Tax Audit – How to Minimize the Risk and the Tax Bill

Our framework in assisting customers with tax audit is based on four principles, MEET, PLAN, ANALYZE, and NEGOTIATE.

According to the latest news, 400 small businesses will expect visits from the Australian Tax Office (ATO) this March.  ATO will target takeaway shops, hair salons, and beauticians to target the problem of under-declaration of income associated with a cash economy.

Over the past few years, the ATO has enhanced and extended their data matching software. When the ATO processes tax returns, they cross-reference the information declared in the returns against records collected from other government organizations like the Department of Transport, Centrelink, Workcover, Superannuation Funds, Banks, and Financial Institutions.

During the tax audit process, a professional and experienced accountant with an excellent command of tax regulations and rulings can make a fundamental difference between paying a hefty penalty or getting out of the audit with ease.

In our experience a “quick” audit takes around 28 days, worst case scenario it can take 3 to 4 years to completely resolve a complex audit. The process can involve face-to-face meetings with the ATO and requests for financial records for up to five years from the date of lodgement. The costs incurred can be significant (running into tens of thousands of dollars), even if all your lodgements are eventually proved to be correct.

Hence a highly experienced accountant must specialize in the field of a tax audit is there to work with the client. A very experienced accountant specializing in tax audit will assist customers in the following areas.

  1. To deal with the ATO on behalf of the customer, which involves understanding exactly the reason behind the audit;
  2. To explain to the ATO the circumstances arising from the issue both from personal and technical grounds;
  3. To provide and analyze the client’s data;
  4. To negotiate with the ATO to reach a better outcome and/or object the ATO to improve the audit outcome.

Sometimes a tax audit could be just a simple exercise in which ATO wants to clarify some information from the client. However, if it is not handled correctly, it could mean that the small issue will be blown out of proportion, leading to a large-scale tax audit costing a significant amount of money and resources.

EndureGo Tax has always been viewed by our clients as one of the best accountants and tax agents in Sydney and Ashfield. We aim to deliver exceptional quality accounting and tax services, especially during the tax audit time. We promise to work closely with the clients and ATO tax auditor, thoroughly analyze the information, and seek the best outcome for the client. We have an excellent track record of reaching a successful outcome during tax audit, our success rate is 95%.

We would like to share with you a real scenario to demonstrate our prowess in helping clients to reach a favorable outcome during the tax audit, which helped them to reduce a significant amount of tax bills.

Example of how we helped a client reach an excellent outcome in a tax audit

One of our clients so-called Joe had been with EndureGo Tax for some years, we managed his bookkeeping and tax affairs.

Joe ran a news agency, the business was doing ok. However, once we engaged the client, we identified a critical issue he does not have a cash register or a fully functioning cash register in the shop.

As a responsible accountant, we would raise the matter with the client at every quarterly meeting. We would urge the client to get a cash register, and that it is vital to have a cash register, failure to have one would mean that we will have no evidence to defend at the time of an ATO tax audit on the issue of under declare of income.

Also, we reported to him in our quarterly meetings that his benchmark significantly deviates from the ATO business benchmark, and that would pose a significant tax Audit Risk.

A few years later, ATO audited the client on the very issue that we had mentioned to the client for the past few years, which is out-of-range benchmark figures. Once the client found out, he was scared and did not know what to do.

Our framework in assisting customers with tax audits is based on four principles, MEET, PLAN, ANALYZE, and NEGOTIATE.

We immediately set up a meeting with the client and explained to him the nature of the tax audit in that it might be just ATO wanted to clarify some information from him. We also assured him that we would support him along the way and we would update him about his progress every week.

We also set up a meeting with the ATO tax auditor to find out the exact reason behind the tax audit. We then review and analyze all the information, prepare a tax audit plan, and report back to the client.

tax audit

EndureGo Tax will help you with tax audit to ensure to good outcome

We then structured a meeting between the client and the ATO tax auditor to make sure the auditor knows the client on a personal level, this has proved to be critical in reaching a favorable outcome for the customer during the audit. We then delivered the information as requested from the ATO to the tax auditor promptly.

The tax auditor did not look into the expense in-depth, as they had confidence in our bookkeeping work.

However, we told the client to hold on, as there was still some risks that if ATO gets its way without much objection from us

However, the very fact that the client does not have a cash register placed the client in a very unfavorable position, and there is not much we can do as well.  Hence we make sure the client understands this very well, and that our job is to minimize the damage. In the end, the tax auditor formulated the report and stated that based on the ATO benchmark, there would be an additional $200,00 in sales, and given it is over a few years back, there would be a penalty and accrued interest for the excess tax. However, they also consider the client might not have much experience in record keeping and that it is not intentional. Hence they applied the lower scale of the penalty. Even with that, the client is looking at paying $100,000 in that particular audit year.

The client was thinking of accepting the outcome. However, we told the client to hold on, as there were still some risks that if ATO gets its way without much objection from us, they might examine the client for other years, and if that happens, the client would be in an atrocious position. Hence we need to negotiate or object to the ATO for the decision.

We then formulated a report that referenced the facts, our arguments, and relevant legislation in the tax acts and raised an objection to the tax auditor at ATO. Our objection was accepted by ATO on a technical ground, and we were able to successfully eliminate all the penalty and interest for the client, and also ensure that the additional sales would be allocated to other family members hence reducing tax. After our successful negotiation, the tax bill was significantly reduced to $10,000 in that year, a 90% reduction. What is more, the ATO did not look into the tax affairs of the client for other years.

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We would like to help more clients to reach a favorable position in the tax audit, this is especially with the renewed focus from the ATO on targeting the cash economy. Hence we would like to give the first 10 customers a free 15-minute consultation time with our principal John Cheng FCPA to briefly review your financial affairs to determine the audit risk and succinct insight into how to reduce it. Please call John Cheng at 0410-829-900, or write to him at john.cheng@endurego.com. You can also raise the inquiry at our website.