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ATO Tax Audits – Increased scrutiny as tax audits become more sophisticated

The Australian Taxation Office (ATO) is increasing its scrutiny of all businesses dramatically with a record number of Tax Audits being conducted in recent years.

The ATO has enhanced and extended its data matching software so that when it processes tax returns it cross-references the information in the returns against records collected from other sources.

An audit can range from 28 days to four years and the cost can be significant. The X factor in dealing with the ATO can sometimes be the personality of the ATO officer you are dealing with. This can create uncertainty and unpredictability in the process and the outcome.

Effectively handling a tax audit requires negotiating skills, experience, knowledge and patience to get through the maze. If you are audited, it’s in important to engage Advisors who have all those attributes.

Audit triggers

Audit triggers are factors that raise unwanted attention from the ATO and increase the odds of you being audited. Some of these are:

  • ● substantial difference in income or GST payments compared to industry patterns;
  • ● lack of alignment between the economic performance, productivity and tax performance;
  • ● a history of aggressive tax planning and /or poor compliance record; and
  • ● information and intelligence gathered by the ATO from its market surveillance units.

Types of audits and reviews

There are many different levels that the ATO can conduct an audit or review at. Some of these are:

  • ● data matching: matching information with other bodies such as Centrelink or Land Titles Office;
  • ● research audits: industry or activity research enquiries undertaken to gather intelligence;
  • ● desk audits: requests of receipts, invoices and other documents to substantiate tax returns lodged;
  • ● risk reviews: commenced with a questionnaire and followed by analysis from the ATO. A detailed expert opinion will be developed and a risk classification will be made. Risk classifications can be subcategorised into preliminary, comprehensive and specific review.
  • ● audits: intensive case examination including investigations into payment of income tax and GST; and
  • ● continual monitoring: a specific taxpayer can be requested to provide expanded or special purpose tax returns.

Attendance at the audit

We recommend, unless required by specific notice by the ATO, you do not attend the audit. It would be more beneficial to have your tax advisor/ accountant attend on your behalf. The ATO will normally have at least 2 or 3 and sometimes more officers including lawyers and technical specialists attend and difficult questions will be asked as they gather information. The meeting may be taped and it is capable of being used in evidence in future court proceedings.

New initiatives

In an attempt to move away from the combative nature of dealing with the ATO it has commenced a number of initiatives. These are based on early and open engagement and a more collaborative approach to resolving taxation issues before they get to the dispute stage. This started with ASX listed entities and has now filtered down to the top private individuals and groups and there are signs the approach will filter down to major transactions and taxpayers. The initiatives include:

Pre-lodgement Compliance Review (PCR)

A PCR is used mainly for the higher level taxpayers and major transactions. Its main aim is to ensure that the right tax outcomes are achieved by identifying and managing material risks through early and transparent engagement. A PCR can run for up to  two years.

A PCR typically involves:

  • ● initial discussions to establish the framework for the PCR;
  • ● additional discussions throughout the year where the taxpayer makes disclosures and the ATO raises issues;
  • ● the taxpayer provides required information to support disclosures or issues;
  • ● analysis of information by the ATO;
  • ● pre-lodgement discussion of details to be included in the tax return;
  • ● post-lodgement conversation to discuss issues identified in the tax return and seek a resolution; and
  • ● a letter sent to the taxpayer at the completion of the PCR setting out issues and planning next steps if the issues are unresolved.

Alternative Dispute Resolution (ADR):

ADR refers to the process where an impartial person helps those in a dispute to resolve or narrow the issues between them. There are three categories of ADR utilised by the ATO:

Facilitative processes (Mediation):
The ADR practitioner assists the parties to identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement.

Advisory processes (Neutral Evaluation):
The ADR practitioner considers and appraises the dispute and provides advice on some or all of the facts of the dispute, the law and possible or desirable outcomes.

Blended processes (Conciliation):
The ADR practitioner plays multiple roles where they may facilitate discussions as well as provide advice on the merits of the dispute.

Mediation

As an additional service, the ATO now provides a mediation service free of charge. Individuals or small businesses with a tax or super disputes can use the ATO’s In House Facilitation service.

This service is a mediation process where an impartial ATO facilitator meets with you and ATO case officers. Any information shared during the facilitation process is only to be used during the process – this service is confidential.

Conclusion

Tax audits and the other initiatives the ATO is offering are all complicated and can be extensive and technical processes. They need to be approached with caution and planned with your advisors.

Madison Marcus can offer you skills, expertise and experience in dealing with the ATO to ensure that you achieve the best possible outcome in a cost effective manner.

If you would like more information or advice on this topic, please contact Rolf Koops, Partner – Tax, via the below

rolf-koops-partner-madison-marcus-law-firm
Rolf Koops
Partner – Tax
+61 2 8022 1222
rolf.koops@madisonmarcus.co
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Madison Marcus Law Firm produced this article. It is intended to provide general information in summary form on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.

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