreements about the preliminary findings

For example, an investigation into a single GST reporting discrepancy may be resolved relatively quickly if accurate records are available.

An audit involving multiple entities, complex transactions or several years of financial information may take considerably longer.

The ATO may provide an indicative completion timeframe or establish an audit management plan with agreed milestones.

How far back can the ATO audit?

The period the ATO can examine depends on the type of tax and the circumstances.

For income tax, the standard period for amending assessments is generally two years for many taxpayers with straightforward tax affairs, while a four-year period applies in other circumstances.

For GST, the standard period of review is generally four years.

However, these amendment periods aren't necessarily limits on how far back records can be examined.

Different rules and exceptions may apply. For example, where the ATO forms an opinion that fraud or tax evasion has occurred, it may amend assessments outside the usual time limits.

Your accountant can explain which requirements apply to your circumstances.

What records should you keep in case of a tax audit?

Accurate record keeping is one of the best ways to prepare for an investigation.

Most Australian business tax records must generally be retained for at least five years, although the starting point and retention requirements vary. Some documents need to be kept longer.

Important records include:

• Invoices and receipts supporting income and expenses
• Bank statements and reconciliations
• Financial statements and accounting reports
• Supporting evidence for deductions and other claims
• Payroll, superannuation and employee records
• Contracts and documents relating to significant transactions

Receipts are particularly important when substantiating expenses. Depending on the deduction, bank statements alone may not provide sufficient evidence.

Maintaining detailed records throughout the year is usually easier than trying to reconstruct transactions during an investigation.

Regular checks of accounting records can also help identify inaccurate data and common mistakes before tax returns are lodged.

If you receive an audit notice, don't alter or destroy relevant records. Discuss any errors or missing documentation with your accountant.

What happens if the ATO finds mistakes?

An audit can result in several outcomes depending on the nature and significance of the findings.

No changes required: If the tax office is satisfied that the taxpayer has complied with the relevant legislation, the investigation may conclude without adjustments.

Additional tax payable: If undeclared income, incorrect deductions or other reporting errors are identified, the ATO may issue an amended assessment requiring payment of additional tax.

Interest and penalties: Interest charges may apply where tax has been underpaid. Administrative penalties may also be imposed depending on the nature of the error and the taxpayer's conduct.

Tax refunds: An investigation doesn't always result in paying additional taxes. If an amended assessment establishes that you've paid too much tax, you may be entitled to a tax refund. The tax office may also examine unusually large refund claims before payment is released.

Serious compliance action: Deliberately providing false information, making fraudulent deductions or engaging in tax evasion can result in stronger enforcement action, potentially including criminal proceedings.

Making a genuine mistake doesn't automatically mean criminal charges will follow.

Can you dispute an ATO audit outcome?

Yes. If you disagree with the findings, you may have options to challenge the decision.

The first step is often to discuss the proposed adjustments with the case officer and provide any additional supporting evidence.

Depending on the circumstances, options may include alternative dispute resolution, ATO in-house facilitation or lodging a formal objection against an eligible assessment or decision.

Time limits apply to objections, and the requirements depend on the type of decision involved.

Your accountant or tax agent can help you understand the findings and determine the appropriate next steps.

What should you do if the ATO contacts your business?

If you've received an audit or risk review notification, taking an organised approach can help reduce disruption.

Contact your accountant early. An experienced tax professional can explain the investigation, review information requests and communicate with the ATO on your behalf.

Understand the scope. Confirm which tax returns, transactions or financial years are being examined so you can gather the relevant information.

Review your financial records. Check that accounting reports, bank statements, invoices and receipts are complete and consistent.

Identify any errors. If you discover mistakes or inaccurate information, discuss them with your accountant. Voluntary disclosure may be appropriate in some circumstances.

Keep communication organised. Maintain copies of correspondence, record deadlines and seek clarification where requests are unclear.

Taking a cooperative approach, supported by accurate records and professional advice, can help the process run more smoothly.

How Bonerath can help with ATO audits and risk reviews

Having an experienced accountant and tax agent on your side during an ATO audit can make a significant difference.

At Bonerath, we can act as your representative, helping you understand the process, prepare the necessary records and respond to enquiries.

Our team can help:

• Communicate with the ATO on your behalf, handling correspondence and ensuring responses are timely and accurate.
• Review your records and identify compliance risks, helping you prepare explanations and supporting documents.
• Clarify complex tax rules and legislation, so you understand your rights and obligations.
• Assist with audit outcomes and payment arrangements, including reviewing proposed adjustments and helping you understand your options.
• Minimise disruption to your business, by managing information requests and helping the process run as efficiently as possible.

Importantly, working with an accountant before you're ever audited puts you in a better position if the ATO does come knocking.

Regular check-ins, accurate bookkeeping and reliable financial reporting can help identify potential issues early and ensure your records are in good shape.

If you've been contacted about an audit or risk review, please contact our team to discuss how we can help.

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