As we have mentioned in a previous video, many small business owners need to question whether or not to purchase tax audit insurance.
One of the first things you might consider is… how likely is it that you will be audited by the ATO?
The ATO have a digital flagging system which allows certain business activity to be highlighted for an audit. Triggers that might draw attention to your business include:
- Failure to submit an income tax return or Business Activity Statement.
- Large, suspicious deduction claims.
- Deducting 100% on items that would typically be used partially for personal use.
- Bad outstanding debts.
- Significant revenue losses.
- Not being Single Touch Payroll compliant.
- Unusual business structures.
Unfortunately, the above points are not the only reasons you may be audited. Some businesses are randomly selected for an audit.
If you are unluckily selected, is the tax audit process difficult?
During an audit, the ATO might call, write or visit you or your registered tax accountant.
They will often require access to all of your documents in order to identify whether your lodgements have been fully-reflective of your business activity. In some cases, the ATO will request data from up to the previous five years.
The duration of an audit will depend on how large your business is and how significant your tax errors have been. In most cases, if you have been doing everything in an organised and legal fashion, the audit will be finalised relatively seamlessly.
With all of this considered, is it a good idea to have tax audit insurance?
There is a large amount of administrative work required on the behalf of your tax accountant to respond to the ATO’s audit requests.
Tax audit insurance covers you for all the associated fees relating to dealing with the tax office in the case of an audit. Your tax accountants don’t make any money out of the insurance. It simply reduces your costs if you are chosen to be audited.
Because the ATO now have an outstanding data matching system and are conducting more audits than ever, tax audit insurance is critical.
