ATO Audits and Risk Reviews: What to expect if you get audited
Australian Taxation Office (ATO) audits can happen any time to a business, so it's important to understand what to expect and ensure you're prepared.
The ATO will usually conduct a risk review initially, to determine if there are compliance issues that warrant a full audit process. Often the risk review process allows issues to be resolved quickly and simply without the need for a full audit.
What is a tax audit?
A tax audit is a detailed look at a business’s financial records and tax returns conducted by the ATO to ensure the information provided is accurate and complies with tax laws. Unlike a general review or inquiry, a tax audit involves a thorough investigation into specific areas of concern, such as income reporting, deductions, GST, employee superannuation, or business structure.
The audit process can involve requests for supporting documentation, interviews, on-site visits, and the analysis of bank accounts, financial statements, accounting records, and business activity statements (BAS). Depending on the complexity of the case, audits can take weeks or even months to complete.
Being selected for an audit doesn’t necessarily mean you've done anything wrong. The ATO uses data-matching technology, industry benchmarks, and random selection to determine which businesses to audit. However, non-compliance uncovered during an audit can lead to administrative penalties, interest charges, or legal action, so it’s important to take the process seriously and seek professional support if needed.
What to expect from ATO risk reviews and audits
If an audit is instigated, there are several stages including an initial meeting, research and investigation by the ATO agents, and discussions with the business owner before the ATO issues a final audit report and outcomes. Often the ATO will issue an interim report before the final report, allowing the business owner to review their position and make comment or provide further information. Most audits will be concluded within a few months and others may take up to 18 months.
Why does the ATO audit taxpayers?
The ATO audits taxpayers to ensure compliance with Australia’s tax legislation and to maintain the integrity of the tax system. Audits help detect errors, deliberate tax evasion, false or misleading statements, and underreporting of income or overclaiming of deductions.
The ATO uses data-matching technology, analytics, and risk models to identify discrepancies and suspicious activity. Taxpayers may be selected for an audit if their financial information doesn’t align with industry benchmarks, if there are inconsistencies in declared income or expenses, or if they operate in high-risk sectors or cash-heavy businesses.
Audits are also used as a deterrent, encouraging voluntary compliance across the wider community by showing that the ATO actively monitors income tax returns and enforces tax obligations.
What to expect during tax audits
- If your business is linked with a registered tax or BAS agent, the ATO will generally liaise with them first. The business will be assigned an ATO case officer.
- An initial interview, at which they will explain why the business was selected for an audit. The ATO tax officer or representative should outline the audit's scope, giving an indication of the period to be audited, the business owner's obligations, what to expect from the ATO during the process and an opportunity for voluntary disclosure. They will also provide the means for raising concerns during the audit or for disputing the result of the audit.
- Investigation of business records. Business records are crucial to an ATO audit going smoothly and efficiently. The easier it is to access business records, the quicker the process will be finished. The ATO will require access to all records including bank statements, contracts, agreements, payroll, finance arrangements, asset purchase and disposal, and all accounting records.
- Personal records may also be needed if the ATO suspects significant undeclared cash income or business takings.
- The ATO has a flexible and cooperative approach. Assume the best; just as much as you want the audit to be over, they want to resolve the issues. Be calm and professional in your dealings with your case officer.
- If you don't agree with the findings, there are options to dispute the outcome. Alternative dispute resolution is available if a third-party is required for mediation.
If you've been contacted directly by the ATO about a review or audit, talk to us about helping you through the process to reduce the stress of the process.
Even if you haven't been flagged for an audit yet, we can help proactively manage your records and get your systems and accounts into excellent shape to minimise the impact on your business. Professionally managing the audit process will save you time and money.
ATO Audit Focus Areas for 2024–25
The ATO is targeting specific risk areas in its compliance activities. The ATO acknowledges most small businesses aim to do the right thing but will take stronger action against those deliberately avoiding their obligations to ensure fairness.
Key focus areas include:
Risk Behaviours
- Treating business income as personal income
- Using business assets or funds for personal benefit
Deductions & Concessions
- Non-commercial business losses
- Incorrect use of small business CGT concessions
- Misuse of small business boost measures
Operating Outside the System
- Unregistered GST in ride-sourcing and taxi services
- Contractors not declaring income
Encouraging Good Habits
- Promoting monthly GST reporting over quarterly to improve compliance
To learn more about the areas the ATO is focusing on, visit their page on small business focus areas.
How we can help
Having an experienced accountant and tax agent on your side during an ATO audit can make a significant difference. We can act as your representative, helping you navigate the process with confidence and clarity.
A good accountant can:
- Communicate with the ATO on your behalf, handling correspondence and ensuring responses are timely and accurate.
- Review your records and identify any red flags and compliance risks before the ATO does, helping you prepare explanations and supporting documents for specific risks.
- Clarify complex tax rules and legislation, so you understand your rights and obligations throughout the audit.
- Negotiate outcomes or payment plans if the audit leads to a tax liability.
- Minimise disruption to your business by managing the audit process efficiently and keeping it as stress-free as possible.
Importantly, working with an accountant before you’re ever audited puts you in the best position for a smooth audit. Regular check-ins, clean bookkeeping, and accurate tax affairs mean that if the ATO does come knocking, you’re already well-prepared, reducing the risk of issues and giving you peace of mind.
If you need more advice on this issue, please contact our team or seek legal counsel.
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