When the Australian Taxation Office calls and says it wants to audit your business, don't panic: Allan Mason of Broadview Accounting has five steps to help you emerge unscathed.
The phone rings, the person at the other end asks - is this is the business owner. Thinking it is probably another telemarketer selling a telephone plan, you curtly reply. You suddenly get that sinking feeling in the pit of your stomach. In the next few seconds your worst nightmare is about to be realised.
The tax office has selected you for an audit. Whether or not you have been cheating, you know it is going to cost you. You recall the last time you heard a police siren and were asked to pull over. The same feeling of hopelessness comes over you.
Since January we have seen a three fold increase in the number of audits conducted. If this trend continues, and we see no indication that it won’t, this year the statistic will show a six-fold increase in audits. The GFC holiday is now well and truly over.
The ATO considers they are entitled to a large chunk of what you earn. When you talk to auditors they see it as their money, and you are merely the short term custodian. If you are to come through the audit unscathed it is vital you understand some basic rules. The following will help:
1. Have goods books and records to prove your claims. This sounds silly, but you would be surprised how many clients we see that cannot prove their claims. Even worse, we see many clients not claiming enough because their record keeping is so poor. Taxpayers sometimes can be their own worst enemy on this.
2. Engage a good professional advisor and ensure they are the first point of contact. In the 70’s I was an accountant for Consolidated Press Holdings Ltd (in which Kerry Packer was Chairman). It was company policy to engage the best professionals money could buy. Kerry made a point of telling you that you had to show you were worth at least double your salary. A good professional should save you far more than they cost.
3. Consider having audit protection insurance. While this will not cover you for any extra tax or penalties, it will cover the professional costs associated with an audit. Smaller business audits cost somewhere in the order of $5-10,000, and that is the simple ones. If you are not in the wrong, this is an extra cost burden. If you have contentious issues, this cost is more than worth it. Costs range from $90 as an individual and from $250 for a small business or company.
4. Be very careful what you say to a tax auditor. Don’t engage in idle chatter, the less said the better. Remember the taxation office have a different agenda than you. While we always advise our clients to be courteous and respectful, don’t be drawn into pre-audit fact finding conversations. Like many specialised areas words within the tax act have special definitions, and these may differ from every day meanings. We have a client with a court case pending due to the misinterpretation one word. The client wrote on their bank statement the word “distribution” against a large payment to family members. They meant it to mean money being given to family members, which it was. The tax office are treating is as a taxable distribution of profit; with lot of tax is at stake.
5. Use your professional advisor as the contact point. This gives you time to get an answer, to consider the consequences and if necessary get your books in order. It will also be a calming influence to help tone down any emotion you may have.
In 2009 and 2010 the tax office were more tolerant of business cash flow problems. This changed early this year. The tax office has currently resorted to using contracted debt collectors, and they are ruthless. We had a client in early March that owed the ATO $140,000. They requested 50% immediately and the balance over twelve months. Needless to say my client didn’t have the money. Within 2 weeks they issued a garnishee order on his bank account, and were preparing to clean him out. The sad fact of this case was that the client came to us from another accountant because of a gut feeling that something was wrong. When we reviewed the files, we found more errors than auditions for the latest Dancing with the Stars. When we corrected the errors, the debt reduced to $73,000. If the tax office had of been successful with the garnishee my (new) client would have had his business torpedoed by the ATO. Be mindful the ATO see it as being in the public interest to collect as much as possible. In my experience they have never once considered allowing a client to survive with the promise of more tax later. So if their collection tactics are any guide don’t expect pity, because you won’t get it.
If you know you have a problem – it is always wise to let your professional handle or mediate it. Don’t pretend or think that you can put your head in the sand. Be totally honest with your advisor. More than likely he has seen it all before. The tax office in fact encourages you to come clean, and will reduce penalties, if at the start of an audit you state you have made errors the culpability penalties will be reduced from 50% to 25%.
The tax office now has sophisticated data matching tools to detect fraud. This data matches not only includes bank interest, but property rentals, share transactions, real property transfers and money transfers. They also have industry benchmarks to help detect variances in your return compared to others in the same industry. So don’t underestimate the powers and skill of the ATO to detect tax shortfalls. I recall a time when the ATO were auditing a client operating a business in the snowfields. About 15 federal police officers raided our office with warrants. Everyone was asked to step back from his or her computer. They then took a back-up copy of everything on our computers. They didn’t find anything, but the point is they have the power. This client had a number of false name bank accounts, which we didn’t even know about. The audit went on for two years and the client was fined in excess of $800k and served 8 years in jail for tax fraud.
While the ATO has almost unlimited power if they call, be calm. Treat them with respect. If you treat them well they will treat you well. Our experience with tax auditors is that they are just doing their job. You would be surprised how many times we have sought help from the auditor and providing it does not affect the outcome, they have always obliged. By the way, don’t even think about offering a bribe, as one builder client once asked me. Not only is it illegal, you could end up being prosecuted. Frankly in my 30 years in the profession, I have never once heard of any tax officer taking a bribe.
Allan Mason is the director of Broadview Accounting and author of three books; How to Choose an Accountant, Survival to Success and Business Bullseye, available at bookstores or online at