ATO Tax Audits: Part 2 - Strategies for dealing with an ATO tax audit

In last month's ClearLaw we explored the potentially daunting experience of an ATO Tax Audit and how taxpayers can prepare for them. In this article, we explore strategies for the next step, namely dealing with an ATO tax audit when the ATO comes knocking. Anna Tang

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Providing access to information

During an audit, the Commissioner of Taxation (Commissioner) will typically request information from a taxpayer. The Commissioner can do that both formally and informally.

Less formal requests

If ATO officers request documents orally (either by telephone or in person) then, depending on the nature of the request, it is prudent to ask for written confirmation of the request. This reduces misunderstandings between the taxpayer and the ATO as to the nature and scope of the information sought.

Formal access, examination and copying

In addition to informal requests, the ATO has the power to access, examine and copy a taxpayer's documents and to require taxpayers or other persons to provide information, evidence or documents[1].

These powers enable the Commissioner:

• to have full and free access, at all times, to all buildings, places, books, documents and other papers;
• to make copies of any such books, documents or papers; and
• to issue a notice requiring any person to furnish information or to attend before the Commissioner to give evidence and to produce books, documents or other papers in their custody and control.

The access powers under sections 263 and 264 enable the Commissioner to conduct wide-ranging, 'full and free', 'roving enquiries' and to 'fish' for information concerning the income or assessment of a taxpayer.[2] The only statutory constraint is that the powers may be exercised only to enable the Commissioner to administer the tax law.

Additional powers allow the Commissioner to seek information or documents which may be outside Australia.[3] Access powers are also available under double tax treaties and under the criminal laws[4]. In addition to section 264A, Australia's double tax treaties may also provide for the access of information located overseas.

What if documents etc. are not provided?

If a taxpayer or other person does not provide information or documents that the Commissioner has requested, then the taxpayer is not able to use them when disputing an assessment of income tax.

Voluntary disclosure

A taxpayer's audit strategy should involve considering voluntary disclosure to the Commissioner of any tax shortfall of which the taxpayer is aware. A voluntary disclosure will reduce the amount of administrative penalties imposed. The amount of the reduction depends on the time at which the disclosure is made. If the disclosure is made:

• before the commencement of audit activity, the amount of penalties will be reduced by 80%; or
• after an audit has been commenced, the amount of penalties will be reduced by 20%.[5]

The Commissioner will treat a disclosure as being made voluntarily if it is made without having been prompted by the ATO.[6]

Taxpayer's options available when access is sought

Accordingly, a taxpayer served with one of these notices should comply with the notice, unless one of the following applies:

• the information sought is privileged; or
• the notice is invalid.

The common law privilege against self-incrimination does not prevent the Commissioner from accessing documents or information.[7]

It is an offence to not comply with a section 263 or a section 264 notice.[8]

Check the ATO Officers' authorisation

If the ATO seeks access to information under section 263, then the taxpayer should always request that ATO officers produce valid authorisation (usually known as a wallet authority).

If the ATO officer does not produce their authorisation they can still enter the premises and search etc. However, an officer who does not produce a wallet authority could be asked to leave and does not have to be shown documents or given information. Also, there may be other bases on which the officer is entitled to remain on the premises (e.g. as a common law invitee) until the invitation is revoked.

Access to privileged documents

If a taxpayer claims privilege and the ATO disputes that claim then ATO officers can still search under section 263 until the claim for privilege has been resolved. The ATO's Access and Information Gathering Manual (chapter 6) sets out the Commissioner's preferred process for securing privileged documents and resolving claims of privilege. In that light, a taxpayer should be able to agree with ATO officers on a process for dealing with privilege claims in accordance with the manual.

