I was at an accountants seminar last week (yes it was not exactly riveting and exciting) on Cloud Accounting and improving business performance.

One interesting paper was a presentation on ATO audit strategy.   It expects to match 640 million transactions this year to tax returns (a lot of detail is required now in returns), and carry out over 30,000 audits on SME's.   We have already received "audit requests" for three clients.   I'll keep this Blog as short as possible and deal with an overview of six Types of Audit, the typical content of the Records Audit, and our suggested approach to handling the risk.

Audits

An audit is likely if the ATO considers a firm is either not complying with its obligations or that a simple review may be insufficient.   The most common audits are:

Records Audit:   selected due to industry, risk to revenue, outside ATO benchmarks, low income

Specific audit-data comparisons:   discrepancy in data-matching

Specific audit amendment:   identified from other audit work of ATO, or a 'dob-in'

Correspondence audit:   similar to Records, but discussed by phone to determine if a more detailed audit is required

Cash audit:   similar to Records but escalated to a full audit in the belief that there is a low likelihood of compliance

Complex audit:   complex structures and transactions, and believed to be a low level of compliance

Possible Content of a Records Audit

The ATO selects a BAS Quarter (like June 2013) and asks for that Quarter's GST Detail Report, bank statements, supplier invoices, till tapes or sales invoices, wages and superannuation records.   If the client's system is in order, the ATO assumes the risk to revenue is low.

The program is likely to include:

- Check from till tapes or sales invoices to bank statements, then to BAS, and to sales in the tax return

- Inspect supplier invoices for claim of GST, verified paid in the bank statements, correctly classified in the ledger as an expense (and not private or capital)

- Inspect Wages books for deduction of PAYG tax, and check TFN declaration and Choice of Super form

- Determine whether contractors are really common-law employees, and if so tax to be deducted and super paid (see 'Contractors' Blog emailed 26 ^th February 2014)

- Verify super contributions remitted on time otherwise super cannot be claimed as a tax deduction

- Sight car log books and ensure the usage has not changed (see 'FBT' Blog emailed 24 ^th March 2014)

- Check that the ledger has been reconciled to the bank account on a regular basis.

Whether mistakes are deliberate or accidental penalties will be imposed, usually between 20% and 50%, but can go up to 100%.

Our Recommended Approach

First, we suggest you check and ensure all of these records can be produced within 14 days if requested (although they could be requested for any period and not necessarily the June 2013 quarter).    Make sure that a log book exists on every car in use ('a vehicle carrying less than 1 tonne and less than 9 passengers'), and is in line with the percentage claimed as business use.

If the ledger or records are not in order, we may need to do some work with you to get them in shape, especially with MYOB or Quicken books.   This could be reconciliations to bank accounts, classifications, checking of BAS, checking of Wages & Sub-Contractors, and even Super remittances and Log Books.

Expect the audit can take a couple of days.   We have no problem with the audit being held in our office, as long as all the records are supplied, and you will need to set aside some time to respond to their queries and concerns.   We never know how much time is required as it depends on the nature of the audit, records available, co-operation, other information in the hands of the ATO, etc.

Consider purchase of tax audit insurance.   We are talking to a supplier now who provides cover for this risk.   The company only handles this risk, its claims process is simple and cover is automatic.   The premium can range from around $220 to about $700 for big cover.   It's very cheap compared to the cost of us sitting with the ATO for 2 to 3 days.   I'll write more on this next week when we have the details.