For small business owners, taxes can be a daunting task. The thought of being audited can be downright terrifying. While tax audits are relatively rare, they can happen to anyone, and being prepared is essential. Tax audits can be time-consuming, stressful, and costly. However, you can survive a tax audit with minimal damage with the right knowledge and preparation.
Here, we’ll discuss what small business owners need to know to survive a tax audit.
Why Do Tax Audits Happen?
Before we dive into the tips for surviving a tax audit, it’s essential to understand why tax audits happen in the first place. The Australian Taxation Office (ATO) conducts tax audits to ensure all taxpayers comply with tax laws and regulations. Tax audits can be triggered by a variety of reasons, including:
- Discrepancies in your tax return
- An unusually high or low income in comparison to previous years
- Random selection
- Industry-specific issues
- A tip-off from a third party.
Preparing for a Tax Audit
Preparation is necessary to survive a tax audit. The more organised you are, the smoother the audit process will be. Here are several tips on how to prepare for a tax audit:
1. Hire a Small Business Accountant
One of the ways to prepare for a tax audit is to hire a reputable small business accountant in Perth. A small business tax accountant can aid you in organising your financial records, prepare your tax returns, and represent you during the audit process. An accountant can also provide you with valuable advice on how to handle the audit process.
2. Keep Accurate Records
Keeping accurate records is critical when it comes to tax audits. For at least five years, you should keep all financial records, including receipts, invoices, bank statements, and tax returns. Keeping accurate records will help you provide the necessary documentation during an audit.
3. Review Your Tax Return
Before the audit, review your tax return and ensure it’s accurate. If you notice any errors, you should correct them before the audit.
4. Be Prepared to Explain Discrepancies
If there are discrepancies in your tax return, you should be prepared to explain them. You should have documentation to support any deductions, expenses, or income that may be questioned during the audit.
Surviving a Tax Audit
Now that you’re prepared for a tax audit, let’s discuss some tips for surviving the audit process.
1. Respond Promptly
If you receive a tax audit notification, respond promptly. Ignoring the audit or delaying your response can incur additional penalties and interest charges.
2. Cooperate with the ATO
Cooperating with the ATO is essential during a tax audit. You should provide the ATO with all the necessary information and answer their questions truthfully. If you’re unsure about a question, it’s okay to say that you don’t know or need to check your records.
3. Stay Calm and Professional
During a tax audit, it’s essential to remain calm and professional. Don’t argue with the auditor or become defensive. Remember the auditor is just doing their job, and you want to make the process as easy as possible for both parties.
4. Be Honest
Honesty is the best policy during a tax audit. If you made a mistake on your tax return, admit it, and work with the auditor to correct it. Trying to hide or cover up mistakes will only make the situation worse.
5. Appeal the Decision if Necessary
If you disagree with the auditor’s decision, you have the right to appeal. You can appeal the decision to the ATO or the Administrative Appeals Tribunal (AAT). Your accountant can provide you with advice on whether to appeal and how to do so.
Conclusion
Surviving a tax audit can be a challenging experience for small business owners. However, with proper preparation and mindset, you can come out of the audit process unscathed. Remember to hire a professional small business tax accountant, keep accurate records, and be honest and cooperative during the audit process. By following these tips, you can survive a tax audit and get back to running your business.
Prosperity Accountants is a team of seasoned small business tax accountants in Osborne Park who offer cost-effective accounting, tax, and advisory services with fixed fees, assisting business owners in reducing taxes, enhancing cash flow, and boosting profits. Schedule your appointment with one of our accountants today!