ATO officers cannot simply seize all the taxpayer's documents; rather, officers are required to make a reasonable effort to distinguish between relevant and irrelevant documents.[9]

Challenging the validity of a section 263 or 264 notice

There are three main lines of argument which can be used to challenge the validity of a section 263 or 264 notice:

1. The notice is invalidly issued. For example:
   1. the notice was issued for an improper purpose; or
   2. the issuer was not authorised to issue the notice.
2. The notice is invalidly drafted. For example:
   1. the notice exceeds the scope of the relevant provision under which the notice was issued;
   2. the notice is oppressive; or
   3. if the notice is issued under section 264:
      1. the notice does not adequately specify the items sought; or
      2. the notice does not provide the taxpayer with sufficient time for compliance.
3. The notice is invalidly served.

If a taxpayer is contemplating challenging a section 263 or 264 notice, then the taxpayer should promptly contact the ATO with its concerns.

Inappropriate conduct and process

If the audit process and the conduct of ATO officers do not conform with the Taxpayer's Charter, then the taxpayer is able to make a formal complaint to the Ombudsman Special Advisor (Taxation).[10] In addition, the Inspector General of Taxation may also review systematic problems with processes.[11]

General obligations of the taxpayer and ATO

Taxpayer's access to premises

The taxpayer's business operations should be able to continue despite the conduct of the audit. This is because when ATO officers are exercising an access power, they must allow the taxpayer or its staff to access the taxpayer's premises and records - unless the access results in the officer being unable to effectively exercise his or her statutory power.[12]

Confinement

Tax audits can be time consuming. Accordingly, to minimise disruption, but while ensuring compliance with its obligations, a taxpayer should:

• properly accommodate ATO officers physically at its premises;
• ensure it has sufficient resources to respond to requests for information within the time stipulated
• provide ATO officers with a designated working area with minimal contact with the rest of the organisation; and
• ensure dealings with ATO officers are conducted only through a designated person (that is, either an in-house tax manager or in-house lawyer).

Reasonable facilities and assistance

The taxpayer is required to provide reasonable facilities and assistance for access where a section 263 notice is served.

However, the assistance is only in relation to access. This would mean that a taxpayer and its personnel are not obliged to answer questions about the taxpayer's general tax affairs.

The precise scope of this obligation seems to require the taxpayer to:

• indicate (verbally or by other means) the location of documents or other relevant items;
• open locked storage facilities or providing the means to do so;
• provide adequate lighting and power, working space and facilities such as photocopying; and
• provide access to relevant data stored on computer or other electronic storage systems, for example by operating the computer so as to display the information or producing a hardcopy printout.

It is an offence to breach these obligations.

Concluding Comments

A tax audit can be stressful for both the taxpayer and advisor. As it is common for audits to take a long time, taxpayers should devise appropriate strategies to minimise the disruption and financial impact of a tax audit. The best defence against a tax audit is preparation - both before and during the audit process, see the previous ClearLaw about preparing for an audit.

More information

For more information:

• on this article contact Anna Tang on 03 9288 0555.
• about tax and revenue queries generally please contact Maddocks on 03 9288 0555 or 02 8223 4100 and ask for a member of the Maddocks Tax and Revenue Team.

[1] These formal access and investigative powers are contained in section 263 and section 264 of the Income Tax Assessment Act 1936 (Cth) (ITAA36).
[2] FCT v ANZ Banking Group Ltd (1979) 143 CLR 499.
[3] Under section 264A of the ITAA36
[4] Such as the Crimes Act 1914 (Cth), the Criminal Code 1995 (Cth) and the Crimes (Taxation Offences) Act 1980 (Cth).
[5] Section 284-225 of the TAA.
[6] TR 94/6.
[7] Stergis & Ors v FC of T & Anor 89 ATC 4442.
[8] Section 8C of the TAA.
[9] JMA Accounting Pty ltd v Michael Carmody, Commissioner of Taxation [2004] FCAFC 274.
[10] Inspector General of Taxation Act 2003 (Cth).
[11] Ibid.
[12] Section 288-35 of the TAA.