Every accountant knows that reviews or audits of your client’s tax returns or financial compliance obligations can sometimes be unavoidable. When an audit hits, this is rarely a reflection of the work put into preparing the return and is more often due to a specific crackdown by the Australian Taxation Office (ATO) or other State & Federal government revenue authorities.
This could be through a variety of data matching or other artificial intelligence sources used to assist in initiating audit activity of your client’s lodged returns. These methodologies have proven to work very well and there are no signs to show that the ATO or other State & Federal government revenue authorities with ease up on these.
Due to the COVID-19 pandemic, 2020 saw a temporary lull in some of the ATO and other State & Federal government revenue authorities’ usual audit activity levels. However, the data we have obtained shows that overall audit activity was still prevalent. We also noted a new audit category related to JobKeeper payment audits that accounted for a high proportion of audit activity.
The below pie chart shows the distribution of Audit Shield claims activity in Australia*
These are the highlights from the five most frequent claim types amongst accounting firms offering Audit Shield in Australia:
Number One: BAS Audits and Reviews (Pre & Post Assessment)
The Accountancy Insurance Claims team noted an increase of more than 10% in BAS Audits and Reviews (Pre & Post Assessment) over the 2020-2021 financial year. This has placed BAS Audits and Reviews into the number one position of all audit categories over the last 12 months. This is interesting because prior to the 2020-2021 financial year, BAS Audits and Reviews had remained steady since 2018 with only a very small increase noted in 2019-2020.
The spike, attributed to cash flow boost payment activity statement audits and reviews, was part of an ATO crackdown in 2020. The ATO will continue its checks throughout 2021 to ensure that cash flow boost payments reached those employers that were entitled to the payments. This will inevitability lead to more audit activity.
Whilst the cash flow boost program drew to a close with the lodgement of 30 September 2020 activity statements, we still expect to see ongoing audit activity throughout 2021, especially where employers are declaring unusual variations in W1 and W2 amounts in 2021 vs 2020 activity statements.
Claim proportion (frequency) 2020-2021: BAS Audits and Reviews (Pre & Post Assessment)
accounted for 17.23% of all Accountancy Insurance claims.
Number Two: Employer Obligations Audits and Reviews (PAYG/SG/FBT)
For accountants this may be the most frustrating type of audit activity as it is one where accountants are not always in control. In general, accountants do not get involved in their client’s payroll preparation or maybe see it once a year (when it is too late) at tax return preparation time.
Throughout 2020 and into 2021, many Australian businesses will not have not kept up to date with their superannuation guarantee (SG) obligations because of COVID-19 business cash flow pressures and this has been receiving a lot of attention from the ATO.
With Single Touch Payroll (STP), the ATO can easily identify and flag under payments of SG and we have seen STP reporting as a big driver of ATO SG audit activity in 2021.
Claim proportion (frequency) 2020-2021: Employer Obligations Audits and Reviews (PAYG/SG/FBT) accounted for 14.87% of all Accountancy Insurance claims.
Number Three: Payroll Tax Investigations (All States)
Payroll Tax Investigations (All States) continues to be a major focus area by all State Revenue Offices around the country. Comparing the claim frequency of Payroll Tax Investigations in 2019-2020 to that in 2020-2021, we can report a small decrease in prevalence in this area.
Given that there were so many individuals that were out of work and so many Australians on JobKeeper in 2020-2021, this audit area still remained a significant figure and reinforces the States and Territories governments’ commitment to reviewing Payroll Tax.
Issues identified in Payroll Tax Investigations include:
- Grouping of related employer entities
- Employees based in other states (requiring registration in other states)
- Employers not being registered when data (e.g. STP) shows they are over the Payroll Tax registration threshold
- Data sharing with other government authorities (ATO, WorkSafe, icare, etc.) is also a key contributing factor in identifying employers to target for Payroll Tax Investigation activity.
Claim proportion (frequency) 2020-2021: Payroll Tax Investigations (All States)
accounted for 9.82% of all Accountancy Insurance claims.
Number Four: Income Tax (Full/General/Combined) Audits and Reviews
Following closely behind Payroll Tax in claim frequency is Income Tax which covers a vast array of different types of ATO audit activity that can be linked back to the lodged income tax returns of taxpayers. What kept this category high on the list were key ATO audit focus areas such as the Next 5,000 Streamlined Assurance Review program that commenced in October 2020.
