How to audit – proove your business
Audits can be very stressful for any company regardless of how big or small their span of operation is. One would of course think that if they were honest in filing their company’s taxes, then they would be spared the stress and tension of a tax return audit, but that is not the case. Theories abound as to what prompts the ATO to conduct these audits, but no specific reason has come to the front so far. People often question that does such a thing as an audit proof return exist? Well, obviously there is no way you can maintain a very low profile or be invisible when you are running a business. The ATO was formed to monitor all business activities and so you cannot expect to escape from all kinds of surveillance. The ATO maintains a very close watch to ensure that small businesses report all of their income and that no illegal activity is taking place.
Points to remember:
- As noble as this cause maybe, it does develop as a stressful activity for small businesses because audits can take months to complete during which time all business activities get disrupted.
- While you cannot escape an audit completely, what you can do is minimize the risk of getting picked for a tax return audit.
- To be able to do that you first have to become familiar with some of the benchmarks that ATO monitors. These benchmarks are financial ratios that the ATO has developed to measure the performance of small business companies. By making of these financial ratios, the ATO can compare the performance of companies that perform within the same industry.
- If the financials of your company do not match to that of the other companies then, you are marked for an audit by the ATO.
An understanding of these financial ratios or benchmarks as they are commonly called would help you keep your performance under check and minimize the risk of being called in for an audit. This would also give you an insight into what prompts the ATO to highlight companies for an audit.
The first are performance benchmarks. These ratios or benchmarks are used by the ATO to identify companies that have not been reporting all their income. You should be aware of this ratio to ensure that you have complied with this aspect of the tax requirements. The second type of benchmarks is the input benchmarks. These ratios are for trades people who work in direct contact with the customers and purchase their own materials. Based on the materials they use and the amount that they spend on hiring labor, the ATO can calculate their expected income or at least the range in which the income would lie and then this expected income is compared to what other trades people in the same profession are earning. Trade associations are of immense help when these ratios are being developed.
Being familiar with these benchmarks alone, however, would not help you completely. If you want to minimize the risk of getting called in for an audit then, you can keep the following suggestions in mind as well.
A good knowledge of what you can claim as a deduction significantly reduces the amount of tax that you are liable to pay. The first suggestion, which is given by every professional associated with the field of taxes, is to make use of a computer for all calculations, or at least make sure that you have consulted a professional for this purpose. When you get a professional or a computer to do this work for you, you can be sure of the accuracy of their preparations. You would also know that the probability of errors would be far less as compared to when you would prepare your taxes yourself.
Be sure that you compare your business performance with that of other companies in the same industry at the end of the year when you receive your taxes from your lawyer or when you finish doing them yourself. This would give you an idea of where you stand and what are the chances that you might set off some flags with the tax office. You can even do this throughout the year. For this, you will have to make sure that your bookkeeping is up to date and that all accounts are being maintained well. If at all, after all this analysis you find that you are falling behind the range then you should seek guidance from a professional or from your accountant about what you can do. It would be necessary to find out what you are doing wrong.
If you have these things in place then some of the other steps that you can take are making sure that all your calculations are accurate. Maintain proper documentation for all your deductions. You need to be able to prove that your claims are accurate and correct. Proper receipts and bills for the expenditures that you are claiming and also keeping copies of the same would not only help you in preparing your taxes but will also be useful in making sure that you are well organized. These would come in handy when your records would be checked through. Even the smallest bill should be kept safe and should be paid. Again, you should also keep records of your incomes.
Another thing that you should keep in mind is when you become eligible for a refund do not claim it immediately. You should seek a refund the next year. This would give you a lower profile, and you would not be on the radar of the ATO, which would help you minimize the risk of being called up for an audit. There is, of course, still no guarantee that you would be able to avoid an audit because if your performance benchmarks or input benchmarks provide the ATO with an indication that your performance is different from that of your competitors than you would raise some flags with them. But by following these points you should be able to better monitor your performance.