The ATO has announced that it will scrutinise every tax return lodged during Tax Time 2019 as part of its ongoing focus on "closing tax gaps".

Assistant Commissioner, Karen Foat, said taxpayers who have done the wrong thing may be subject to an audit, even if the over-claim of deductions is minor. Third party data indicating under reported income, and deductions that appear high compared to people with a similar job and income level, tend to raise concerns, Ms Foat said. 

While the ATO contacts around two million people each year about their returns, in most cases, Ms Foat said an audit is not the ATO's first action. If the ATO does decide to conduct an audit, it will contact the taxpayer and/or their tax agent to make further enquiries of evidence to support the claims in question. The ATO may also request information from third parties (ie employers) to verify expenses, and depending on the behaviour of the taxpayer, it may apply penalties or seek to prosecute.

Once the ATO has been in contact with a taxpayer to review claims, "it is important to be honest and get the matter resolved quickly". The ATO notes that taxpayers are more likely to face penalties if they aren't honest. If a taxpayer thinks they may have made a mistake, or there is an error in their tax return, the best thing to do is "fess up" as soon as possible, Ms Foat said.

Case studies

The ATO has set out more detailed information by way of case studies, the outcomes of which range from refunds in the taxpayer's favour to prosecution for making false and misleading statements in tax returns. The case studies typically involve work-related deductions for travel, clothing and motor vehicles.

For example, a taxpayer had claimed $20,000 in self-education expenses related to his MBA. When the ATO contacted the taxpayer to ask for information about how his studies related to his work, the taxpayer provided receipts for expenses such as tuition and textbooks, and was able to explain how these costs related to his work as a business analyst. The ATO accepted these expenses and allowed the deductions.

However, the ATO denied other deductions claimed by the taxpayer for headphones and a sports backpack.

The taxpayer believed he was entitled to do so because he used them for study sometimes but the ATO explained that the items were private in nature and not deductible. As the taxpayer had taken reasonable to care and had made an honest mistake, the ATO did not apply a penalty but reduced his refund.

Most of the time the ATO will be looking for documentation or evidence to support your deductions or claims. It may even contact third parties such as your employer to verify certain deductions (ie clothing/uniform, possible reimbursed expenses, or whether the expense was related to earning your income). Therefore, good record keeping throughout the year is essential to defend against any audit.

You may be wondering why the ATO is targeting such small fry when multinational companies get away with paying minimal tax. According to the ATO, it understands that most taxpayers over-claim by a little, but small amounts of overclaiming by a large number of people adds up to $8.7bn less each year in revenue collected. So, by its thinking, it really is a case of a every little bit counts.

If you're subject to an audit, it's not always doom and gloom. In some cases, you may get a higher deduction if the ATO discovers that you haven't claimed something you're entitled to. For example, you may be entitled to a deduction for depreciation on a laptop or other technology used for work but had incorrectly calculated the claim or omitted it altogether.

In the event of an audit and you're found to have over-claimed, the ATO may apply penalties depending on your behaviour. If you're found to have over-claimed based on a genuine mistake, for example, if you've claimed the costs which are private and domestic in nature that are sometimes used for work or study (eg sports backpack or headphones), the ATO may choose not to apply penalties.

However, in cases of fraudulently claimed deductions, the ATO will apply penalties in addition to requiring the repayment of any refunds issued. It notes in extreme cases, prosecution through the courts may be pursued. The ATO gives an example where a taxpayer was convicted of making false and misleading statements in their tax return which resulted in the repayment of the refunds totalling $45,000, a fine of $3,000, penalties totalling $20,000 as well as court costs. The claims related to travel, clothing, and work-related expenses which were paid by the employer, as well as charitable donations to an organisation that was not registered as a DGR.