The Australian Tax Office (ATO) picks a number of taxpayers each year to drag a fine-tooth comb through their expenses. The random nature of the selection process means a taxpayer never knows when they will be chosen for a tax audit, which may make surviving one quite difficult.
It is wise, then, to keep in mind that the ATO is automatically informed of the following sources of income: wages and salaries, subcontract payments, social security payments, interest received from financial institutions, dividends from companies and superannuation pay-outs.
If you are operating a business, you also need to be mindful of any significant divergence from past performance figures and those that diverge from industry average.
Here are 5 tips to surviving a tax audit.
It sounds like you are going through an Eastern European checkpoint during the Cold War and it may feel like it too. However, if you have your documents in order you should have nothing to worry about. The ATO will send out blank substantiation schedules and you will be asked to list your substantiating documentation, including for any rebates you have claimed. If the ATO is feeling particularly prickly, they will audit the last three years of your life so it is best to have documentation, receipts and invoices for this period all filed neatly away and easily accessible.
In some cases you will have paid for hardware that you have claimed back on tax. Computers, stationery, clothes etc… While you don’t necessarily want to take the shirt from your back, the ATO will accept the actual goods as proof of your claim. If you have lost or thrown out the receipt, this is a great way to appease the tax office. You can also hunt down the shopkeeper and ask him to retrieve the receipt, but that is time consuming, a burden for everyone involved and used only as a last resort.
Know what you can claim. Think about how bad it looks if you have only declared $50,000 in income, but you have purchased a car, house, yacht or holiday all in the same year. If you do this, red flags are raised and the auditor will examine all public records including vehicle registry, land titles and will no doubt find any areas of large-scale tax evasion. The bottom line for survival is: declare what you must.
When you are called into the tax office, you will be interrogated. Although you can take someone with you for support, you and you alone must answer all questions. If you recall what you have spent money on, what you have claimed, where your money has gone and your cash flow and revenues, you will survive. Of course knowing all of this information is akin to studying for an exam, but well preparedness will impress the auditor and show him or her that you are above board with your approach to the tax audit.
Keep your calm when being audited. The worst thing you can do is antagonise the auditor and the last thing you need is for the auditor to exact some form of revenge. If you have prepared your returns correctly, you will survive this imposition. The best way to prepare for a tax audit is to stay calm and be co-operative without conceding more than you have to.
Other points of note to keep you prepared: