Behind the Scenes of a Tax Audit: A Small Business Owner's Survival Guide

February 20, 2024
8
minutes to read
by
Ben Winford
Table of Contents

A tax audit is the stuff of nightmares for most small business owners. The worst part is even if you follow all the rules, you may still be subject to a tax audit by the Australian Taxation Office (ATO). A tax audit is an examination of your financial records to ensure that you have correctly reported and paid the required taxes. While it can be intimidating and time-consuming, a tax audit is essential for maintaining the tax system's integrity. In this behind-the-scenes guide, we'll explain what a tax audit is, what triggers it, how it is conducted, and common issues that may arise during the audit. We will also discuss how to avoid a tax audit, what to do if you receive a tax audit report, and how Thriday can help with your tax audit needs. By the end of this blog, you'll understand tax audits and the steps you can take to protect your business.

What is a Tax Audit? 

A tax audit is an examination of a taxpayer's financial records to verify that the taxpayer has correctly reported and paid the required taxes. The ATO may initiate a tax audit randomly or based on a specific trigger. A tax audit's primary purpose is to ensure taxpayers comply with tax laws and regulations and maintain the tax system's integrity. 

Tax audits can be conducted in different ways, depending on the scope and complexity of the audit. The ATO may conduct an audit by correspondence, phone, or in person. An auditor will typically review your financial records, including tax returns, bank transactions, receipts, and invoices, to verify that you have accurately reported your income and expenses. 

Small business owners are particularly vulnerable to tax audits, as they often lack the resources or expertise to navigate complex tax laws and regulations. However, small business owners can reduce their risk of being audited by using automated accounting software, maintaining accurate records and complying with tax laws. 

The next section examines the triggers that can prompt a tax audit and how to identify potential audit triggers to avoid them. 

 

What Triggers a Tax Audit? 

The ATO may initiate a tax audit randomly, but specific concerns, mistakes or behaviours usually trigger it. Some of the most common triggers for a tax audit include the following: 

  • Discrepancies between your tax returns and your financial records: If your tax returns show a significant difference in income or expenses compared to your financial records, the ATO may flag this as a potential issue. 
  • Failing to lodge tax returns or BAS statements on time: If you repeatedly fail to lodge your tax returns or Business Activity Statements (BAS) on time, the ATO may initiate an audit. 
  • A significant increase or decrease in income: If your business income suddenly increases or decreases significantly, the ATO may want to investigate to ensure that you have accurately reported your income
  • Operating in a high-risk industry: Some industries are considered high-risk for tax fraud or non-compliance, such as the cash economy, construction, and hospitality. Running a business in a high-risk industry may make you more likely to be audited. 
  • Tip-offs or reports from the public: The ATO can receive tip-offs about suspected tax fraud or non-compliance from the public. This information can trigger an audit. 

It's important to note that not all triggers lead to a tax audit, but if you want to avoid an audit, it's essential to identify potential triggers and take steps to mitigate them. We will now run through how a tax audit is conducted and what to expect during the process. 

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How is a Tax Audit Conducted? 

The ATO conducts tax audits when it suspects financial information has been misreported and warrants further investigation. The audit process can vary depending on the scope and complexity of the business but typically involves the following steps: 

  • Notification: The ATO will notify you in writing if you have been selected for a tax audit. The notice will include the reason for the audit, the types of records that will be examined, and the date and time of the initial meeting. 
  • Initial meeting: The initial meeting with the auditor is an opportunity to ask questions and better understand the audit process. The auditor will explain what they will be looking for and what records they will examine. 
  • Records examination: The auditor will examine your financial records, including prior tax returns, BAS lodgments, receipts, and invoices. They may also ask for additional information or clarification. 
  • Issue identification: If the auditor identifies any issues or discrepancies during the examination, they will discuss them with you and allow you to explain or provide additional information. 
  • Audit report: Once the audit is complete, the auditor will prepare an audit report outlining their findings. The report will include any adjustments to your tax liability, penalties, and interest. 
  • Response and appeal: If you disagree with the audit findings, you can respond and appeal the decision. 

Being organised and well-prepared when facing a tax audit is essential. By maintaining accurate records and using accounting software like Thriday, you can minimise the risk of errors or omissions on your tax returns. We'll now discuss common issues that may arise during a tax audit and how to avoid them. 

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Common Issues Raised During a Tax Audit 

During a tax audit, the ATO will examine your financial records in detail to ensure that you have accurately reported your income and expenses. Some common issues that may arise during a tax audit include: 

  • Incomplete record-keeping: If your financial records are incomplete or you are missing receipts, the ATO may disallow deductions or assess additional tax. 
  • Tax return discrepancies: If your tax returns show a significant difference in income or expenses compared to your financial records, the ATO may flag this as a potential issue. 
  • Missing income: If you have not reported all of your income, intentionally or unintentionally, the ATO may impose additional tax and penalties. 
  • GST compliance: If you are registered for GST, the ATO will also examine your compliance with GST laws and regulations. This can include issues such as under-reporting or over-claiming GST credits. 

In the next section, we will discuss whether a tax audit report can be revised and what steps you can take if you disagree with the audit findings. 

 

Can a Tax Audit Report be Revised? 

If you disagree with the findings of a tax audit report, you have the right to respond and appeal the decision. However, it's important to note that the ATO will only revise an audit report if there is a genuine error or mistake. 

