Getting audited can be a scary experience, so Eddie Chung lays out the most effective strategies for dealing with the taxman
Most people are fair and honest with their tax affairs. In my experience, people may push the envelope slightly at times, but they are fundamentally good citizens who want to pay their fair share of tax – though, understandably, not a single dollar more than what they have to pay under the law. Regardless of how honest you are, it is inevitable that at some stage during your life you may attract the attention of the Australian Taxation Office (ATO) as a result of random sampling or the submission of information that may appear out of the ordinary.
This article looks at what you could do to minimise potential problems when the tax office knocks on your door, irrespective of whether you are in the right or have inadvertently made an honest mistake. However, any deliberate intention to evade tax is beyond the scope of this article; if you find yourself falling into this category, heavy-duty advice from a professional tax advisor is a necessity.
Depending on the seriousness of the matter and the contact details listed on your tax office account, the case officer from the ATO may either contact your tax agent or you directly.
If the matter relates to an irregularity identified by the case officer that can easily be fixed – for example, a mere form filling error – it may simply be rectified over the phone and the matter will be considered resolved and closed.
If the matter is more complex the case officer may request further information. You are not obliged or expected to have all the answers right there and then. The ATO is generally quite reasonable and you should agree at this point to provide the information within a reasonable timeframe.
If the case officer requires multiple pieces of information, it is both prudent and reasonable to ask for the request to be put in writing so that you can provide exactly what they need without unnecessary and protracted ‘to and fro’ correspondence afterwards.
To lessen the workload for the case officer, ask them to put their request for information in a simple email, as opposed to a formal letter. Remember that you are dealing with flesh and blood here, rather than some unknown government authority who is trying to ‘get you’. A friendly rapport built up at this stage can be tremendously beneficial as your case progresses.
As an even better alternative, you should perhaps consider asking the ATO to contact your tax agent directly if they approached you as their first port of call.
Provided that your tax advisor is experienced in dealing with the ATO, they should be able to handle your matter appropriately without you having to worry about what you should or should not have said to the ATO that may potentially compromise your position.
More often than not, the initial contact from the ATO takes the form of an informal review, but the review may escalate to an audit at any point. Such escalation does not necessarily mean you are in trouble. All it means is that the ATO wants to understand the matter in more detail before they are satisfied and can tick it off their list.
If you are a high-wealth individual, the ATO conducts a periodic ‘Comprehensive Risk Review’ once every few years, so it is not a matter of ‘if’ you get picked for a closer look – it is a matter of ‘when’.
How you package the information to be provided to the ATO is an art form. It is important that you provide everything you have been asked to provide, but it is also important that you do not provide things that do not have any bearing on or support your case. This is not a matter of being upfront or honest here – unrelated information can sometimes ‘muddy the water’ and unnecessarily prolong the ATO’s investigation, which is not in anyone’s interest.
Where possible, try to put the information in a format that is easy to follow and understand. Your aim here is to make the case officer’s job as easy as possible so they can tick all the boxes and put your file to rest. I often put information in table format with clear references to the attached source documents, which makes information jump out at anyone who reviews it.
Be mindful that the ATO has at their disposal multiple sources of information from public records, data matching, other government agencies and so on. For instance, the ATO often cross-checks property sale and purchase details through the titles office, so they are already aware if you have sold a property, when the sale occurred and the sale price of the property. Therefore, you need to ensure that what you provide the ATO is consistent with those records. Otherwise, you may be waving a red flag for potential further investigation.
If you found an error in the information you previously submitted to the ATO in the course of compiling the information that is under review or an audit, there is no need to panic. However, you should consider disclosing the error to the ATO now. The ATO has formal policies that minimise penalties associated with honest mistakes. The earlier you voluntarily disclose the error, the lower the penalty (if one is imposed at all) if there is tax owing due to the error. This is where being upfront will definitely help you. The ATO will also charge a General Interest Charge (GIC) on the amount of tax owing, to compensate the ATO for the time value of the tax owing, but a lower GIC rate may apply if you voluntarily disclose the error.
