Tax Audit & Director Penalty Notices (s353-10 Notices)

Why are audits necessary

In the eyes of the ATO, a tax audit is a necessary tool to encourage taxpayers to do the right thing but the reality is that they are a painful scrutiny of your affairs and can take up to 18 months to complete. In a world where it is impossible to be perfect, the ATO can find problems with even the most fastidious accounts. Industries, where cash payments occur, are at a high risk of being audited.

Although the ATO have recently claimed to have adopted a warmer approach to working with taxpayers it should not be mistaken for thinking that the ATO will not exploit each mistake they find. Ultimately, they will seek to justify a result for the time, effort and resources committed to an audit to ensure there is full compliance. It should be remembered that the taxpayer carries the burden of proof. 

Voluntarily disclosing information during an audit can be a sensible way of reducing the time, effort and resources that the ATO expends during an audit but there is a danger of inadvertently admitting to problems that you did not know existed. Obtaining guidance and assistance from a tax lawyer can fend off the ATO so that you can get back to business.

What are the key indicators of an at-risk business

Over declaring deductions or under-declaring income can lead to heavy penalties, and in some cases criminal prosecution. The ATO are well versed in detecting problems at all levels of business and rarely if ever, are fooled by businesses standard attempts to conceal their wrongdoing. Common indicators for the ATO are things such as the financial performance of the business compared to similar businesses in that area (called the benchmark range), compliance with superannuation and PAYG obligations, variances between tax returns and BAS, and constant losses or other anomalies which often point to problems.

What are the penalties for a tax audit problem

The Tax Administration Act 1953 prescribes the penalties for tax audits, which can be up to 75% of the tax owing. In addition, a further 20% uplift is added in certain circumstances – totalling 90%. Finally, interest at high rates are applied (and backdated) meaning it can easily result in more money being owed in penalties and interest than what is owed in tax! In serious cases, taxpayers can be referred for criminal prosecution.

Different stages of notifications from the ATO

One of the ways that the ATO can demand information from taxpayers by issuing what is called a “section 353 – 10 notice” which is typically a letter received by the taxpayer giving notice that they must give certain information to the ATO regarding their tax affairs. There does not need to be an audit or any other current proceedings on foot for this to occur. In some circumstances, the request can often go back many years. The reason the ATO issue such notices is that they believe you have made false or misleading statements regarding your tax affairs.

Section 353-10 notices operate to demand the production of documents or a compulsory personal attendance at an office of the ATO or by a meeting at your home or business premises, thereby limiting your response that “I left it at home/office”. A failure to respond to a notice may result in fines of up to $11,000 as well as a criminal record.

If you receive a section 353 – 10 notice it is important to obtain professional advice immediately. Unlike most other law firms, at CharterLaw we have a team of senior tax lawyers and chartered accountants. This allows us to assess and provide information but at the same time deal with all the issues, maintain legal professional privilege and ensure that no additional or excessive tax is payable.

It is important to understand that when the ATO is reviewing documents such as bank statements they will simply look at every credit (money deposited) as being taxable income and not loans, inheritance, gifts, or nonassessable sale proceeds. A thorough forensic analysis and legal strategy is required to attempt to overcome the taxpayer’s burden of proof because the ATO does not easily accept unsubstantiated statements.

General

In its administration of taxation laws, the ATO has a very wide range of powers which enables them to collect information from taxpayers.  This information can be collected in many ways, most common is a routine audit or other investigations and some of these audit/investigations can result in serious penalties and/or criminal charges.

There are avenues available to ensure the ATO do not bully or treat taxpayers unfairly. We can provide legal and accounting advice and work constructively with the ATO to resolve any issues and achieve a fair outcome.  The Taxpayer’s Charter is also available to taxpayers and the ATO must ensure that it operates within those guidelines when administering tax laws.  The ATO is a model litigant and therefore must ensure operates within those guidelines. Notwithstanding this, the ATO’s attitude is that you are guilty until proven innocent. This is the taxpayer’s burden of proof.

Our Approach

CharterLaw Accounting can prepare amended material reflecting your best case to enable CharterLaw Legal to robustly negotiate with the ATO to ensure your success. Often, we can also negotiate for the primary tax, penalties and accrued interest that the ATO seeks to impose.

If the ATO is unwilling to negotiate there is still an opportunity to reduce the liability by lodging a formal objection to the ATO’s decision on the basis that you have provided amended information that correctly identifies the tax treatment that should be adopted.