How to prepare for a tax audit
No business owner looks forward to a letter from the taxman requesting a closer look at the books. If you receive a tax audit letter – an official request by the tax authority to review your accounts and confirm you have paid your taxes – don’t panic. Prepare.
These four steps will help you get through the process with minimal stress and the best possible outcome.
Verify that it is a tax audit
There has been a huge increase in scams that use the fear of a tax audit to pressure you into into paying the scammers money. Genuine tax officers are invariably polite and reasonable. Scammers, on the other hand, are usually aggressive and threatening – to frighten you into paying them quickly. If you are in any doubt whether the contact from the tax office is genuine, check the ATO website or speak to your tax agent.
The Australian Tax Office will normally approach through your tax agent, if you have one. Often your tax agent can sort out the issue with the tax office with your only involvement being to provide some required evidence.
If you file your taxes reliably and pay on time, there’s a good chance the government tax office contacted you for a spot check.
In this case, all that may be asked is that you provide receipts and answer a few questions. Give the tax office the information they’ve requested promptly. Then they can close the file quickly, and you can move on.
If the tax auditor wants an on-site audit, you can’t avoid the inevitable. Call to confirm the date and request any information the auditor will need to help you prepare.
Responding promptly and cooperatively every step of the way is the best strategy for getting through an audit. Reacting defensively or unprofessionally can invite more probing questions.
Seek professional help
Get in touch with your accountant as soon as you are notified of a tax audit for advice and support. And if you’ve been handling the books on your own, now is the time to consider engaging a tax agent.
A tax agent can explain the audit process, help you get your books in order, and offer personalised advice to help you prepare.
You may want to hire a tax lawyer if you have concerns that are beyond an accountant’s scope. For instance, you have unfiled returns, under-reported income, understated tax liabilities, or if you can’t validate all of your expenses for the tax year in question.
Many tax lawyers offer a free consultation and can provide peace of mind by explaining your obligations and rights, and helping you protect those rights.
An auditor will ask you to provide receipts that prove you qualify for any write offs you’ve claimed. On the day of the audit, be ready with your paperwork and be prepared to answer any questions.
If you are organised and prepared you show you’ve done your best to report your taxes accurately. If your papers are in good order, and you don’t raise any red flags, it’s much more likely the auditor will wrap up once the audit’s basic requirements are met.
As a word of caution, only provide the auditor with the information they’ve asked for – no more, no less. Offering more explanation or “proof” in the hope of avoiding further questions may backfire, raising new ones. Stick to specifics.
In the best possible scenario – your records are in order and you’ve been conscientious about paying your taxes – an audit won’t lead to any unpleasant surprises.
If, however, an auditor finds that you do owe unpaid taxes, unless you have a solid reason to challenge the auditor’s findings, pay what you owe immediately.
You’ll avoid accruing additional penalties, interest, fees and payments. Perhaps more importantly, you’ll be able to put the tax audit behind you. Then you can get back to focusing on your business.
A final word to the wise: if you do try to fight the taxman, weigh the cost and benefit. Legal fees can add up quickly. So be sure the amount requested by the auditor – including interest and penalties – is worth what you’ll end up paying in legal fees.