Australia’s tax system has operated on a self-assessment basis since the mid 1980s under which the ATO at first instance accepts and processes tax returns on the basis of disclosures made by taxpayers. The nature of self-assessment carries an inherent risk of non-compliance that must be managed by the ATO.
In years gone by, the Review and Audit process was the primary method available to the ATO for gathering information concerning potential taxpayer non-compliance. These reviews and audits were unfortunately often executed in a haphazard and seemingly disorganised manner which in the worst cases manifested as ATO ‘fishing expeditions’.
Over the past few years however, the ATO has invested heavily in improving its ability to collect and process information on a real-time basis. Organisations such as banks, public companies, Land Titles Offices, Insurers and Motor Vehicle Registries now provide continuous data feeds directly to the ATO. The ATO then uses this information, along with data that it collects from tax return disclosures, to build a risk profile for each taxpayer. The size of divergence between the position that the ATO expects to see for the tax payer based on the information it has collected, and the information submitted within the tax return as lodged by the taxpayer, directly impacts on the risk that the ATO associates with that taxpayer.
Treat all ATO contact seriously
If the ATO undertakes a Review or an Audit of a taxpayer’s affairs, they generally have a set revenue target in mind and have a fair idea of what they are looking for, due to the taxpayers’ risk profile predetermined by the ATO. As a consequence, any ATO contact with a taxpayer, be it a Review, Audit or “friendly educational call” should be treated seriously.
The ATO will read a lot into the taxpayers’ attitude to tax compliance from their actions during the audit. A cursory or flippant attitude to an ATO information request will likely prolong the length of the audit at significant longer term cost to the taxpayer. Conversely, a well-considered and comprehensive response to the ATO at first instance, which avoids the risk of leaving the ATO to ‘fill in the blanks’ can put the taxpayer in the box seat to control the direction that the audit will take, and will more often than not result in the ATO discontinuing its action.
The take home message is to treat all ATO contact seriously, and to seek an early engagement with your advisor to plan your response to the ATO. Whilst such an approach will generally result in greater cost up front, it is significantly more cost effective in the long run and will typically result in a far better outcome. Clients should consider holding tax audit insurance as part of their tax risk management strategy. Speak to your Accru Harris Orchard adviser to discuss.