ATO Audit: Responding for a Client

To respond to an ATO audit for a client, confirm the notice and scope, reconcile the requested records and send an authorised response. Review proposed adjustments before finalisation, then assign the payment or dispute tasks that follow.

Read the Audit Letter and Confirm Its Scope

Read the ATO audit letter to identify the taxpayer, tax periods and issues under examination, then record the requested response and its deadline. Separate the client’s personal affairs from each company or trust named in the notice.

A verification enquiry can ask you to explain a particular mismatch or substantiate a claim. A review examines a potential compliance risk. An audit involves a deeper examination of the relevant facts and tax treatment. A review can end without an audit, and the ATO can start an audit directly.

Confirm an unexpected communication through the practice’s ATO online services or an independently obtained official ATO contact channel. Use the reference number to confirm the officer and request. Avoid sending client records through an unverified email link.

Before responding, confirm that the practice has authority to act for the named taxpayer. Agree who will speak to the ATO and who approves the response. Record whether the engagement covers the audit response, specialist advice and any later dispute, including the basis for professional fees.

Ask the client to preserve relevant records, including electronic files and correspondence. Check whether existing tax audit insurance could cover professional response costs and whether notification is required.

Understand Selection and Review Periods

ATO audit selection can follow a data mismatch, an unexplained claim or a transaction requiring closer examination. The selection signal tells you what to investigate in the client’s records. It does not establish that the client has underpaid tax.

The ATO’s landlord insurance data-matching protocol explains how policy and claim information helps identify rental income and deduction risks. A mismatch between those records and a return needs reconciliation. For deductions, establish what the client paid and how the expense relates to income-producing activity.

There is no reliable individual audit frequency to apply to every client. A published program or population-level result cannot tell you when a particular individual will be audited. Address the issue in the notice instead of promising that a certain claim size avoids selection.

Separate Enquiries From Amendment Limits

How far back the ATO can examine depends on the purpose of the enquiry and the relevant tax law. Information-gathering powers and assessment amendment periods answer different questions.

Section 353-10 of Schedule 1 to the Taxation Administration Act permits written notices requiring information, evidence or documents for administering a taxation law. An older acquisition document can still explain a capital gain in a later return. An ordinary amendment period is therefore not a blanket limit on every document request.

For income tax, section 170 generally provides a two-year amendment period for many individuals and qualifying small or medium businesses. Other taxpayers generally have four years. These periods run from the notice of assessment and have qualifications, including certain partnership, trust and scheme circumstances.

Fraud or evasion can permit amendment at any time. Objection outcomes and review or appeal decisions have separate exceptions. Extensions can also apply, including by written taxpayer consent or court order. Obtain advice before consenting to an extension.

A qualifying small or medium business can also request an amendment within four years under the specific taxpayer-application rule. That rule does not give the ATO a general four-year audit amendment period for every small business.

GST assessments have their own period-of-review rules, generally four years, with extensions and exceptions. Identify the assessment type and applicable provision before giving a client an ATO audit time limit. There is no single statute-of-limitations answer covering income tax, GST and every enquiry.

Agree the Audit Timetable

An ATO audit’s duration depends on its scope, the availability of evidence and the issues still in dispute. A missing purchase history takes different work from a clear mismatch supported by a bank statement.

The ATO’s published audit approach for private groups describes an audit management plan with scope, an expected completion date and milestones. Use the applicable ATO guidance and the client’s notice to agree the timetable. An expected completion date is not a guaranteed finish date.

Record revised milestones when the ATO changes the scope or needs further evidence. If progress stalls, identify the outstanding request and seek an explanation through the officer or escalation contact.

Build the Evidence File

Build an evidence index that connects every ATO request to the records and explanation answering it. Assign a preparer and reviewer to each issue so a colleague can trace the response without reconstructing the file.

For each request, record its reference, relevant period, deadline and status. List the source files, reconciliation and explanatory workpaper beside it. Mark a missing record explicitly and record who will retrieve it.

Match Records to the Issue

Audit issue	Records to gather	Reconciliation to prepare
Property and capital gains	Acquisition and sale contracts, settlement statements, ownership and use history, improvement invoices and previous claims	Trace proceeds and cost-base components, then explain any exemption or apportionment claimed
GST	Sales and purchase records, tax invoices, credit notes, bank transactions and lodged activity statements	Reconcile the relevant accounts to the activity statement and explain timing or coding differences
Deductions	Receipts, payment records, business-purpose evidence and any required usage records	Match each amount to the claim and explain private-use exclusions or reimbursement

Keep original records separate from workpapers prepared for the audit. Label reconstructions and explain their source. A newly written client explanation can clarify events, but it must not be presented as a contemporaneous record.

In a fictional rental-property example, the return claims $6,000 in repairs. The evidence file contains a $2,000 repair invoice and a $4,000 invoice for replacing an entire asset. Separate the invoices and assess the replacement’s tax treatment before accepting the original deduction. The $4,000 difference in claimed expenses is not itself the income tax shortfall.

