How to prepare for a Tax Audit
The words ‘Tax Audit’ strike fear in the hearts of many Australian taxpayers. However the expectation is worse than the reality if there is proper preparation. Below are some hints for increasing the chances of surviving an audit unscathed.
Initially, preparing for a tax audit starts with the collation of information for the annual Income Tax Return. Having the documentation to support your claims when the Tax Return is prepared reduces the demand on your time and resources if you are selected for an audit. This is particularly relevant when the request for an audit may be some time after the lodgement of the Tax Return.
If you haven’t planned ahead and don’t have the information at your ‘finger tips’, all is not lost. It only means more time may be required to obtain the specific information requested by the Tax Office. Documentation that is not readily available should be searched out and found. Where the documentation requested is not available, talk to the Tax Officer about obtaining other documentation that corroborates your position and satisfies them.
Once you receive notification from the Tax Office you are subject to an audit, it’s important to continue to communicate with the Tax Office about their information requests or deadlines. If you are not able to collate the information in the timeframe provided, contact the Tax Office and advise the reasons you have for missing the deadline .
Understanding what the Tax Office is doing
An audit is an examination of your affairs by the Tax Office to see if you are compliant with the tax legislation covering areas such as the inclusion of all income (including Capital Gains) you received during the year or confirming you are entitled to the deductions and rebates you’ve claimed. The audits can range in complexity from a review of certain aspects of your Tax Return to detailed examinations of your documentation and you.
Declaring any errors
After receiving notification of an audit, review your situation to ensure that there have been no errors inadvertently made. If there are errors, it may be wise to advise the Tax Office prior to the audit commencing as it may help in reducing penalties.
Sharing of Information
In some instances the review will be done by the Tax Office without your knowledge eg the Tax Office compare the amount of Interest Received in your Tax Return against the amount the Bank have advised they have paid. Any discrepancy results in a letter advising of the discrepancy and asking for any reason why there is one. An unsatisfactory answer will result in the Tax Office amending your Tax Return and in turn amending your Tax Assessment for that year. The list of private organisations and State Government departments sharing information with the Tax Office continues to grow. Diligence on the level of income you include in your Tax Return arising from Interest, Dividends, Centrelink and these sources is recommended.
Another source of information about an audit is the Taxpayer’s Charter. This document is available on the Tax Office website and sets out expectations for both the Taxpayer and the Tax Officer.
As the Government continues to provide additional funding for audit activities, there is an increasing likelihood of being selected for an audit, so it will pay to be prepared.