Just the mere mention of the word “tax’ is enough to make most people break out in a cold sweat, and if the word “audit” is also included, it may provoke a meltdown. Incorrect tax returns can occur whether by accident or deliberately, and depending on the circumstances of the incorrect tax return, a person may face a number of liabilities from the Australian Taxation Office (ATO).
What investigations may the ATO conduct?
The Commissioner of Taxation (Commissioner) possesses wide ranging powers to obtain information, and to access a premises and obtain documents the powers can be found under Division 353 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA). Notices need to be issued when Division 353 powers are exercised.
Assessments may also be made during a one to two year period in instances of a noticeable increase in wealth, yet, the person’s records aren’t complete, and such practices are referred to as the assets betterment method. Assessments of this nature are generally conducted after a detailed audit is completed on the individual.
How far back can an assessment be amended?
Under s 170 of the Income Tax Assessment Act 1936 (Cth) (the ITAA), the Commissioner may amend an assessment of an individual for a year of income within two years after the day which notice of an assessment has been provided. For more complex assessments, the time period for amendment may extend to four years. However, if a person has been suspected of committing fraud or has evaded their tax, there are no time limits.
Theoretically speaking, the ATO may investigate a person’s affairs all the way back to 1915, which was the year that the Commonwealth income tax was introduced if fraud or evasion has been suspected.
A desk audit is undertaken for tax returns that have been pulled out for a check.
For desk audits, a person will either receive a letter or phone call from the ATO requesting them to either visit the ATO or another place most convenient, and the person is required to bring everything that is relevant for the income year such as books or records. The person may also have a tax adviser present.
Desk audits will look specifically at:
- whether the deduction amount claimed has actually been spent;
- whether the deductions are work or business related;
- whether the substantiation requirements have been met such as evidence of the date and nature of the expense for total claims of more than $300.
What happens at the conclusion of an audit?
At the conclusion of an audit, the person will receive the reasons behind any adjustments made by the ATO, and the person will be informed of any errors, penalties or interest. Additionally, an opportunity will be afforded to the person to provide an explanation in order to seek a reduction in the payment of any penalties or interest. The taxpayer will also be informed of their review rights and any possible remedies available.
Mistake: if a person makes a mistake in their tax return, payment for the amount owed and interest will still be required. If the person did not exercise reasonable care, they may be penalised.
Fraud or evasion: if a person has been found to engage in fraud or evasion, the assessment can be amended and the person will be penalised.
Penalty: a penalty tax may be imposed on the person and is dependent on how much of the fault lay with them when submitting an incorrect tax return, and the penalties are as follows:
- 25% for lack of reasonable care;
- 50% for recklessness;
- 75% for intentional disregard.
It should also be highlighted that the penalties will also attract interest.
Penalties may be remitted at the discretion of the Commissioner. Situations such as inadvertent arithmetical errors and voluntary disclosure before the tax is due are just two circumstances that are listed in the ATO Practice Statement PS LA 2011/2 that may attract remittance.
The Administrative Appeals Tribunal (AAT) may also review penalties.
Further tax offences
A number of tax offences are listed on the TAA that can include:
- refusing or failing to lodge a tax return or other documentation;
- making false or misleading statements;
- incorrect record keeping intending to mislead or deceive;
- obstruction of an ATO officer.
More serious offences such as obtaining financial advantage falsely or by deception may be prosecuted under the Criminal Code Act 1995 (Cth).