Many individuals and businesses are concerned about a tax audit, as it can be time-consuming and, in some cases, costly.
Understanding what raises a red flag with the Australian Taxation Office (ATO) can help taxpayers reduce the risk of an audit.
Here are some common triggers, along with tips on how to avoid them.
1. Claiming Unusual or Large Deductions
One of the most common audit triggers is claiming unusually high deductions relative to the taxpayer’s income. For example, if a business owner with modest earnings claims a large deduction for travel expenses, the ATO might be interested. The same applies to individuals who claim significant deductions for work-related expenses that are not typically associated with their occupation.
How to Avoid It: Ensure your deductions are reasonable, consistent with your line of work, and well-documented. Keep all receipts and records, and only claim deductions that directly relate to earning your income. When in doubt, consult a tax professional to confirm the validity of the expenses you’re claiming.
2. Discrepancies in Reported Income
The ATO receives information about taxpayer income from various sources, including employers, financial institutions, and government agencies. If there’s a mismatch between what you report and what’s reported by third parties, it could lead to an audit. Discrepancies may occur if someone forgets to declare income from freelance work, investment dividends, or other secondary income sources.
How to Avoid It: Double-check all income sources and ensure you’ve reported them accurately. Cross-reference each amount on your tax return if you receive payments from multiple sources. If you’re unsure about reporting certain income, a tax advisor can help clarify.
3. High or Unusual Work-Related Expenses
Employees who claim significant work-related expenses, such as uniforms, tools, and vehicle expenses, should be cautious. Claiming more than the standard amount for items like home office expenses or business travel, especially without solid documentation, can attract scrutiny.
How to Avoid It: Only claim work-related expenses that are genuinely necessary for your job, and keep thorough documentation to support these claims. The ATO may request receipts, mileage logs, or records of purchase. Staying within the ATO’s standard claim guidelines is advisable unless you have a clear reason for exceeding them.
4. Sudden Changes in Income or Deductions
A sudden and unexplained increase or decrease in income, expenses, or deductions could prompt the ATO to investigate further. For instance, if your income drops significantly without a clear reason or if your deductions spike sharply from one year to the next, this might raise suspicions.
How to Avoid It: If you experience significant changes in your income or expenses (for example, if you’ve started a new business or lost a major client), document these changes carefully. Notes or records that explain income shifts can be helpful if the ATO requires clarification.
5. High Cash Transactions
Cash businesses like restaurants, bars, or retail stores tend to receive extra scrutiny. The ATO may monitor businesses with higher-than-average cash transactions for signs of unreported income, particularly if income seems inconsistent with industry averages.
How to Avoid It: Maintain accurate records of all transactions, including cash, and use a reliable accounting system to track sales and expenses. A transparent record-keeping process and banking all income can demonstrate compliance and reduce audit risk.
While audits are relatively rare, specific patterns and behaviours can increase the likelihood of being selected. To avoid an audit, ensure accurate reporting, maintain thorough documentation, and seek advice when uncertain about a deduction or income source. Taking these steps will help avoid ATO scrutiny and foster better financial record-keeping and peace of mind.