Identify communications that may need legal professional privilege review before disclosure. Obtain the lawyer’s assessment of potentially protected material and any proposed disclosure. Do not decide privilege from a filename or assume that copying a lawyer protects an existing business record.

Keep an exact copy of every response and attachment sent to the ATO. Record the version, recipient, channel and receipt so later requests can be matched to what the ATO already holds.

Review and Send the Response

Send a response only after the factual reconciliation and tax review explain each requested issue. Use these steps to make the response traceable from the ATO’s question to the supporting record.

1. Reconcile the facts. Compare the return or activity statement with source records and the client’s explanation. Resolve conflicting amounts or identify the unresolved difference explicitly.
2. Review the tax treatment. Check the law for the relevant period and document why each claimed deduction, exemption or GST treatment applies. Have a colleague review material conclusions.
3. Separate any correction. If the work identifies an error, assess the required voluntary disclosure or amendment action. An attachment answering a question does not automatically complete the approved disclosure requirements.
4. Obtain the necessary client approval. Confirm disputed facts, proposed concessions and instructions on any adjustment. Keep the approval with the version the client reviewed.
5. Send the response through the agreed channel. Answer each request in order and identify the supporting attachments. Confirm that the recipient can open the files and retain the receipt.
6. Update the request register. Record what is complete, what remains outstanding and the next deadline. Compare the receipt with the attachment index before marking the response sent.

If a record is unavailable, explain the reason and propose how the gap will be addressed. Ask for an extension before the deadline when needed. An extension request does not itself change a formal notice’s due date. Retain confirmation of any agreed change.

A formal information notice, possible fraud or evasion allegation, privilege issue or threatened prosecution requires prompt legal assessment. Use a tax specialist for a technical issue outside the practice’s expertise and a valuer where an unsupported valuation drives the adjustment. Agree the specialist’s task and responsibility with the client.

Work Through Proposed Findings and Penalties

Compare every proposed adjustment with the evidence supplied and the law applied before advising the client to accept it. Record whether you agree with the facts, the calculation and the legal conclusion separately.

The ATO commonly provides a position paper before finalising an audit and gives the taxpayer an opportunity to respond. Some higher-risk cases follow a different sequence. Read the actual correspondence and record the response deadline.

If the proposal overlooks a record, identify the attachment and explain which finding it changes. If the dispute concerns interpretation, state the point of disagreement and supporting reasoning. Keep agreed adjustments separate so an unresolved issue is not mistaken for a concession.

Separate Tax, Penalties and Interest

Component	What it concerns	What to check
Additional tax	The corrected tax liability	Tax treatment, arithmetic, offsets and amounts already assessed or paid
Administrative penalty	The applicable penalty provision and conduct	Reasons, relevant behaviour, reductions, relief and remission
Interest	The statutory charge for the relevant shortfall or unpaid liability	Charge type, balance, period, rate and remission decision

The ATO’s reasonable-care ruling distinguishes carelessness, recklessness and intentional disregard. For false or misleading statements, reasonable care affects penalty liability. Other penalty provisions, including those concerning reasonably arguable positions, require separate consideration.

Preserve evidence of the client’s instructions, records supplied and advice obtained. Using a registered agent does not automatically remove every penalty. Any relevant safe-harbour conditions need their own assessment.

An eligible voluntary disclosure can reduce a penalty, with the result depending on timing and the statutory conditions. Disclosure after audit notification can still qualify for a reduction in applicable circumstances. Cooperation does not automatically erase additional tax or interest.

Shortfall interest can apply to an increase in income tax identified through an amended assessment. General interest charge can apply to overdue liabilities. Review remission separately under the ATO’s interest guidance. A penalty reduction is not an interest-remission decision, and there is no universal audit-penalty formula.

Close the Audit and Confirm Next Actions

Close the audit response file by reconciling the final written outcome with the client’s assessments and account. Confirm that agreed changes appear correctly and that the file still identifies every disputed issue.

Record the next tasks separately, with an owner and deadline for each:

• Payment: reconcile the balance and due date, then obtain instructions on payment or a payment arrangement.
• Amendment: identify any authorised correction still required for another return or period.
• Dispute: identify the reviewable decision and preserve the relevant objection or review deadline.
• Record retention: retain the evidence, approvals and final notices for the applicable period, including any longer retention needed for an ongoing dispute.

An ATO objection is a separate action from responding to proposed audit findings. A complaint or discussion with the audit officer does not replace it. Lodging an objection also does not automatically suspend the payment due date.

Give the client a closing record of the outcome, amounts payable and outstanding instructions. Keep the final response index, ATO outcome and client notification together. Confirm whether further dispute work needs a separate engagement before marking the audit response engagement complete.

Accurate lodgment and adequate records support compliance, but cannot guarantee that a client avoids another audit. Correct the record-keeping or review failure found in this audit and assign the next check before the relevant return is lodged.