Big Red Flags an Audit is Heading your Way
Getting that phone call or letter from the Australian Taxation Office that you or your business is about to be audited is a frustrating and scary time. You know that you are going to have to spend a lot of time collecting and organising all your documents, justifying your claims and potentially paying fines.
What many people don’t know is that you might not get that letter until over a year after you submitted the tax return. Whilst the ATO tries to get to the audits as quickly as possible, it is possible that it takes them a significant time to get to you.
Who Gets Audited?
The first sign that you are about to be audited is likely to be a notice from the ATO that they are doing a risk review on your business. They will request information from you to try to justify any discrepancies they have found without needing to do a formal audit.
However, there are a few signs that can determine who gets audited. These signs can be found throughout the year but also once you have created your tax return.
Will I Be Audited This Year?
So, don’t sit around thinking to yourself “will I be audited this year?”. Look out for any of these red flags listed below that indicate problems that you need to fix before submitting your tax return.
Otherwise the answer to that question is likely going to be “Yes”.
Missing schedules or documents
When submitting your tax return, you need to check multiple times over that you have submitted all the schedules and documents that are required of you. One of the most common reasons that audits are triggered is because there is paperwork missing.
The numbers don’t match up
This one is especially targeted towards businesses that need to submit profit and loss statements, cash flow statements and a balance sheet. If the amount of cash in your cash flow statement doesn’t match what is recorded in your balance sheet, then you are likely to have an audit coming your way.
If you are finding it difficult to create these necessary financial statements, then it is worth investing in cashflow management software that makes the process much easier. It will help prevent the mistakes that generally attract the attention of the ATO, plus make tax time much less frustrating for you.
Claiming the wrong things as tax deductions
Everyone wants to pay the least amount of tax possible. Many people seek to do this by claiming as many tax deductions as possible, believing they can claim all the deductions that are available by being a little creative. This is not the case. Claiming too many deductions are one of the top mistakes that people make when filling in their tax return.
Every year the ATO pays special attention to certain tax deductions that they believe are not be claimed correctly. In the 2016-2017 tax year, they were targeting work-related deductions that are not able to be claimed such as, trips between home and work, certain meal expenses when travelling for work, everyday clothes that you wear to work, and private use of phone or internet expenses.
While there are a range of legitimate deductions that you can claim in your personal or business tax return, you need to make sure that you are doing this correctly. If you are trying to claim something that is not expressly allowed, then this is a big red flag that an audit is heading your way.
Sometimes even your legitimate deductions may be questioned by the tax office, especially if they are very different from people in the same industry or very different from what you have claimed in the past. Therefore, you need to keep documentation of all the transactions you have claimed so that you are not subjected to a full-blown audit.
Not reporting your cash income
Did you know that you are also meant to report any cash payments you receive as part of your tax return?
For businesses that operate mostly on a cash-basis this is incredibly important for you to follow. If you are not reporting this cash, what will happen is that your expenses will look abnormally high in proportion to your income. This is an obvious red flag for any tax officer, who know how to look out for the signs of the under-reporting of cash.
Consistent operating losses
Following on from the previous red flag, if you run a business that is consistently posting losses then the ATO will become suspicious. It looks like you are not reporting your cash income, or are doing something else a bit dodgy to try to avoid paying taxes. Generally, if you post operating losses for 3 out of 5 years, the ATO is going to be asking you some questions.
Obviously, some businesses going through a rough patch will be reporting these losses honestly. You will just have to make sure that you have all your records in order and available to give to the ATO if they review your tax return. Otherwise you may be audited too.
Out of line with industry benchmarks
Another tactic that the ATO uses to work out whether businesses have been complying with their tax obligations is to compare them to industry benchmarks. If a business has a financial performance that is completely different from what similar businesses have, then they will likely be reviewed.
The ATO posts these benchmarks online, so that throughout the year you can compare your business to them. If your numbers diverge from theirs significantly, then you will be forewarned that you are likely going to be at least reviewed, if not audited.