Getting audited by the ATO can be a daunting prospect. Ultimately its is true that honesty is the best policy and that an attempt to hide something from the ATO will almost always end in tears. You need to make sure that you have all of your documents in order and that you know exaclty what to look for when you are asked questions about what you have claimed. If you are not well prepared in this way, you may face a negative outcome of the audit and further consequences. In 2005/2006, the ATO’s compliance activities raised $6,244 million including tax, penalties and interest. This was mainly as a result of penalities imposed from audits which found that many businesses had failed to pay tax correctly.

During an audit, the ATO:

* examines the tax affairs and records of a taxpayer to ensure that reported information is accurate and to confirm the taxpayer’s tax liability;
* may examine the tax records of other persons which may shed light on the taxpayer’s tax position; and
* may cross-check data against different sources (for example, interest payment records forwarded by financial institutions) may send ATO officers to visit the taxpayer’s (or third party’s) premises to examine records.

So what are some key things to remember if you are being audited or face the prospect of being audited?

1. Document retention policy

Taxpayers should implement an appropriate document retention policy and administrative filing system to enable them to retrieve records efficiently during an audit. The tax laws impose a positive obligation on taxpayers to maintain records that document and explain all transactions and other acts engaged by the taxpayer that are relevant for the purposes of the taxation laws. Taxpayers should determine which documents are protected by “privilege”, mark them as privileged and arrange for them to be kept separate from “non-privileged” documents. This enables the taxpayer to minimise the risk of privilege being inadvertently waived.

Which documents are privileged?

Generally, if a taxpayer has a document that is privileged, then it usually does not have to show that document to the ATO or to a court. The types of privilege available to a taxpayer include legal professional privilege, accountants’ privilege and corporate board document privilege.

If you have any questions about being audited, please do not hesitate to contact us using the for to the right. We would be more than happy to help you.