What Happens When The ATO Audits You?
Lodging your own tax return can be risky business. Because, let’s face it, without the appropriate tools, information and records, you may just be randomly filling boxes without knowing the repercussions. That’s why we’re here to help.
You probably love the convenience of lodging your tax return from the comfort of your lounge while wearing pj's and sipping coffee (we don’t blame you), but we advise proceeding with caution.
When you choose to lodge your tax return without the assistance of an accountant, you’re literally one hundred per cent responsible for your calculations. And with the ATO cracking down on individuals who are choosing to use MyTax, there’s a few things you should be aware of.
When you lodge your own tax return you must: • Declare your entire assessable income
• Only claim entitlements and tax offsets that you are eligible for
It may take some time to research which items you are actually eligible to claim and chase up group certificates, but trust us - it will pay off in the long run.
Each year the ATO targets specific industries and individuals. And not only for the previous financial year, but for up to FIVE previous financial years. This is why lodging accurate tax returns every single time is SO important.
2015 saw a 70% increase in online lodgers, making up a whopping 3 million Australians. Lodging your own tax return can be a safe and time efficient way to complete this task - if it’s done correctly. However, with so many people taking their tax returns into their own hands, it’s expected that the ATO will be monitoring self-lodgers closer than ever before.
PREPARING FOR AN AUDIT So in case the ATO audits you, what should you have prepared?
Have Your Records Ready If you are audited by the ATO, you may be asked to provide your entire collection of records. And the ATO expects that you’ll have these readily available for the past five years. Business bookkeeping, logbooks and receipts are some of the most important. The ATO is able to ask for any of your records and is likely to request evidence for large purchases to investigate these further. We cannot stress enough how important it is to keep a paper trail of your claimed expenses and income.
Check Out Benchmarks If your income and expenses as an individual or business owner significantly differ from others in your industry, this is likely to ring alarm bells for the ATO, specifically those in cash based industries. You can check your industry’s benchmarks through the ATO app to get a rough idea of where you sit in comparison to others in your area of work. If your income and expenses are excessively low or high, you’ll want to be able to prove why.
Evidence If, for example, you’re claiming 80% of your phone and internet costs for work purposes, the ATO will want to know how you concluded this figure. We suggest keeping a logbook of your time spent using your phone, internet and any other time or space related work expenses for at least three months. This way you’ll have proof of the figures being projected over the year. Yes, this can be an annoying and tedious process, but ensuring that your calculations can be justified means that being audited by the ATO won’t be as daunting should the time come.
DCG’S TOP SELF-LODGING TIPS
So just to recap: ● Know what you’re entitled to claim within your industry
● Never claim an expense that you don’t have proof of, i.e. a receipt
● Always store your receipts in a safe place and take photos of them to reduce the likelihood of them fading ● Take the time to follow accurate bookkeeping or log booking methods
● Be diligent with calculations
● Always lodge your entire income. This includes money earned from interest, Uber and Airbnb to name a few
● Don’t simply keep increasing amounts in your MyTax lodgement to grow your refund!
AUDIT OUTCOMES The ATO generally audits individuals and businesses who don’t fit the norm within their industry. This could be in the form of low or high income or claims. There are three outcomes to an audit by the ATO. 1. If you realise that there has been a mistake with your tax return and disclose this information to the ATO, the penalties applied may be reduced as well as interest. This is a win for you, but still doesn’t come without consequences.
2. In the case where you believe that you don’t owe the ATO as much as they believe you do, you are able to dispute this. In some cases, the ATO can make mistakes too so be ready to investigate your situation from your end. This is why it’s so important to be able to justify your earnings, spendings and entitlements if you get audited by the ATO.
3. You intentionally made false claims on your tax return and are hit with a nasty fine, along with interest. Come on guys, this one won’t be you with all of our handy hints, right?
PENALTIES There are three phases of penalties that you could face if you’re audited by the ATO. In the instance where you have simply failed to take reasonable care, you’ll be hit with 25% of the shortfall amount (i.e. the tax you now owe). This is simply when you have not taken the reasonable care that someone else in your position would have done. Next up, recklessness will slap you with a 50% penalty of the shortfall amount. For tax purposes, recklessness refers to a situation where a reasonable person would have realised that there was a real risk however it has been overlooked. And the one you really don’t want to get caught up in is intentional disregard. You’ll get slapped with a huge 75% of the shortfall amount penalty when you or your business has intentionally disregarded the law. This situation arises when you are completely aware of a clear tax obligation and you continue as normal in hope of achieving certain results such as underpaying tax or over claiming an entitlement.
Pretty scary, huh. Our advice to you is to make sure that you are following accurate practices when lodging your own tax return, with your safest bet being going through a tax agent. Taking risks is overrated.