The main thing to pay heed to at this stage of the process is to comply with the ATO’s request, which includes agreed timeframes. If you encounter problems that may delay your response to the ATO beyond the originally agreed due date, promptly contact the ATO to agree on a later due date. Keeping the communication channels open is the key.
Once all the information requested has been provided to the ATO and the case officer has gone through the details, they may come back to you with an ‘all clear’. If that is the case, congratulations and life goes on. However, if the tax office is of the view that you have omitted something or reported something incorrectly in your previous tax return they may issue an amended assessment, which will detail the additional tax owing.
At this point, you need to make a decision as to whether you agree with the amended assessment. If so, you could simply accept the assessment and pay the outstanding tax, penalties (if any), and GIC. If not, the law provides you with the option of objecting against the amended assessment. The objection process is reasonably formal and your objection needs to include a number of prescribed details for it to be valid and considered by the Commissioner of Taxation. You also need to ensure that your grounds for objection are clear and complete to put your case in the best light.
The Commissioner will consider your objection and come back to you within 60 days with either a favourable (to you) or unfavourable decision. If the Commissioner has not issued a decision within the 60 days, you are allowed to write to him and ask for a decision to be made, which will give him an additional 60 days to respond. If he still has not issued a decision after these additional 60 days, your objection is automatically deemed to be unsuccessful.
The next avenue of appeal at your disposal is to take your case to either the Administrative Appeals Tribunal (AAT) or the Federal Court. The rule of thumb is – appeal the matter to the AAT if you disagree with the ATO on the facts of the case, while any disagreement on the interpretation of the law should perhaps be escalated to the Federal Court. Having said that, the cost of running a case at the Federal Court is substantially higher, so the AAT is generally the next sensible avenue for appeal.
Administratively, the ATO would generally ask that you pay half of the disputed tax as a matter of good faith as part of the appeal process. This is not strictly mandatory, but any tax paid now will reduce the GIC on any tax owing should your appeal be unsuccessful. If you are successful, the ATO will pay you interest in addition to the tax you have paid. Paying half of the disputed tax also shows that you have the financial capacity to pay the disputed amount, which will provide assurance for the ATO to suspend any tax debt recovery action on the outstanding amount.
If you find yourself at this juncture, using a professional tax advisor is a must if you have not already appointed one, because there are a lot of procedural issues you need to be across, including attendance at AAT conferences with the AAT Registrar and legal representatives from the ATO. Having to argue your case in this environment is certainly not for the faint-hearted. Sometimes your tax advisor may recommend that a barrister be concurrently engaged if the technical issues are complex. This will naturally be costly, which is why every step of the appeal process should be weighed up from a cost-benefit point of view before you proceed. Once the matter ends up in court, the cost will go up astronomically, which is not surprising because the legal system discourages cases appearing in courts when they are not warranted.
Being contacted by the ATO would put the most honest and courageous taxpayer into a state of panic, but it does not have to be that way. At the risk of repeating myself, be mindful that you are dealing with human beings who happen to work for the ATO and deserve respectful treatment. Dealing with the ATO with a bit of emotional intelligence could go a long way in diffusing the technical issues at hand.
Also, at any stage of the appeal process you have the right to settle with the ATO, especially when the stakes get too high and it is not worthwhile to carry on – your tax advisor should be able to help you make the call.
Having said that, the ATO does have wide powers and can take a more aggressive approach, for example showing up at your workplace or accountant’s office demanding information, but this kind of aggressive treatment is generally reserved for people who are equally aggressive with their tax affairs.
is Partner, tax & advisory, property & construction, at BDO (QLD) Pty.
Important disclaimer: No person should rely on the contents of this article without first obtaining advice from a qualified professional person. The article is provided for general information only and the author and BDO (QLD) Pty Ltd are not engaged to render professional advice or services through this article. The author and BDO (QLD) Pty Ltd expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.