Behind the Scenes of a Tax Audit: A Small Business Owner’s Survival Guide

Behind the Scenes of a Tax Audit: A Small Business Owner’s Survival Guide

  • October/20/2023

For most small business owners, a tax audit is the stuff of nightmares. The worst part is that even if you abide by all the regulations, the Australian Taxation Office (ATO) may still audit your taxes. A tax audit is a review of your financial records to see whether you have accurately reported and paid the applicable taxes. A tax audit is necessary for preserving the credibility of the tax system, even though it can be daunting and time-consuming. In this behind-the-scenes tutorial, we’ll describe what a tax audit is, what causes it, how it’s carried out, and typical problems that could come up during the audit. We will also go over how to prevent a tax audit, what to do if you receive a tax audit report, and how Excelsior Tax Advisory may assist you with your tax audit needs. After reading this blog, you’ll comprehend tax audits and the precautions you can take to safeguard your company.

What is a tax audit?

A tax audit reviews taxpayers’ financial records to ensure they have correctly reported and paid taxes. The ATO may initiate a tax audit randomly or respond to a predetermined event. The primary objective of a tax audit is to ensure taxpayer compliance with tax laws and regulations and to preserve the integrity of the tax system.

Tax audits may be conducted in various methods depending on the scope and complexity of the audit. The ATO may conduct audits via mail, telephone, or in person. Typically, an auditor will examine your financial documents, such as tax returns, bank transactions, receipts, and invoices, to confirm that you accurately reported your income and expenses.

Small business owners are especially susceptible to tax audits because they frequently need more resources and knowledge to navigate complex tax laws and regulations. However, small business owners can reduce their audit risk by utilising automated accounting software, keeping accurate records, and adhering to tax laws.

How do we identify potential tax audit triggers to avoid being audited?

What Leads to a Tax Audit?

The ATO may randomly initiate a tax audit, but specific concerns, errors in tax returns, or behaviors of concern typically attract tax audits. Among the most frequent causes of a tax audit are the following:

Inconsistencies between your tax returns and financial documents:

If your tax returns indicate a significant disparity between your income, expenses, and financial records, the ATO may identify this as a potential problem.

Failure to timely file tax returns or BAS statements: The ATO may initiate an audit if you repeatedly fail to submit your tax returns or Business Activity Statements (BAS) on time.

A substantial income increase or decrease:

If your business income abruptly increases or decreases substantially, the ATO may investigate to ensure that you have reported your income accurately.

Certain industries, such as construction, hospitality and the cash economy, are considered high-risk for tax evasion or non-compliance. Operating a company in a high-risk industry may increase your likelihood of being audited.

Tips and observations from the general public:

The ATO can receive tips from the public regarding suspected tax fraud or non-compliance. This information can initiate a review.

Not all triggers result in a tax audit, but if you want to avoid one, you must identify potential triggers and take measures to mitigate them. We will describe how a tax audit is conducted and what to anticipate during the process.

How is a tax audit conducted?

When the ATO suspects financial information has been misreported and warrants further investigation, it conducts tax audits. Depending on the scope and complexity of the business, the audit procedure can vary but typically includes the following step


The ATO will notify you in writing if you have been designated for a tax audit. The notice will include:

  • The purpose of the audit.
  • The categories of documents that will be reviewed.
  • The initial meeting date.

Initial meeting:

The initial meeting with the auditor is a chance to ask for enquiries and better understand the auditing procedure. The auditor will describe what they will be searching for and which records will be examined.

Records examination:

The auditor will review your financial documents, such as prior tax returns, BAS submissions, receipts, and invoices. Additionally, they may request additional information or clarification.

Issue identification:

During the examination, if the auditor discovers any issues or discrepancies, they will discuss them with you and allow you to explain or provide additional details.

Audit report:

After the audit, the auditor will produce a report detailing their findings. The report will include any tax liability adjustments, penalties, and interest.

Response and appeal:

You can respond and appeal the decision if you disagree with the audit’s findings.

It is essential to be organised and well-prepared when facing a tax audit. By keeping accurate records and utilising accounting software, you can reduce the likelihood that your tax returns contain errors or omissions.

The following section will focus on common tax audit issues and how to avoid them.

Response and Appeal: Common Issues Raised During a Tax Audit

During a tax audit, the ATO will examine your financial records to ensure that you accurately report your income and expenses. Among the common issues that may arise during a tax audit are the following:

Incomplete record-keeping:

If your financial records are insufficient or you haven’t provided invoices, the ATO may not allow deductions or assess additional tax.

Tax return discrepancies:

If your tax returns show a significant difference in income or expenses compared to your financial records, the ATO may flag this as a potential issue.

Missing income:

If you have intentionally or unintentionally failed to disclose all of your income, the ATO may impose additional taxes and penalties.

GST compliance:

The ATO will also assess your compliance with GST laws and regulations if registered for GST. This may involve underreporting or over-claiming of GST credits.

The following section will discuss whether a tax audit report can be revised and what you can do if you disagree with the audit’s findings.

Can a tax audit report be revised?

You have the right to respond and appeal the decision if you disagree with the findings of a tax audit report. However, it is essential to note that the ATO will only revise an audit report if there is a genuine error or oversight.

To request a revision, you must file an objection with the ATO within the allotted timeframe, typically 60 days after receiving the audit report. In your objection, you should enumerate the reasons for your appeal and provide evidence to support them.

The ATO will evaluate your objection and may request additional details or clarification. If the ATO agrees that an error or blunder exists in the audit report, it may be revised accordingly. If they disagree with your objection, they will render a verdict regarding your appeal.

Noting that objecting can be a complex and time-consuming process is essential. Working with a qualified tax team ensures that you can effectively present your case and increase your chances of success.

In the following section, we will discuss how to avoid a tax audit and reduce your likelihood of being audited in the first place.

How to avoid a tax audit

Although avoiding a tax audit is only partially within your control, there are steps you can take to reduce the likelihood of being audited. These consist of:

Maintain accurate records:

Keeping precise and detailed records of your income and expenditures can ensure the accuracy of your tax returns and reduce the likelihood of errors or discrepancies.

Utilise accounting software automation:

Accounting software automates the record-keeping process and reduces the likelihood of errors.

Check your GST obligations:

If registered for GST, ensure you comprehend and abide by GST laws and regulations.

Review your tax returns:

Before submitting your tax returns, you should verify that all information is accurate and complete.

By taking preventative measures to reduce the possibility of a tax audit, you can avoid the stress and potential financial repercussions of a tax audit.


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