Avoid these red flags that could trigger an ATO tax audit

If the words ‘ATO Tax Audit’ sends cold shivers down your spine, you’re not alone.

There are a few red flags that the ATO can identify, that could trigger a tax audit. Understanding some of these factors can help put your mind at ease when you begin your next tax return.

For Aussie taxpayers and business owners, tax time doesn’t have to be a stressful and intimidating situation, long as you understand what mistakes to avoid.

What is an ATO tax audit and why do they happen?

The Australian Taxation Office (ATO) can seem like a large, foreboding figure like a parent scolding their children for reaching into the cookie jar. However, they are actually here to ensure we all play nicely.

Mistakes can happen, but in lots of situations it’s deliberate and criminal fraud and tax evasion can ruin the fun for everyone.

The Australian tax system is designed to make sure the correct amount of tax from each person and business owner is paid correctly each year. After they conduct a tax review, the ATO can contact anyone who they consider needs a more in-depth examination.

This is where people often find themselves in hot water if they’ve been neglecting their receipts and documentation to support their claims.

Tax audits and reviews can be expensive in terms of extra tax payable, interest and penalties, so the key is to avoid the situation all together.

Luckily, if you have a business accountant on your side, you may be less likely to receive an audit.

How do I avoid a tax audit?

Lodging on time

A simple way to hopefully avoid an ATO tax audit is to manage your tax returns during the financial year.

Waiting until the last minute to pull together your documents means you’re more likely to make mistakes.

If you stay on top of your accounts and receipts, you’ll be thanking yourself later. Trying to locate information, months and months (or even years later) is an almost impossible scenario, so much better to be proactive.

Maintaining accurate records

We are all well aware that it’s important to hold on to receipts for every single item you claim, whether digital or physical.

Keep in mind that the ATO will look more closely at a cash-based business- therefore providing records of all transactions is vital. Avoid any issues by being extra vigilant with your records will help, provided you’re not under-declaring your income.

Investing in good accounting software can help mitigate this issue.  We recommend using a Cloud based software, like Xero, when it comes to maintaining your records. Not only does it give the user the ability to log in from anywhere, it makes the accounting process seamless and the end product is faster, cheaper and accurate records. 

Review calculations and declare deductions

Deductions are the only fun part of completing your tax return. Be warned, the ATO will take notice if you add excessive work-related deductions (you can thank the pandemic for this).

If in doubt, remember you can only claim for items you actually spent the money on so be sure to keep records to support these deductions.

As tempting as it is to try to claim as much as possible on your tax return, stick to claiming legitimate deductions. There are many helpful resources available online to determine what you can or can’t claim on your tax return.

If you are still unsure if you can claim a deduction, we recommend keeping a record of the purchased item and reviewing it with an accountant when filling out your tax return.

Keep documents for five years

When the ATO conducts a review, they will look back into a history of your tax returns.

Income tax returns are generally two years for individuals and small businesses, and four years for other taxpayers, from the day after you receive a notice of assessment.

Keep in mind that you need to keep your records long enough to cover the five-year retention period and the period of review for the assessment.

This is another great reason to use a software like Xero for any small businesses, accountants and bookkeepers. 

How can we help you avoid a tax audit?

Seeking professional assistance with something as sensitive as a tax return is always recommended. Our team offers taxation planning, consultation and advice to business owners.

Tax return preparation is vital in ensuring that your business is on-track when it comes to tax time.

We help collate your monthly, quarterly and annual activity and instalment statements, so that the information provided to the tax department is precise and your tax returns are accurate.