Surviving a Tax Audit: What Small Business Owners Need to Know
As a small business, one of the worst letters or phone calls that you can receive is from the ATO, telling you have been selected for a tax audit. An ATO audit can be very stressful and difficult to work through, but keeping your documents organised and communicating with you accountant will help you through the process.
When conducting a tax audit, the ATO looks at your tax returns and documentation to make sure the information you have given is accurate, including whether you:
- Declared all the income you received
- Are entitled to the deductions, credits or tax offsets you claimed
- Correctly withheld and reported PAYG(W) amounts
- Correctly calculated and reported other tax-related obligations
To help them with their investigations, the ATO recently invested in a computer system that can reveal tax irregularities and unusual transactions very easily. They have a clear message – if you are not paying the right amount of tax, there is a high chance you are going to be caught.
The system is not perfect, and any business with business records and tax statements that are significantly different from the industry benchmarks may be selected for an ATO audit, even if they have completed them correctly.
To help you through your tax audit, follow these few simple tips.
Keep accurate, up-to-date records
Poor record keeping is a common problem amongst small business owners.
It’s a good idea to get your hands on some easy small business accounting software to take care of your books. The program should be up to date with all tax regulations to ensure your compliance. To make full use of this software, regularly enter your income and expenses and the system will generate up to date business statements for you, at any time.
Small business cloud accounting software such as Cashflow Manager Cloud allows you to access your accounts from any location, so that you can record your business transactions as soon as they occur. This is the simplest way of ensuring your accounts are accurate, and reduces the amount of work you have to do when creating your tax returns.
It is also helpful to speak with your accountant often, as they will know which tax deductions apply to you. Keep in mind that you are responsible for any mistakes or omissions, so it really does pay to be up to date.
Always double check before filing your tax return
The majority of changes that need to be made in tax returns are because of mathematical errors. Especially when doing work manually, it is easy to add up columns incorrectly or apply the wrong percentage. Using software like Cashflow Manager can help cut down these kinds of errors in your figures. Check and double check your figures and look for miscalculations or any discrepancies between your business financial statements before sending them off.
Keep documents for at least 5 years
Most ATO tax audits are conducted on the previous year’s tax return, but auditors can go back to previous tax returns if they believe you have largely understated your taxable income. By keeping all your documentation from the last five years you are able to back up any claims you have made.
If you notice an error correct it right away
If you realise you have made a mistake, be honest with the ATO and report it straight away. If you do state you have made errors at the start of the audit, the ATO will likely reduce any penalties you may incur.
What to do if you are audited by the ATO
If you have received word that you are going to be audited here are a few hints that will help you through the process.
- If you are going to be audited you will receive a letter from the ATO outlining the scope of the tax audit. Don’t do anything until you have spoken with your accountant.
- Your accountant should be able to explain clearly what the ATO is asking for and what they want to look at.
- Specify one person only to be the contact point with the ATO. This could be your accountant or another professional adviser.
- Take notes at every meeting. Obtain a copy of any ATO recording if one is made.
- Watch what you say. Be courteous and respectful when you are dealing with auditors. It’s also best to limit what you say instead of engaging in idle chit chat.
To keep your financial statements in order, it is very important to be able to access your business accounts at any time to record transactions and stay up to date on your finances. Cashflow Manager Cloud is a secure and easy to use system, where you simply record your financial transactions on a user friendly interface.
Try Cashflow Manager Cloud free for 30 days.