How to Prepare for a Tax Office Visit
The Tax Office is actively targeting geographic areas for special visits as part of a nationwide crackdown on the black economy.
This financial year, the ATO has visited 22 regions with another four in progress. Next financial year they plan on visiting over 10,000 businesses.
The ATO is seeking to identify businesses that are hiding sales, paying cash in hand, or are underpaying workers. We have all seen businesses that prefer cash payments (and give discounts for cash), or do not run sales through the cash register. It's likely that in many of these cases this income is not being reported.
The ATO has a plethora of case studies to support these visits, like the $2 million in undeclared income for a series of nail salons owned by the one taxpayer. The ATO's interest was initially piqued by anomalies between the owner's lifestyle and assets, and the income being declared from the salons. In another case a restaurant owner was only declaring eftpos payments and not cash payments received (the cash was kept in a shoe box). An audit revealed unreported income and overclaimed expenses of around $1.1m.
So why these areas? The ATO says these areas exhibit some statistical anomalies, for example, a higher number of businesses not registered for PAYG or GST. Other indicators that set off the ATO 'alarm bells' include businesses that:
- operate and advertise as 'cash only' or mainly deal in cash
- ATO data matching suggest don't take electronic payments
- are part of an industry where cash payments are common
- indicate unrealistic income relative to the assets and lifestyle of the business and its owner
- fail to register for GST or lodge activity statements or tax returns
- under-report transactions and income according to third-party data
- fail to meet super or employer obligations
- operate outside the normal small business benchmarks for their industry
- are reported to the ATO by the community for potential tax evasion – the number of reports received by the ATO shows that the community is less tolerant of unfair practices in these industries.
While it is ok for your business to be outside of the statistical norm, you need to be able to explain why. For example, you might be a gardener with very high deduction claims for equipment outside of what is normal for your industry, but a recent large contract meant that you had to upgrade all of your equipment.
If ATO officers turn up at your business, they may ask you to show them how you record your sales and ask to see the records for the past day or so. If there appear to be anomalies in your reporting, further action might be taken.
They may also check payroll records to ensure that staff are 'on the books' and superannuation entitlements are being met. A classic problem area is cash payments or poor records of family members working in the business. If a family member is employed, unless they are a Director of the business, you need to meet the same standards as if they were not related including minimum wage, PAYG withholding and superannuation guarantee payments.
What you can do to prepare for an ATO visit:
- Have great records, particularly if your business predominantly uses cash
- Make sure your paperwork is up to date - invoicing for services provided, recognition of expenses (with receipts), salaries and cash taken out of the business by the owners
- Ensure staff are recording sales and expenses correctly
- Ensure your business has a separate bank account – it cannot be your personal bank account.
What to do if you get audited
No business owner looks forward to a letter from the taxman requesting a closer look at the books.
If you've received an audit letter – an official request by the tax authority to review your accounts and confirm your taxes have been paid to date – don't panic. Prepare.
These four steps will help you get through the process with minimal stress and the best possible outcome.
- If you file your taxes reliably and pay on time, there's a good chance the government tax office contacted you for a spot check.
- In this case, all that may be asked is that you provide receipts and answer a few questions. Give the tax office the information they've requested promptly so they can close the file quickly, and you can move on.
- If an on-site audit is required, you can't avoid the inevitable. Call to confirm the date and request any information the auditor will need to help you prepare.
Responding promptly and cooperatively every step of the way is the best strategy for getting through an audit. Reacting defensively or unprofessionally can invite more probing questions.
Seek professional help
- Get in touch with us as soon as an audit has been scheduled for advice and support.
- We can explain the audit process, help you get your books in order, and offer personalised advice to help you prepare.
- You may want to hire a tax lawyer if you have concerns that are beyond an accountant's scope – if, for instance, you have unfiled returns, under-reported income, understated tax liabilities, or if you can't validate all of your expenses for the tax year in question. Many tax lawyers offer a free consultation and can provide peace of mind by explaining your obligations and rights, and ensuring those rights are protected.
- Consider taking out tax audit insurance. Tax audit insurance is cost effective protection against the substantial costs that may be incurred should the ATO or other government revenue agency conduct an audit, enquiry, investigation or review. It also covers the accountant fees incurred during the audit process. Contact our office to find out how we can help you can get covered.
- An auditor will ask you to provide receipts that prove you qualify for any write offs you've claimed. On the day of the audit, be ready with your paperwork and be prepared to answer any questions.
- Being organised and prepared shows you've done your best to report your taxes accurately. If your papers are in good order, and you don't raise any red flags, it's much more likely the auditor will wrap up once the audit's basic requirements are met.
As a word of caution, only provide the auditor with the information they've asked for – no more, no less. Offering more explanation or "proof" in the hope of avoiding further questions may backfire, raising new ones. Stick to specifics.
In the best possible scenario – your records are in order and you've been conscientious about paying your taxes – an audit won't lead to any unpleasant surprises.
If, however, an auditor finds that you do owe unpaid taxes, unless you have a solid reason to challenge the auditor's findings, pay what you owe immediately.
You'll avoid accruing additional penalties, interest, fees and payments. Perhaps more importantly, you'll be able to put the audit behind you so you can get back to focusing on your business.
A final word to the wise: if you do try to fight the taxman, before pursuing legal action weigh the cost and benefit. Legal fees can add up quickly, so be sure the amount requested by the auditor - including interest and penalties - is worth what you'll end up paying in legal fees.
If we can assist you with any information or queries you might have about preparing for a tax office visit or what to do if you get audited, please call us on 8848 3000 or e-mail us at email@example.com.