Can you – or your clients – afford to be audited? We find out why it pays to be prepared.
It’s the letter or phone call you may not want to receive: a client, or even your own accounting practice, is being targeted for a tax audit.
For Simon Flowers FCPA, a principal at LBW Business + Wealth Advisors, the experience is all too familiar.
“We probably have 12 to 18 clients go through an audit each year,” he says. “Audits typically come at the worst times, when you’re really busy but have to drop everything and start gathering information for the tax office.”
What triggers an audit?
This year, the Australian Taxation Office (ATO) has announced that it will be cracking down on work-related expense claims – potentially undertaking over one million interactions (including audits) with taxpayers making claims in this area.
However, there is an abundance of other red flags that can trigger an audit or review, explains Roman Kaczynski CPA, director at Accountancy Insurance.
“Business activity statement (BAS) audits are our highest frequency of claims, but rental property owners are also a focus, as well as businesses that may be involved in the black economy,” he says. “We're seeing a lot of audits of restaurants or takeaway shops right now; any businesses that conduct a lot of cash transactions.”
Cryptocurrency compliance is also in the spotlight, Kaczynski continues, and self-managed superannuation funds (SMSFs) still get their fair share of audit attention.
“The big trend for me is employer obligation audits,” he says. “These are going to increase significantly because with SuperStream in place, the ATO knows immediately when employee superannuation guarantee payments are missed.”
Counting the costs of an audit
Even when the outcome of a tax audit is positive, the process itself may not. Flowers estimates that it takes between 10 and 20 hours to collate all the information required – or $3,000 to $4,000 in employee costs.
“If the client doesn’t have protection in place, justifying these extra fees is a tricky conversation to have,” he says. “If they don’t have protection, we often make up some of the cost.”
Kaczynski says that some public practitioners look to go it alone with self-insurance. However, it can sometimes be a case of a small saving now, only to pay big costs later.
“Some accounting firms may look to cover their clients using a self-insurance model instead of something like Audit Shield – not fully realising that in doing so, they can leave themselves vulnerable,” he says. “In particular, under a self-insurance model, not having access to external professional services can lead to either a limited response or additional unexpected costs for the client, making it difficult for practitioners to recover professional fees.”
Waiting for a response from the ATO can likewise be stressful. “It puts pressure on the relationship between the accountant and their client,” says Kaczynski. “It’s never a good experience.”
Preparing for the unexpected
With the ATO’s random audit program now in full swing, even the most vigilant taxpayer can be the target of an audit. It pays to be prepared: in fact, Kaczynski says Accountancy Insurance reimburses around $1 million each month for the professional fees and associated costs of ATO audits.
“Accountants know they can respond confidently on behalf of their clients, while their clients have peace of mind that they'll get the response they want without having to pay any extra fees,” he says. “It’s a win-win situation.”
As the ATO continues to refine its data analysis systems, tax audit protection is set to become increasingly useful.
“With Single Touch Payroll and all the data matching tools that the ATO is using at the moment, a lot more targeting is going to happen,” says Kaczynski. “In this environment, a protection solution is cost-effective and alleviates the financial stress of being audited.”
Visit Accountancy Insurance to find out more about the audit protection solutions available to your practice.