Tax audits can be a stressful experience, especially if you’re unsure why you were selected or what the process involves. In Australia, the Australian Taxation Office (ATO) conducts audits to ensure that individuals and businesses are meeting their tax obligations. Whether you're a sole trader, a company director, or a property investor, understanding your rights and responsibilities under Financial Services and Tax Law is essential.

In this article, we’ll explain when you can be audited, what typically triggers an audit, how the process unfolds, and what you should do if you receive a notice.

What Is a Tax Audit?

A tax audit is a detailed examination of your tax affairs by the ATO. The aim is to verify that the information you've reported is correct and that you've complied with your tax obligations. An audit may look into your income, deductions, superannuation, or business activity statements (BAS).

Tax audits can vary in complexity—some are routine and involve straightforward checks, while others can be more intensive and stretch over several months.

When Can the ATO Audit You?

There is no fixed schedule for tax audits. The ATO has broad powers under Australian Financial Services and Tax Law to audit any taxpayer it suspects of non-compliance.

You can be audited if:

• Your tax return contains discrepancies or omissions.
• You're involved in high-risk industries (e.g. construction, cash-based businesses).
• Your deductions or claims are unusually high compared to others in similar income brackets.
• You're linked to others under investigation.
• The ATO receives a tip-off or complaint.
• You engage in international transactions or own offshore assets.

Audits are not always triggered by wrongdoing. In many cases, taxpayers are selected through data-matching programs or random sampling.

What Triggers an Audit?

The ATO uses data analytics, cross-referencing information from banks, employers, government agencies, and even social media to flag inconsistencies.

Common audit triggers include:

• Sudden fluctuations in income or expenses.
• Large or inconsistent work-related deductions.
• Undeclared foreign income or cryptocurrency transactions.
• Failure to lodge tax returns or pay superannuation.
• Incorrect GST or PAYG withholding reports.
• Lifestyle inconsistencies—living beyond your declared means.

The more complex your financial affairs, the more important it is to seek guidance from professionals familiar with Financial Services and Tax Law.

What Happens During a Tax Audit?

If you’re selected for audit, you’ll receive a formal notice from the ATO outlining the scope of the review. The process typically follows these stages:

Notification You’ll receive a letter or call from the ATO explaining the reason for the audit and what information is required.

Information Gathering The ATO will ask for documents such as:

• Tax returns and BAS statements
• Bank statements and loan documents
• Invoices, receipts and contracts
• Superannuation records
• Business activity summaries

You may need to attend interviews or allow the ATO to access your premises.

Review and Findings The ATO will examine the documents and may ask follow-up questions. They will then issue a draft audit report or notice of outcome.

Resolution If discrepancies are found, you may be asked to pay back taxes, penalties, and interest. You may also have the right to object or appeal.

What Are the Potential Outcomes?

Depending on the audit findings, the ATO may:

• Accept your position with no further action
• Issue a tax adjustment (you’ll owe more tax)
• Apply penalties for false or misleading statements
• Prosecute if fraud or evasion is involved

Penalties vary based on the severity of the issue and your level of cooperation. Interest charges can also accumulate quickly, especially on unpaid tax debts.

How to Respond to a Tax Audit

Receiving an audit notice doesn’t mean you’ve done something wrong. However, how you respond is crucial.

Here are some best practices:

• Stay calm and comply: Cooperate professionally with the ATO and respond within timeframes.
• Seek legal guidance: Seek legal guidance: Engage a lawyer experienced in Financial Services and Tax Law to protect your rights and ensure proper communication.
• Organise your documents: Keep accurate records and have them ready for review.
• Be honest: Do not attempt to mislead or conceal information.
• Understand your rights: You have the right to seek legal advice, request time extensions, and object to decisions.

Why Legal Support Matters

Tax audits can be overwhelming, particularly when large amounts of money or potential penalties are involved. Missteps can escalate quickly, especially if the ATO interprets inconsistencies as intentional.

A lawyer specialising in Financial Services and Tax Law can:

• Communicate with the ATO on your behalf
• Identify errors in the ATO's reasoning or assumptions
• Help negotiate penalties or payment plans
• Advise on whether to settle, object, or appeal
• Protect your business reputation and minimise disruption

Audits are a reality of the Australian tax system. While being audited by the ATO can be stressful, it’s manageable with the right preparation and legal support. Understanding your rights and obligations under Financial Services and Tax Law ensures you can respond appropriately and avoid further complications.

Have you received an audit notice—or want to prepare just in case? At New South Lawyers, our Financial Services and Tax Law experts are ready to guide you through the entire process. We provide confidential, strategic legal support to minimise risk and secure the best possible outcome.

Contact New South Lawyers today and gain the peace of mind you deserve.