ATO reviews and audits: managing clients and engaging with ATO audit teams

This article was originally published in CCH iKnow.

To many taxpayers and their tax advisors, the ATO is primarily a revenue agency, tasked with raising taxes – but the true picture is more complicated than that.

From its Corporate Plan, the ATO says:

The ATO’s purpose is to contribute to the economic and social wellbeing of Australians by fostering willing participation in the tax and superannuation systems.
We have two aspirations for 2024:
-building trust and confidence
-being streamlined, integrated and data-driven.

‘Fostering willing participation’ and ‘building trust and confidence’ in the ‘tax and superannuation systems’ requires the ATO demonstrating some ‘carrots’ for those who comply voluntarily and the judicious application of some ‘stick’ along the way for those who may not otherwise be too ‘willing’ to do so.

The ATO’s Annual Report each year shows that the vast majority of revenue and transfers comes from ‘voluntary compliance’ with the tax and superannuation systems, while a smaller component flows from ATO compliance activities.

There is a defensible view that these relatively high levels of voluntary compliance are directly supported by the effectiveness of the ATO’s methods for detecting and dealing with areas of non-compliance.

Some of those impacts flow from the role of ATO compliance action in providing both specific and general deterrence, but an even larger element may be due to the community perception of how much they have ‘trust and confidence’ in the ATO’s administration of the tax and superannuation system.

The ATO approaches compliance through the application of various engagements like risk reviews and audits. Determining when and how these products will be applied is based on the application of the ATO’s compliance model.

Compliance model

In a sense, the vertical axis in the compliance model looks at the intensity of ATO interventions, which then feeds into how much the ATO will need to resource those client engagements.

In turn, the ATO uses its data-driven understanding of the relevant taxpayer/s in a risk population to engage with those clients in ways that are tailored to the client’s circumstances and their behavioural drivers.

In theory, the ATO engages with taxpayers using a range of approaches that are supposed to fit under the philosophy and values embodied in the Taxpayers’ Charter, which states:

Our relationship with you is based on mutual trust and respect. We nurture that relationship by:
- providing you with service that is professional, respectful and timely
treating you fairly and respectfully
- engaging with you based on your circumstances and previous compliance behaviour
- making it as easy as possible for you to get things right
- supporting those who want to properly participate in these systems
- being open, transparent and accountable in our dealings with you and the community
- delivering our services in the most effective and efficient way.

In practice, the client experience in a review or audit context can vary widely, depending on where the ATO sees the client sitting within the risk population using the lens of the compliance model.

Running up the vertical axis of the compliance model, the range of intensity of ATO compliance engagement products ranges from low-intensity portal, phone or email queries, to correspondence reviews and then to more extensive and intensive reviews or audits.

In practice, for many practitioners and their clients, a deep and long ‘review’ can feel very much like an ‘audit’.

Perhaps the most challenging client engagements arise when the ATO has more serious concerns about a taxpayer’s potential involvement in specific types of non-compliant activity – such as are often targeted by ‘Taskforces’, like those for Serious Financial Crime, Tax Avoidance, Trusts or Phoenix risks.

Once a taxpayer is subject to these ‘pointy-end’ of the compliance model approaches, it can become difficult to change the initial ATO risk assessment, but as advisors, we need to try to do so by providing context and supporting evidence to the extent possible.

There are also special programs of review targeting larger public and private groups – under the Tax Avoidance Taskforce funding provided to the ATO. Programs like the ‘Next 5,000’ are using ‘Streamlined Assurance Reviews’ to look at the population of wealthier private groups to assess their tax risks and then may target specific areas of concern through further specific reviews or audits.

The ATO’s stated aim of the program is “….to increase ongoing willing participation by applying our justified trust methodology in our one-to-one tailored engagements. The program also focuses on prevention rather than correction through providing public advice and guidance on issues relevant to the Next 5,000 population. An aim of the program is to determine whether the ATO can have justified trust in the HWPG’s systems.”

Better engagement and the ATO ‘risk hypothesis’

The case law indicates that the Commissioner is generally free to conduct whatever enquiries may seem appropriate within the ATO’s suite of powers. The Commissioner’s assessment powers are predicated on the use of information and the ATO’s access and information-gathering powers are directed to providing sufficient information to allow such assessments to be made.

Aside from limited technical challenges on use of powers, this means that taxpayers and their advisers can’t generally argue about ‘relevance’ or prevent ATO auditors from raising queries. However, there are still some useful approaches to better engaging with the ATO team to try to understand and influence how the relevant ATO case may proceed.

To better manage the process, advisors should try to get the ATO to unpack ‘Why’ the ATO are asking ‘What’ they are raising with the client and ‘How’ this may best be addressed. The ATO has publicly stated that they will be transparent about their ‘risk hypothesis’ and what information may be required to assess that hypothesis.

Understanding that ‘risk hypothesis’ can help advisors do two things: help to allay ATO concerns where possible through managing the flow of information/evidence and/or to highlight where the client may need to consider their options (like making voluntary disclosures) on the relevant issue.

From experience, one of the most important things that an advisor can do to influence the course of an ATO review or audit is to provide the taxpayer’s context and their perspective on the relevant transactions as early as possible in the ATO enquiries.

It is far harder to shift an existing position than it is to influence the formation of such a position – so we get one opportunity to provide a first impression on behalf of the taxpayer.

Sharing the taxpayer’s narrative with the ATO team at an early point can therefore be vital to successful mitigation or resolution of any resulting dispute.

To join the discussion on how to better manage ATO reviews of audits in practice, register for the CCH Learning session with Bruce Collins from Tax Controversy Partners Pty Limited ‘ATO audits – Managing clients and engaging with the audit team’ that will be held Tuesday 26th July, at 10.30am.