The ATO has the power to remove deductions and change details that it thinks are suspicious.
Many taxpayers don’t realise that the ATO could audit their return anywhere from one month to even two or three years after it is lodged. Generally, taxpayers have between two to three weeks to respond to an ATO letter, so it’s important to take action as soon as a letter is received.
The ATO use data matching technology to scrutinise suspicious claims and will send data matching letters to the taxpayers in question, querying the suspicious entries and outlining the changes it plans to make.
These lessons can often make their way to well-meaning taxpayers who made a mistake, like failing to include one PAYG summary after changing jobs, or not declaring bank interest or government support payments as income.
Responses to ATO concerns can be backed up by a PAYG statement summary, private health statement or bank statement, and deductions can be proven through receipts or supporting records like logbooks.
Once the ATO has the evidence, it will decide whether to alter the return, and taxpayers will receive another notice of assessment if the office decides to follow through with the changes.
However, if the taxpayer can’t back up their income or deduction claim, the ATO will consider whether the taxpayer took reasonable care when completing their return when deciding on the penalty.
There usually won’t be a penalty when an innocent mistake, such as entering an incorrect digit or forgetting the PAYG summary from a second job, has been made. However, if the mistake results in a larger tax refund than the taxpayer is entitled to, they’ll have to repay the surplus amount, and potentially interest too.
In situations where the ATO determines that the taxpayer did not take reasonable care, was reckless in completing their return, or intentionally disregarded tax rules, a penalty might be issued in addition to repaying any overpayment and interest.
If you have not already taken out tax audit insurance and would like any more information about this please contact Helen Bunford of our office on 9387 5637. Tax audit insurance covers professional fees incurred in dealing with ATO reviews.