To request a revision, you can lodge an objection with the ATO within the specified timeframe, usually within 60 days of receiving the audit report. In your objection, you should clearly outline the grounds for your appeal and provide supporting evidence. 

The ATO will review your objection and may request further information or clarification. If the ATO agrees that the audit report has an error or mistake, they may revise it accordingly. If they do not agree with your objection, they will issue a decision on your appeal. 

It's important to note that objecting can be a complex and time-consuming process. Working with a qualified tax team ensures you can present your case effectively and maximise your chances of a successful outcome.

In the next section, we will discuss how to avoid a tax audit and minimise your risk of facing an audit in the first place. 

  

How to Avoid a Tax Audit 

While it's not entirely in your control to avoid a tax audit, there are several steps you can take to minimise the risk of facing an audit. These include: 

  • Maintain accurate records: Keeping accurate and complete records of your income and expenses can help ensure that your tax returns are accurate and reduce the risk of errors or discrepancies. 
  • Use automated accounting software: Automated accounting software like Thriday can help simplify the record-keeping process and reduce the risk of errors. 
  • Check your GST obligations: If registered for GST, ensure you understand and comply with GST laws and regulations. 
  • Review your tax returns: Before lodging your tax returns, review them carefully to ensure that all information is accurate and complete. 

By taking proactive steps to minimise your risk of facing a tax audit, you can avoid the stress and potential financial consequences of a tax audit. The following section will discuss how Thriday can help small businesses navigate tax audits and compliance issues. 

 

How Can Thriday Help with Tax Audits? 

At Thriday, we understand that small businesses face unique tax compliance and audit challenges. That's why we offer various services designed to help small businesses stay compliant and confidently navigate the audit process. 

Our all-in-one financial management software reduces the risk of a range of tax issues, including incomplete record-keeping, receipt reconciliation, GST tracking, and invoice compliance. We can also assist with preparing and lodging objections in the event of an audit. 

In addition, our automated accounting software can also help streamline your record-keeping process and reduce the risk of errors or discrepancies. By working with Thriday, you can have peace of mind knowing that you are meeting your tax obligations and minimising your risk of facing a tax audit. 

In the next section, we will discuss tax audit insurance and how it can help small businesses manage the financial costs of a tax audit.

 

What is Tax Audit Insurance? 

Tax audit insurance, also known as audit shield, is a type of insurance that can help small businesses manage the financial costs of a tax audit. It covers professional fees associated with responding to an audit, such as the fees charged by your accountant or tax advisor. 

Tax audit insurance typically covers a range of tax audits, including income tax, GST, and payroll tax audits. It can also cover reviews and investigations by government agencies, such as the ATO. 

While tax audit insurance can provide financial protection in the event of an audit, it's important to note that it does not cover any additional tax liabilities or penalties that may be assessed due to the audit. It just covers the cost of the time your accountant or tax agent spends dealing with the audit.

At Thriday, we recommend Audit Cover as part of our suite of partners designed to help small businesses manage their tax compliance and audit risks. Audit Cover tax audit insurance covers a wide range of audits and investigations, and their team provides expert support and guidance throughout the process. 

Tax Audit FAQs

What is a tax audit?

A tax audit is an examination of a taxpayer's financial records and tax returns by the tax authority to verify that the taxpayer has complied with tax laws and regulations.

Why am I being audited?

You may be selected for a tax audit for various reasons, such as random selection, information received from third parties, or suspicion of non-compliance with tax laws.

What happens during a tax audit?

During a tax audit, the tax authority will review your financial records, tax returns, and other relevant documents to verify that you have complied with tax laws and regulations. They may also ask you questions and request additional information or documentation.

What are the potential consequences of a tax audit?

The potential consequences of a tax audit can include additional taxes, penalties, and interest on any unpaid taxes. In some cases, a tax audit can also lead to criminal charges if there is evidence of fraud or other unlawful activity.

Do I need to hire a tax professional for a tax audit?

While you are not required to hire a tax professional for a tax audit, having a tax professional represent you during the audit process can be helpful. A tax professional can help you understand your rights and obligations, assist you in responding to audit requests, and negotiate with the tax authority on your behalf.

What should I do if I am being audited?

If you are being audited, you should cooperate with the tax authority and provide all requested information and documentation. It would be best to consider hiring a tax professional to represent you during the audit process.

How long does a tax audit take?

The length of a tax audit can vary depending on the complexity of the issues involved and the amount of documentation that needs to be reviewed. In some cases, a tax audit can be resolved quickly, while in others, it can take several months or even years to complete.

Can I appeal the results of a tax audit?

Yes, you have the right to appeal the results of a tax audit if you disagree with the findings. You should consult with a tax professional to determine your options for appeal.

While tax audits can be a daunting prospect for small businesses, steps can be taken to minimise the risk of facing an audit and manage the financial costs and potential penalties associated with an audit. Working with a qualified accountant and utilising automated accounting software can help ensure accurate record-keeping and compliance with tax laws and regulations. And in the event of an audit, tax audit insurance can provide valuable financial protection and peace of mind. At Thriday, we are committed to providing comprehensive support and solutions to help small businesses thrive in tax compliance and audit management. 

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360  AFSL 241167 (Regional Australia Bank).  Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you.

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