What is a Tax Audit?
An audit involves the examination of a taxpayer’s financial affairs to ensure their income tax returns have been correctly compiled and to verify any tax liability or refund they may have. The Tax Office targets in audits at areas of high non-compliance and high risk to government revenue.
Penalties are imposed if taxpayers are found to have understated their assessable income or overstate their deductions or otherwise manipulated the amount of tax they rightfully should pay.
Audits can be conducted by mail or phone, while some will involve face to face meetings with the auditor Tax audits are now the primary weapon available to the Tax Office in its administration of the taxation laws. This audit activity is increasing year by year and nowadays most taxpayers can expect to be audited or Tax Office surveyed every couple of years.
In conjunction with its new product ruling system, the Tax Office has widened its audit net to also capture the promoters or instigators of various tax driven investments and schemes. Recently a number of tax driven investments into films, primary production and other plans have been the subject of review.
The review does not necessarily mean that the Tax Office will disallow the tax deduction associated with the investment, but it does offer a challenge to taxpayers. A taxpayer contemplating investing into a tax based investment must ensure the transaction is sound both in taxation law as well as in commercial law and of course should also ensure it stacks up as an investment.
The Tax Office has extended its review function to incorporate the establishment of a “dob in” telephone service. Advertising of the service is directed at ordinary Australians to “dob in” tax cheats or unsavory practices and schemes. It takes little to imagine the service being used in some cases for “pay backs” disgruntled ex employees and the like.
TYPES OF AUDITS
The basic types of audits are:
- Research audits – looks at compliance levels in particular industries;
- Primary audits – directed at employees, contractors, investors etc;
- Desk audits – usually takes the form of an interview with a Tax Office Auditor;
- Substantiation audits – the most common audit for employees;
- Tax agent audit program – usually directed at work related claims;
- Business audits – usually includes all aspects of business, ie; FBT, CGT etc;
- Large business/complex audits – directed at our larger corporations;
- Special audits – directed at large scale tax avoidance activities; and
- GST audits – review of GST related transactions and BAS statements to confirm compliance with the New Tax System.
At the outset of an audit the taxpayer should:
- Contact your tax agent or representative;
- Identify the auditor and their supervisor or case manager;
- Discuss the scope and anticipated length of the audit;
- Seek the opportunity to volunteer any information that may impact on the outcome of the audit (this may assist in reducing the quantum of any potential penalties); and
- Nominate a person as your representative – this will normally be your agent or advisor.
During an audit taxpayers have the following obligations:
- Co-operate with all lawful reasonable requests;
- Make available all requested records and documents;
- Answer questions fully and truthfully;
- Attend all interviews;
- Promptly supply any additional information sought;
- Provide access to business premises and private residence if requested at mutually agreed times; and
- Provide reasonable facilities and assistance such as a cleared workspace, access to amenities, use photocopier etc.
If a taxpayer chooses not to co-operate, the laws provide auditors with the right to full and free access to buildings, places and documents and the right to make copies of documents.
During an audit, taxpayers have the following rights:
- To expect written notification of an audit;
- To involve their tax agent or other advisor in the audit process if they wish;
- To see the auditor’s identification;
- To be given reasonable time to collect records for the audit;
- To expect questions to be clear and unambiguous;
- To make notes about the interview;
- To ask for interviews at mutually convenient times;
- To expect the auditor to be professional, courteous, fair and impartial;
- To not disclose confidential legal advice;
- To be allowed to explain circumstances which they believe justify a reduction of any proposed penalty and
- To object to any assessment (including additional tax) resulting from the audit if the taxpayer has grounds to indicate the assessment is incorrect or excessive.
WHAT HAPPENS DURING A DESK AUDIT?
Generally, the course of events takes place as follows:
1. The auditor will contact you in order to make an appointment for an interview. This initial contract will usually be by letter or may be by telephone. At this point you should involve your tax agent or advisor.
2. You will be asked to produce certain documents, in writing beforehand or at the interview, At the interview you will be asked a series of questions aimed at gathering information that can assist in the verification of the tax return that you lodged for the year that is being audited;
3. The auditor will take the records requested and information gathered and conduct a verification process;
4. The tax auditor may compile an excess expenditure statement or asset betterment statement;
5. If any discrepancy is found between your income tax return and the statement compiled in 4 above, you are given the opportunity to examine the statements;
6. You are given the opportunity to put forward any corrections that may be required to the statement produced and negotiate any doubtful points; and
7. At the conclusion of the audit and if discrepancies were found an amended assessment will be issued.
Auditor’s Rights: the two most important powers that tax auditors have are the right of access and the
right to request production of documents.
If you are interested in talking to an auditor to help you with your tax audit then please take the time to look over this website. Following you will find a summary of the firm, Adam’s credentials and the services that the firm offers.
To make an appointment or contact one of our advisers
call: 02 9089 8851
Alternatively please send us your details and we will contact you