‘Painful, tedious’: This is what it is like to have your tax return audited

The first time Moxin Reza received a letter from the Australian Taxation Office to say he would be audited, he was shocked. But when the taxman approached him a year later, he was ready.

For millions of Australians lodging their own income tax return, October 31 was the cut-off. Failing to meet that deadline can pique the ATO’s interest and nudge up your chances of being audited.

Moxin Reza claimed tax deductions while studying for his MBA.Credit: Simon Schluter

The first time Reza was audited, in 2012, he was unprepared, frustrated by the process, and felt a bit threatened.

“The first time was painful,” he said. “It’s a tedious process.”

Reza is the managing director of buyers’ agency Investor Partner Group. The two audits were triggered by the large expenses he was claiming while completing his MBA.

The MBA cost Reza, who lives in suburban Essendon in Melbourne, about $40,000 a year, which he claimed as a self-education expense. That reduced the income Reza was assessed on for tax purposes by that much for two years.

In the end, Reza was able to show the expenses he had claimed were legitimate, but the process was time-consuming.

“You get a letter outlining what you claimed,” Reza said.

“The ATO will then ask if you can fix, come clean on, or provide evidence for those transactions, sometimes accepting bank account or credit card records if you don’t have the receipts.”

Saving receipts and indexing them saved time, Reza said, including when he was audited on the second occasion while travelling.

“I got a letter, spoke to the case officials, and had 28 days to respond,” he said.

“It was two months of back and forth with the ATO because I was travelling overseas, but I sent them a Dropbox link with the proofs of transaction and my tax refund was released two weeks later.”

The Tax Office is this year targeting incorrectly claimed work-related expenses, inflated claims for rental properties and failure to include all income.

About 2 million Australians are contacted every year by the ATO to review their tax returns, although most of these are not subjected to a full audit.

HLB Mann Judd tax consulting partner Peter Bembrick said that while the ATO was probably more focused on wealthy individuals, some tax returns could be selected at random.

For those earning ordinary salaries or wages, it’s more often excessive deductions or a large transaction that trigger the ATO’s interest.

Bembrick said some of his clients were audited after being gifted a deposit to buy property from parents overseas, or moving large sums of money from portfolios overseas.

In the event of an honest mistake, Bembrick said the ATO’s response would depend on the person’s circumstances and the size of the error.

“You’re less likely to be treated leniently, and the ATO might not agree with you that it’s a mistake, if you’ve got a history of doing things [wrong],” he said.

People should seek advice for anything they were unsure about, Bembrick said.

“If you’ve not just ignored the issue, and you’ve made the effort, for example by getting advice or doing some analysis, and the ATO takes a different position, you’re less likely to be penalised,” he said.

Even before tax returns are lodged, a range of automated processes are in place to reduce errors, according to the ATO.

For example, “nearest neighbour methods” are used to compare amounts being entered into the system with those of other people in similar circumstances. If a claim is significantly different to what is expected, a message pops up, prompting the taxpayer to check their figures.

In 2020, nearly 340,000 taxpayers received a pop-up message suggesting they review a specific label, which the ATO estimates added about $37 million to tax receipts.

Once taxpayers lodged their returns, a range of data and analytics could be used to review the information, an ATO spokesperson said.

The ATO can receive data from various sources, including employers, financial institutions, government agencies such as Services Australia, companies paying dividends and, more recently, cryptocurrency exchanges and sharing-economy platforms.

If the ATO picks up on anything out of the ordinary, it can ask the taxpayer to review or amend the return. When it has a high level of confidence, it can adjust a taxpayer’s return itself to include income that should have been reported, or deny expenses they are not entitled to claim.

“The taxpayer, or their registered tax agent, may receive written correspondence or a phone call requesting more information about the income they have reported, or failed to report, or the expenses they have claimed,” the ATO spokesperson said.

Auditors then review the information and make an assessment, informing the taxpayer of the outcome. The taxpayer can request a review of the decision.

On Thursday, Inspector-General of Taxation Ruth Owen, who took on the role in July, recommended the ATO make it faster and simpler for taxpayers to lodge objections.

“Objections are an essential part of the tax system and are often the only affordable option open to many taxpayers to challenge Tax Office decisions,” Owen said.

An audit can be confronting the first time, Reza said there was no need for people to be scared if they were doing the right thing.

“They’re not out there to get you,” he said. “They’re just ensuring people do the right thing.”

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