What to do when the ATO contacts you

Garreth Hanley:
This is With Interest, a business finance and accounting news podcast, brought to you by CPA Australia.

Dr Jane Rennie:
Hello, and welcome to With Interest. I'm Dr. Jane Rennie, Head of Media and External Engagement at CPA Australia. We're now well into tax time 2023. Indeed, if you don't have a tax agent, the deadline for lodging, your return is approaching. That's the 31st of October. For many listeners, you may have already lodged your return and inevitably some listeners may have been contacted by the Australian Taxation Office about their return. Being contacted by the ATO can be a stressful experience for taxpayers and for that matter, their advisors. But it helps if you know what to expect and how to respond. Joining me to explain what to do if the ATO does come knocking is CPA Australia's Head of Policy and Advocacy, Elinor Kasapidis. Welcome to with interest Elinor.

Elinor Kasapidis:
Thanks Jane.

Dr Jane Rennie:
Elinor, to start with, how does the ATO typically contact taxpayers if it has a question about their return and say, if you don't have a tax agent for your return?

Elinor Kasapidis:
So if you don't have a tax agent, and there are a lot of self-lodgers in Australia, the ATO will generally reach out through your myGov. So the same way that you lodge a return, the ATO will reach out with a notice. They might also give you a call, identify themselves and say, "Hi, we're from the ATO. We just have a couple of questions about the tax return you've lodged." If you do have a tax agent, which again, many Australians do, particularly if they have more complex affairs like a rental return or something like that, they will generally get in touch with the tax agent first. And remember, tax agents will often field questions like this from the ATO, and they'll get in touch with you to let you know.

Dr Jane Rennie:
I know that tax scams do increase around this time of year. So if I got a phone call from someone saying, "Hi, I'm from the ATO," I might be a little bit worried about that being a scam. What should I do in that circumstance?

Elinor Kasapidis:
And that's not a bad response to have. It's important to keep an eye out for scams and haven't we all been receiving those, "Your tax refund is ready," SMSs that you sort of wonder, "Hang on a sec, I didn't lodge my tax return yet." So get the contact details of the ATO officer and call them back on their dedicated phone lines because they have a centralised system and they'll be able to pick up when you call them back. What you don't want to be doing is providing personal details over the phone. And certainly if they start asking for bank account details and things, that's a sign that you need to check a bit further.

Dr Jane Rennie:
What are some of the reasons that the ATO might contact someone? Is it always the case that they think you've done something wrong?

Elinor Kasapidis:
It's not about doing something wrong because the tax system is complex and it is easy to make a mistake. All of the tax returns that are lodged do go through the ATO's data analytics system. So they have these digital checks and balances where they might compare your return against others that look like you, or there might be something in there that's a little bit different from previous returns, for example. So generally it'll be a verification check. They'll be asking to see records to prove your claims, or there might be something that doesn't quite match. So they've received additional information, they've data matched it, and the numbers don't align. What's important though is they should explain to you why they're calling, what the issue is. So for example, work-related expenses or perhaps a rental claim that you've made, or perhaps a missing income that they've picked up from one of the gig economy websites. So you should have a pretty good idea by the end of the call as to what they're asking about.

Dr Jane Rennie:
Will their inquiry relate to the current tax year or could they ask about five years ago?

Elinor Kasapidis:
For most people, it will be about their most recent tax return. However, there are these things called periods of review. So that will differ for different kinds of taxpayers. So from two years onwards. So what might happen is they'll call about a particular claim in your tax return this year, but if the same error is apparent in prior years, it doesn't stop them from opening up maybe last year's return or even the return before that.

Dr Jane Rennie:
And if you've already received your return, does that mean that the ATO won't contact you?

Elinor Kasapidis:
Unfortunately, it's not a get out of jail free card, no. Because they have that period of review of at least two years, what that means is they can come across information later on. So they do have a big data matching machine where they'll go out and obtain information about rental income or taxi driving or whatever it might be. So definitely they will, what they call post lodgement, follow up if they do come across information that you might've missed.

Dr Jane Rennie:
Elinor, you mentioned a two-year review period. Does that mean that's as long as I need to keep my tax records for so I can throw out those three year old tax records?

Elinor Kasapidis:
Once again, you do need to have the records to prove any claims. And the legal requirement is it does vary once again. So we tend to recommend keep those records for up to five years just in case. But certainly you don't need to hang on to it forever.

Dr Jane Rennie:
Is it the case that if the ATO does contact someone, they should do the equivalent of what in crime shows would be termed lawyer up, but in this case, I guess we mean speak with a CPA.

Elinor Kasapidis:
It's always a really good idea to have someone in your corner, particularly when you're dealing with something like tax law, which can be complicated. So we're not talking about criminal offences here, but you do need to understand what the ATO is after and what the issues are. So a tax agent, they're familiar with the process, they know the laws, they probably have helped you with your tax return, or you can go and seek advice if you've done it yourself. So they can help you get it right. They can also let you know which records you do have. Maybe you have made a mistake that they pick up and they can also help you resolve the issues with the ATO and represent you.

Dr Jane Rennie:
Right, so say I am doing this on my own, how long am I likely to have to respond to the ATO? And I'm not suggesting that anyone drag their feet, but is say a same-day response required or will I have a little bit longer?

Elinor Kasapidis:
The ATO has a thing called the taxpayer's charter, which sets out your responsibilities but also your rights, and basically they need to give you a reasonable time to respond. So again, depending on the type of inquiry, if it's just asking for a few receipts and diaries that you should already have on hand, the time required to respond might be a little bit shorter than an inquiry about say, rental returns and rental income. So the general standard is 28 days. And certainly if you do need more time, you can always get in touch and ask for that extra week or so.

