The most important thing to do when you’ve just received notice that the Australian Taxation Office (ATO) will be undertaking a tax audit or review of your tax returns is to stop and consider your position.
A tax audit can be very stressful, particularly when the ATO is seeking to expose suspected income that you have not declared and has information supporting its suspicions.
As you will see, in this situation seeking legal advice will save you more than just money. It will also save you significant stress.
The ATO has two ways of advising you that they are investigating your tax affairs.
Often, the ATO will issue what’s called a Notice of Review that they are undertaking a review of your tax affairs.
At this stage, the ATO does not necessarily have information that you have failed to disclose income.
If you have failed to disclose income in your past income tax returns, now is your best opportunity to rectify this mistake. If you make a voluntarily disclosure of all undisclosed income this will significantly reduce any penalties that may be imposed if the ATO discover you have undisclosed income.
On the other hand, if you do not make a voluntary disclosure and the ATO later discovers you have undisclosed income, they may impose significant penalties which could almost double that tax debt.
The message here is that if you have undisclosed income this is a great opportunity to disclose it without the risk of serious penalties.
If the ATO is not satisfied with the outcome of the Review, that is, they think you have undisclosed income they will escalate the Review to a full tax audit.
The ATO may also go straight to the audit without a review. It will do this if the ATO have enough information to satisfy themselves you have not disclosed income.
Importantly, this arises as a result of two main information-gathering techniques: third parties and data matching programs.
The ATO can collect information concerning your finances from third parties such as banks, government agencies and engaged businesses.
That information is then matched against a corresponding tax declaration as in the case of the collection of sellers’ information from eBay. Using that program, the ATO can review a seller’s transaction history and make a judgment as to whether that account holder may be running a taxable business.
Data matching even extends to your social media presence. Platforms like Instagram and Facebook are checked for evidence of tax discrepancies, such as you, the suspect taxpayer, posting a picture of yourself in a newly purchased Tesla Roadster. If your tax declaration doesn’t fit the obvious wealth shown on Instagram, you may have just red flagged yourself to the ATO.
If the ATO is satisfied from an audit that you have failed to declare your tax accurately, you will be required to pay:
Failure to take reasonable care: 25%
Intentional disregard: 75%
If you believe that the ATO is incorrect in relation to the undisclosed income, or the amount of penalties, you can object to the decision. In these circumstances, your best chances of success are by engaging a lawyer who knows how to deal with the ATO, and can put your best case forward.
Even if it seems common sense, seeking advice will have significant benefit for you.
But most importantly, as a taxpayer involved in a dispute with the ATO, seeking legal advice extends beyond the immediate monetary benefit. When seeking tax advice, a lawyer will equip you with all the information necessary to confront the ATO. The ATO will nearly always tell you the worst-case scenario but a lawyer will inform you otherwise and make you aware of a possible compromise.
The saying goes that only two things are sure in life: death and taxes. After your case ends, you the taxpayer, will always remember how to approach taxation properly and how to tackle an ATO audit effectively, potentially saving you thousands of dollars and days of restlessness.