How your Instagram posts could trigger an ATO audit

Think the ATO doesn't know about your shares, crypto, or side-hustle income? It may already have the details.

ATO letters are landing in mailboxes across Australia, warning hundreds of thousands of taxpayers that the tax office already has access to a growing amount of financial data.

The warning has sparked concern online, with many Australians questioning whether the correspondence is genuine. Tax experts say it is, and that it reflects the ATO's increasingly sophisticated data-matching capabilities.

While receiving a letter doesn't mean you've done anything wrong, it serves as a timely reminder that mistakes, omissions and unusual claims can quickly attract attention.

Here are some of the red flags that can put your tax return on the ATO's radar this tax season.

The ATO receives data from a range of third-party sources and can compare that against your tax return.

Before you lodge your tax return, it's worth understanding what information the ATO already has access to and the mistakes most likely to attract scrutiny.

Most Australians will never face an ATO audit. But that doesn't mean the tax office isn't keeping an eye on your return.

Using sophisticated data matching and risk assessment tools, the ATO compares information from employers, banks, government agencies and other sources to identify returns that may warrant closer scrutiny.

Large deduction claims, cryptocurrency transactions, unreported income and significant capital gains can all attract attention. Here are some of the most common red flags that can put you on the tax office's radar.

The ATO doesn't need proof you've done anything wrong to take a closer look.

Often, it is unusual patterns, inconsistencies or transactions that stand out from the norm that trigger a review.

A review doesn't necessarily mean you've done anything wrong. In many cases, the ATO simply wants more information.

But understanding the red flags that attract scrutiny can help taxpayers avoid common mistakes and keep better records at tax time.

The tax return red flags the ATO is watching this year

At its simplest, the ATO will look for risk factors like these:

Reporting and compliance issues

• Failure to lodge tax returns or other required documents on time
• Failure to pay outstanding tax debts
• Incomplete or inaccurate information in tax returns
• Declining or erratic tax performance over several years

Income and deduction mismatches

• Inconsistencies between tax returns and third-party data
• Unusual or high-risk refund claims
• Lifestyle not supported by reported after-tax income
• Results outside ATO benchmarks for similar taxpayers or businesses

Business and investment red flags

• Capital gains transactions, including property, shares and cryptocurrency
• Unexplained losses
• Private use of business assets
• Large, one-off or unusual transactions
• Loans to associates or related parties

Structures and tax planning arrangements

• Complex group structures
• Unexplained flows of funds between related entities
• International or offshore dealings
• A history of aggressive tax planning
• Tax outcomes that appear inconsistent with the intent of the law

This is by no means complete but it gives a flavour of the types of factors which the tax office takes into account.

Broadly speaking, the more risk factors a taxpayer triggers, the more likely they are to be reviewed/audited.

The transactions attracting the most ATO scrutiny

There are certain issues which consistently deliver results for the ATO, either because the law is complex and poorly understood or because the nature of the transaction is particularly prone to non-disclosure, partial disclosure or incorrect disclosure.

If you fall into any of these areas, make sure you are satisfied that the transactions have been correctly disclosed, that your understanding of the law is right or at least reasonably arguable and that you have appropriate records and supporting documentation:

• Capital gains and losses, including profits from shares, investment properties and cryptocurrency sales
• Work-related deductions such as car expenses, home office costs, uniforms and self-education claims
• Whether a profit or loss is of a revenue character or capital in nature
• International transactions
• Trusts, including distributions and loss provisions
• Taking money out of a private company by way of a loan
• Small business benchmarks

What's the difference between a review and an audit?

Review

Because a review can feel (to both the taxpayer and the tax agent) like an audit, this is often mistaken for an audit, but it isn't.

A review is designed to firm up the ATO's initial view of the risk so it is important to note that at this point, the ATO is still approaching the taxpayer (in theory at least) with an open mind and you need to convince the auditor that the risk does not exist in order to avoid an audit.

At this point, the Tax Office will contact you (or your tax agent) and will ask for information in relation to the risk areas they have identified.

They may ask for:

• copies of records, invoices, contracts
• diaries
• records of meetings and conversations
• explanations surrounding the commercial and/or taxation drivers around the suspect transactions

They may provide a bespoke questionnaire, and they may also request formal or informal interviews.

