Receiving a query from the ATO can be a cause for concern, and it is usually safest to treat any communication with the ATO as a potential audit or review, regardless of the terminology used by the ATO.

There are a few steps that can be taken as soon as the ATO makes contact to reduce the time, severity and cost of a review or audit.

Preparation is key

As a general rule, all communications with the ATO should be taken seriously, no matter how informal the nature. Time should be invested up front to prepare for and clarify the process and expectations on both sides. This can help reduce both the duration and severity of such audits and reviews, which in turn impact on the overall cost to the taxpayer of respondoing to an audit or review.

Voluntary disclosures

Voluntary disclosures made prior to the start of an examination of the taxpayer’s affairs will result in more generous penalty reductions compared to voluntary disclosures made at a later point.

For this reason it is important to understand when an ATO examination has begun, as this may not always be made clear by the ATO.

ATO categories

The ATO classifies taxpayers into four broad categories, depending on their size, wealth or turnover, nature of transactions they undertake, their effective tax rate and compliance history.

This allows the ATO to take a targeted approach, focusing on higher risk and compliance areas.

Understanding this approach can help taxpayers understand this approach can help taxpayers understand what the ATO’s likely course of action will be.

The four categories are:

1. Key taxpayer: This group can expect consistent ATO monitoring, and may be subject to ongoing annual compliance arrangements with the ATO.
2. They are more likely to receive formal correspondence from the ATO regarding planned compliance activities. The ATO expects these taxpayers will fully disclose potentially contentious matters voluntarily.
3. Higher risk: These taxpayers may be considered higher risk due to a combination of size/wealth, nature of transactions, effective tax rate and compliance history. They can expect continuous review, and interactions with the ATO are more likely to be formal. ATO activities are likely to include more intensive approaches such as audit and risk review.
4. Medium risk: The ATO may undertake periodic reviews and audits. Taxpayers may be identified as part of compliance projects targeting multiple businesses with similar tax risks.
5. Lower risk: The ATO takes a less intensive approach to this group, including information requests on identified tax issues, and they are less likely to be contacted or targeted by the ATO for review or audit. The overall approach may include raising awareness and education on key tax issues.

Audit insurance

Taxpayers may wish to consider taking out audit insurance to mitigate some of the risks associated with the cost of dealing with ATO reviews and audits, which can be substantial.

HLB Mann Judd is a group of independent accounting firms across Australia and New Zealand