How to protect your business from a tax audit

The last thing you want to have to deal with when you’re running a business is a tax audit.
Audits are invasive, time consuming and stressful, and they are definitely best avoided. Knowing how to avoid an audit or how to deal with one if you have to is essential knowledge for anyone who owns or manages a business.

What is an audit?

In basic terms, an audit involves someone coming in and going through all of your financial books, records and dealings.

Companies can carry out private audits for their own benefit but a tax audit is carried out by the government. In Australia, the main auditing body is the Australian Taxation Office (ATO).

The ATO says that they will carry out an audit when they believe that “more in-depth examination” is needed. They have the legal power to access any of your records they want and as a business owner or individual, you are required to help them in any way you can.

They provide a full rundown of what they do during a tax audit on their website for a more thorough look at their process but here are some essential things to know.

Who gets audited?

So what makes the ATO think that a “more in-depth examination” is needed? There are a few triggers that will set the auditor’s alarms going:

  • Late tax returns: If your business sends its returns late, especially consistently, it will make the ATO curious. Simply getting your returns done on time is the first and easiest way to stay off their radar and avoid a tax audit.
  • Sloppy bookkeeping: A return that is full of mistakes and omissions will be another red flag to the ATO. Meticulous bookkeeping is arduous but essential to getting your return right. It makes sense to hire help to absolve yourself of the ongoing responsibility.
  • Dodgy deductions: Making unreasonable or fraudulent deduction claims will bring the auditor running. If there are one or two things which don’t look right, the tax office may be curious to find out if there are more.
  • No deductions: Ironically, not claiming any deductions at all may also arouse the auditor’s suspicion.
  • Lies and illegality: If you lie on your tax return or other official financial documents or engage in illegal financial activity you are increasing the risk of a tax audit. This is the very type of activity that the government hopes to find and stomp out when it conducts audits.
  • Anyone: At the end of the day an audit may simply come out of the blue. The ATO may need to meet a quota in your business’s sector or your business’s name may just have ended up on a list. This is why being prepared for an audit no matter what is vital for any business.
Be ready for a tax audit

Avoiding the mistakes listed above is the first step in being ready if a tax audit lands at your door. Keep meticulous records and make sure your numbers are balanced carefully and routinely.

Keep all your records, receipts, paperwork etc. organised and easily accessible. The easier it is for the auditor to find and go through your records the sooner they will be done. Tracking things electronically is a good way to keep records as every bank transaction will be recorded, or you can have an app on your phone where you scan and store receipts.

Be friendly and open and work with the auditing team. At the end of the day if you haven’t done anything wrong the only thing you will lose is some of your time. The more helpful you can be, the less time the audit will take.

Get help

The absolute best way to avoid a tax audit or to deal with one that you can’t avoid is to use the services of a reliable tax accounting firm. Contact Mobbs & Co for help making your business audit proof.

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