Requests for documents and other information are likely to be informal but if satisfactory and timely responses are not forthcoming, they may use formal access powers.

A review will take on average about six months.

If the auditor is satisfied that the risk does not exist, is not provable or if ATO resourcing does not permit, compliance action may be terminated at this point.

If the risk is established as likely to be real (and if the tax at stake is also significant), the matter will be approved by ATO management to progress to audit.

Audit

This is the place where you do not want to be.

The ATO will write to you to advise that an audit is commencing.

This letter will provide the taxpayer with an opportunity to voluntarily disclose.

This may be the last opportunity to do so whilst suffering the lowest penalty rates.

Before an audit commences, penalties can be remitted by up to 80%.

From this point on, higher penalty rates are likely to apply and the maximum remission available will be 20%.

The ATO will request further documentation, interviews and technical opinions to back up the legality of the transactions undertaken. This may be done informally or using formal powers.

The audit may look at the specific issues first identified in the review (above).

If further issues have been identified at those stages, or if further issues come to light during the audit itself, the audit may open out into a comprehensive audit of the taxpayer's whole situation.

An audit can last up to two years.

What to do if you get audited

• Understand where you are in the process and what product you are dealing with (review or audit)
• Make contact with the ATO auditors. Obtain their names and contact details and give them yours
• Determine the technical issues in dispute
• Determine whether the ATO is still in time to issue assessments (an audit can only commence within two years of the date of lodgement of the tax return, for individuals and some small businesses)
• Quantify the amount of tax/penalties at stake
• Consider making voluntary disclosures if there is something you want to get off your chest!
• Consider whether to settle or argue

How to manage your relationship with the ATO

• Don't wait
• Be perceived as low risk
• Bring in experts if required
• Open clear communication lines
• Build a constructive relationship
• Make sure documentation is in order
• Be proactive. Don't delay and don't tolerate delay from the ATO
• Understand ATO guidelines and policies
• Respond to all communications
• Don't be afraid to escalate to higher levels within the ATO

What happens if the ATO audits you?

Generally speaking, an ATO audit will follow a set series of steps:

• Commencement of the audit, involving notification
• Information gathering
• The issue of a facts/position paper
• The taxpayers response
• The issue of assessments
• Objections
• Settlement and/or alternative dispute resolution (this stage may be reached earlier)

What if you owe an ATO debt

Many taxpayers are convinced that they have done nothing wrong and baulk at paying any assessments which the ATO may raise during an audit.

Nevertheless, by failing to pay, taxpayers leave themselves open to being pursued by ATO debt collectors, who increasingly these days are actually third-party debt collectors acting on behalf of the ATO.

Even though debts are disputed, the ATO will still look to enforce them.

Given the need to collect revenue on behalf of a cash-strapped government, the ATO is likely to be more assiduous in pursuit of such debts than ever.

For taxpayers, the stress of being under audit can be bad enough.

Being pursued by debt collectors can be a step too far.

You should consider offering to pay the tax whilst the amount is in dispute, if not all of it then some of it.

The ATO is open to 50:50 arrangements whereby half the tax in dispute is paid and the other half unpaid.

The ATO will formally accept such arrangements and will not generally pursue the unpaid amount.

Even if you are unable to pay 50%, speak to the ATO debt staff and come to some arrangement with them such that you pay something.

Failure to pay (even where the amount is disputed) or failure to come to an arrangement may lead to formal debt collection action including garnishee notices on bank accounts, prosecution and bankruptcy proceedings.

Penalties

The relevant penalty percentages and penalty units and the types of taxpayer conduct to which they relate are set out below:

If a taxpayer makes a voluntary disclosure before an audit commences, the ATO may reduce tax penalties by 80%.

Even once an audit commences, it is still possible to persuade auditors to apply the 80% penalty remission if the matter being disclosed is either not the subject of the audit or has not been 'discovered' by the auditor.

Once the audit commences (subject to the above comments), the amount of penalty remission will be capped at 20% where a voluntary disclosure is made.

The overall extent of penalties before remission is determined by the behaviour of the taxpayer and their advisers.

Culpable behaviour may lead to penalties being increased by 20%, which may include:

• Taking steps to prevent or obstruct the ATO from finding out about the tax shortfall
• Failing to correct a statement made to the ATO about a shortfall within a reasonable time
• Having a previous shortfall amount

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