Claim proportion (frequency) 2020-2021: Income Tax (Full/General/Combined) Audits and Reviews accounted for 8.64% of all Accountancy Insurance claims.
Number Five: Covid-19 JobKeeper Payment Audits and Reviews
Despite Covid-19 JobKeeper Payment Audits and Reviews being a new category, it still made it into the top five most frequent claim types in the 2020-2021 financial year.
The ATO has historically been very active in reviewing government benefit schemes. Recognising this, Accountancy Insurance put in place an endorsement to our Audit Shield policy that includes JobKeeper Payment Audits and Reviews (post payment).
With so many Australian employers previously enrolled in JobKeeper, it is very likely that ATO audit activity will continue throughout 2021.
We are currently receiving claims for:
- JobKeeper extension – Decline in turnover verification
- Employee eligibility checks
- Nomination form compliance
- Proof of tier 1 vs tier 2 payment records compliance
Claim proportion (frequency) 2020-2021: Covid-19 JobKeeper Payment Audits and Reviews
accounted for 7.73% of all Accountancy Insurance claims.
Audit activity outside of the accountant’s control
Earlier in this article, we mentioned that often audits and reviews of your client’s tax returns can sometimes be unavoidable. We regularly hear from accountants that they “don’t need to worry about tax audit insurance as they always take the conservative approach when preparing their client tax returns” and as a result, they are “not on the ATO audit radar”.
However, there are many ATO and State & Federal government revenue authority audits and reviews (including four of the highest claim types noted) where quite often the accountant only becomes involved after the audit activity has started.
Over 59% of the audit activity we recorded in 2020-2021 were for claim types where the taxpayer (your client) and/or a bookkeeper may have prepared the lodged returns or managed the employer obligations compliance that were under audit and the accountant had no involvement nor performed any review prior to the audit activity being instigated.
Frequency for claim types 2020-2021 that accountants may never see - until it’s too late:
BAS Audits and Reviews – 17.23%
Employer Obligation Audits and Reviews – 14.87%
Payroll Tax Investigations – 9.82%
Covid-19 ATO JobKeeper Payment Audits – 7.73%
ATO Excess Super Contributions – 4.93%
WorkCover – 3.08%
Land Tax – 1.97%
Who was audited?
Throughout the mix of accounting firms and their participating clients working with Accountancy Insurance, the following client categories had the highest number of claims in 2020-2021:
In order of frequency (business groups):
- $1M to $3M turnover
- $0 to $500k turnover
- $3M to $6M turnover
- $10M to $25M turnover
- $500k to $1M turnover
How to reduce the impact of ATO audits and reviews:
The ATO and other State & Federal government revenue authorities in Australia are not going anywhere. They will continue to find new and innovative ways to deal with those taxpayers that are not paying their fair share of tax or meeting their financial compliance obligations – of that we can be certain. This is emphasised throughout the media and reinforced by the continued support from the Australian Government both financially and through various data-sharing platforms.
As official reviews, audits, investigations and inquiries of taxpayer lodged returns and their taxation affairs in general continue to remain prevalent, the best course of action is to ensure that your accounting firm has a comprehensive tax audit insurance solution such as Audit Shield in place.
Audit Shield is an end-to-end tax audit insurance solution that covers accountants’ professional fees and the fees of experts, should your client be subject to ATO or other State & Federal government revenue authorities’ initiated audit activity in relation to lodged returns or financial compliance obligations - including JobKeeper payment audits and reviews (post payment).
Thousands of accounting firms have made the decision to implement Audit Shield. These accounting firms benefit, as they are not out of pocket for the additional work they need to undertake on behalf of their clients. They also avoid an awkward conversation regarding additional, yet necessary, professional fees incurred because of tax audit activity.
Without Audit Shield, accounting firms and their clients experience additional stress caused by audit activity instigated by the ATO or other government revenue authorities. It’s a win-win and no net-cost solution for your accounting firm.
DON’T BE A TOTAL MESS,
AVOID THE ATO STRESS.
To find out more about Audit Shield visit the Accountancy Insurance website or call our team on 1300 650 758.
Associate Director, Accountancy Insurance
Director, Accountancy Insurance