ATO focuses on small business compliance: What to do if you get a “data matching” letter from the tax office

The Australian Tax Office has warned business owners it is watching them closely to ensure compliance, but as the focus on “data matching” increases, accountants say SMEs should remain calm if the tax office knocks on their door asking for more information about their affairs.

Last Friday, ATO commissioner Chris Jordan addressed the National Congress of the Institute of Public Accountants, highlighting five key areas of priority for ensuring individuals and businesses pay the correct amount of tax.

One of these areas was the monitoring of “unexplained wealth” of business owners, with a warning also being issued against those incorrectly claiming personal expenses as related to work or the running of a business.

It follows a announcement from the ATO earlier this year that it would be using social media platforms like Facebook to monitor for displays of wealth from individuals that did not match up with what they had reported about their income and affairs.

The tax office lists 16 different kinds of data matching letters it may issue individual taxpayers, based on discrepancies it has found between what has been reported to the ATO and data available from health funds, employers, companies, banks and government agencies.

According to the ATO, these communications generally arrive more than a year after the tax information it relates to has been lodged.

David McKellar of Allied Accountants tells SmartCompany there are a range of reasons the tax office could contact a business owner or individual taxpayer requesting more information about their affairs, and while some people “react terribly” to these interactions, there is a clear process to follow, regardless of whether the questions relate to your individual tax return or your small business affairs.

“Some people do get scared and think someone is out to get them, but that’s not the case. These things come out of an automatic system through data matching,” he says.

“If you’re forthcoming with them [the ATO] from the outset, in these cases there are often very minimal penalties, or penalties can be waived completely.”

Received an ATO letter? Don’t put in an angry call to the customer service line

While some might be tempted to react with emotion upon receiving a letter and ring the tax office to argue their case, the best action to take after receiving any communications is to take these to your tax agent or adviser, McKellar says.

“The first thing to do would be look at what they’re actually suggesting, and then go back and look at a very broad level, review your situation and see if you have missed anything in reporting,” he says.

While some small business owners are “very cost conscious” and can be tempted to call the ATO straight away to argue their case instead of paying for an accountant’s consultation, McKellar advises taking the time to gather the necessary documents and asking your adviser about how to communicate with the ATO.

“Generally, most dealings with the ATO are on terms of 28 days. If it is a big or complex matter, they can grant you additional time, it’s just a matter of you or your adviser contacting them and saying that you need that,” he says.

Be upfront with any missing pieces

Most importantly for small business owners, the biggest trouble that can come when the tax office questions discrepancies in your information is when there is an active effort to hide something, McKellar says.

“In the first instance, if they’ve contacted you, they have identified something may be wrong — they are not out to get you,” he says.

If a business owner or individual realises there has been an oversight in reporting, it’s critical this is admitted straight away.

“You go back and basically let them know that you’ve missed something, and whatever reason for it,” McKellar says. 

The ATO advises that if a taxpayer receives a letter, they must give notice if they disagree with the amended tax assessment attached to that letter within the timeframe listed in the communications. There are a variety of templates for providing “supporting information” that the office provides for use in challenging a letter from the ATO.

This makes maintaining records from previous financial years incredibly important, says McKellar, as you must be able to provide evidence when explaining any concerns raised.

“Some people are just terrible at record keeping, but it is often relatively easy to obtain records from places like your bank,” he says.

Working with your tax agent should make this process much easier, as they are often best-placed to communicate about an individual’s tax affairs.

“It probably comes down to the fact that if you’re an individual and you call [the ATO] up after getting a letter and just accept what they say, you might even end up just paying something that you shouldn’t have to,” he advises.

“Whereas when questions come back to us [as accountants], we often have the answers.”

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