Dr Jane Rennie:
Given that there is time then to make a plan, what would you suggest that people do before responding to the ATO?

Elinor Kasapidis:
Like I said before, it's really important to understand what they're after. So narrow down their inquiries into being quite specific. So what is the issue? What's the label on the tax return that they're asking about? What information and records do they need to be able to make a decision? So it's that back and forth about where do you need me to get it from? When do I send it to you? And that will also allow you to progress the inquiries. So what I mean by that is get the officer's details, have a record of the conversation and make sure that you are responding to them as they need to.

Dr Jane Rennie:
And having established what they want and why. I suppose I then need to look at the facts of my circumstances. What could that involve?

Elinor Kasapidis:
Think about the situations. So for example, what records do you have available? Where are they? Did you show them to your tax agent? Can they help you work through them to make sure that you're providing the tax office with the right evidence? The other thing is certainly you might need to have diaries, for example, if you have a rental property that you need to apportion. So again, what records, what other evidence do you have to show, who was using the property at what time? So it's really about evidence, which is why we go back to, no, it's not like dealing with the police and you need a lawyer, but the approach is very much the same. So dates, kilometres, receipts, invoices, they're the things you want to start pulling together.

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Dr Jane Rennie:
And when the ATO has examined that evidence and they have completed their inquiries, what are some of the potential outcomes that might occur from that?

Elinor Kasapidis:
So sometimes it'll be a tick. So you have all the records, everything is in order, and the return will go through, you'll get your results, perhaps a refund. Other times you might find that you've made a mistake, perhaps you don't have a receipt for something that you've claimed. It's best to come forward and talk to the ATO officer to correct the return. And what that does is reduce the potential penalties that can be applied. The other thing is if you come across mistakes from previous returns that you've made, you can also amend those just to make sure you are getting it right. And once again, the penalties should be lower. It can be a challenge sometimes though where you go into an audit situation. So that is where you believe you have a reasonable position that you are arguing, but the ATO may not necessarily be accepting the evidence or the argument that you're putting forward. So in that case, what they might do is amend your return to the way that they see fit. So it's the commissioner's view, and then there are objection and dispute processes that will kick in then.

Dr Jane Rennie:
And if the ATO did amend your return, in addition, can the ATO levy fines?

Elinor Kasapidis:
Yes. So there are penalties at different levels depending on what they call your behaviour. So were you cooperative? Did you voluntarily disclose, and have you identified all of the issues? And that will determine the level of penalty that you get. And there are also interest charges if the tax was due a while ago. So they're both aspects that you can apply or ask to have them taken off.

Dr Jane Rennie:
Does the taxpayer have any say in what the different outcomes are?

Elinor Kasapidis:
I think it's perhaps not a say. You can certainly put your position forward and ask that the commissioner consider it, but they certainly are obligated to outline the options. So once again, that taxpayer's charter is a really good document. It's a lot shorter these days. And so it really explains how they are supposed to guide the taxpayer or their advisor through the process, how they're supposed to keep the taxpayer or their advisor informed. And also how to raise complaints or objections or disputes if things become challenging.

Dr Jane Rennie:
You've just mentioned objections then. So what does happen if I'm not happy with the ATO's decision? Is there something I can do about it? And I don't mean if I'm just cross that I had to pay more tax, but if I have a legitimate concern about the conclusion that the ATO has reached?

Elinor Kasapidis:
Certainly there are different pathways depending on what the issue is. So for example, if you are unhappy with perhaps the way that the process unfolded, the ATO has a complaints mechanism that you can put through. And beyond that, there's also the Inspector General of taxation who's an independent ombudsman. The other pathway is if you are in disagreement about the legal position that the ATO or the commissioner has taken, you go down what's called an objections pathway. So you write a very long submission that sort of basically compares your argument to the law, shows the evidence. And what it does is it provides another opportunity to have the decision reviewed by a completely separate part of the ATO.

Dr Jane Rennie:
Do taxpayers often object to the ATO's decisions?

Elinor Kasapidis:
No, the number of objections is relatively small. And the ATO does publish the statistics in their annual report. It's a real challenge because every taxpayer has their own choices and sometimes it may be easier to pay a couple of thousands of dollars in tax, rather than necessarily having to pay a lawyer tens of thousands of dollars to run an objection. So even if you have a legal argument, there are a lot of reasons why a taxpayer may not proceed. So I think that it's really around knowing where you stand, being informed and getting good advice. And also, like I said, talking with the ATO about the position and seeing whether you can negotiate something with them that's reasonable.

Dr Jane Rennie:
And I guess also, if you are considering appealing the ATO's decision, that might be a good time to speak with your tax agent rather than try to DIY it?

Elinor Kasapidis:
It is certainly something we recommend. I know that in the legal profession, they always recommend against self-representation. Again, tax law is very, very complicated and the ATO is a very big organisation with a lot of rules. So navigating it with someone, an expert who actually does this as part of their professional job, it's always better to have them in your corner.

Dr Jane Rennie:
That's all we've got time for today. Thanks very much to our guest expert, Head of Policy and Advocacy, Elinor Kasapidis. A link to CPA Australia's tip sheet on responding to ATO inquiries is included in the show notes along with a link to the taxpayer's charter. From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
This is With Interest, a business finance and accounting news podcast, brought to you by CPA Australia.