Every accountant knows that reviews or audits of your client’s tax returns or financial compliance obligations can sometimes be unavoidable. When an audit hits, this is rarely a reflection of the work put into preparing the return and is more often due to a specific crackdown by the Australian Taxation Office (ATO) or other government revenue authorities.
The below pie chart shows the distribution of Audit Shield claims activity in Australia*.
* Correct as at January 2022.
These are the highlights from the five most frequent claim types amongst accounting firms offering Audit Shield in Australia between 1 July – 31 December 2021:
1. Employer Obligations Audits and Reviews (PAYG/SG/FBT)
For accountants this may be the most frustrating type of audit activity as it is one where accountants are not always in control. In general, accountants do not get involved in their client’s payroll preparation or maybe see it once a year (when it is too late) at tax return preparation time.
Throughout 2020 and 2021, many Australian businesses will not have not kept up to date with their superannuation guarantee (SG) obligations because of COVID-19 business cash flow pressures and this has been receiving a lot of attention from the ATO. With Single Touch Payroll (STP), the ATO can easily identify and flag under payments of SG and we have seen STP reporting as a big driver of ATO SG audit activity in 2021.
Claim proportion (frequency) 1 July – 31 December 2021: Employer Obligations Audits and Reviews (PAYG/SG/FBT) accounted for 13.70% of all Accountancy Insurance claims.
2. BAS Audits and Reviews (Pre & Post Assessment)
The Accountancy Insurance Claims team noted a decrease of around 5% in BAS Audits and Reviews (Pre & Post Assessment) over the second half of 2021 when compared to the 2020-2021 financial year to 31 June. This has dropped BAS Audits and Reviews into the number two position of all audit categories.
The drop, brings the frequency more in line with what the Claims team usually saw prior to the commencement of cash flow boost payment activity statement audits and reviews.
Claim proportion (frequency) 1 July – 31 December 2021: BAS Audits and Reviews (Pre & Post Assessment) accounted for 12.62% of all Accountancy Insurance claims.
3. Income Tax (Full/General/Combined) Audits and Reviews
Following closely behind BAS Audits and Reviews in claim frequency is Income Tax which covers a vast array of different types of ATO audit activity that can be linked back to the lodged income tax returns of taxpayers.
Claim proportion (frequency) 1 July – 31 December 2021: Income Tax (Full/General/Combined) Audits and Reviews accounted for 12.41% of all Accountancy Insurance claims.
4. ATO (High Wealth) Audits and Reviews
Although connected with the Income Tax (Full/General/Combined) Audits and Reviews category, this category of ATO (High Wealth) Audits and Reviews demonstrates just how much of a focus the ATO has on reviewing those that fall into the high wealth category.
The Next 5,000 Streamlined Assurance Review program that commenced in October 2020 is a big driver of audit activity here and it is expected to remain high in 2022.
Claim proportion (frequency) 1 July – 31 December 2021: ATO (High Wealth) Audits and Reviews accounted for 8.20% of all Accountancy Insurance claims.
5. Payroll Tax Investigations (All States)
Payroll Tax Investigations (All States) continues to be a major focus area by all State Revenue Offices around the country.
Issues identified in Payroll Tax Investigations include:
- Grouping of related employer entities
- Contractors
- Employees based in other states (requiring registration in other states)
- Employers not being registered when data (e.g. STP) shows they are over the Payroll Tax registration threshold
- Data sharing with other government authorities (ATO, WorkSafe, icare, etc.) is also a key contributing factor in identifying employers to target for Payroll Tax Investigation activity.
Claim proportion (frequency) 1 July – 31 December 2021: Payroll Tax Investigations (All States) accounted for 7.66% of all Accountancy Insurance claims.
Audit activity outside of the accountant’s control
Our team regularly hear from accountants that they “don’t need to worry about tax audit insurance as they always take the conservative approach when preparing their client tax returns” and as a result, they are “not on the ATO audit radar”.
However, there are many ATO and State & Federal government revenue authority audits and reviews (including three of the highest claim types noted) where quite often the accountant only becomes involved after the audit activity has started.
Nearly 50% of the audit activity the Claims team recorded between 1 July – 31 December 2021 were for claim types where the taxpayer (your client) and/or a bookkeeper may have prepared the lodged returns or managed the employer obligations compliance that were under audit and the accountant had no involvement nor performed any review prior to the audit activity being instigated.
Employer Obligation Audits and Reviews – 13.70%
BAS Audits and Reviews – 12.62%
Payroll Tax Investigations – 7.66%
WorkCover – 4.21%
ATO Excess Super Contributions – 3.99%
Land Tax – 3.67%
Covid-19 ATO JobKeeper Payment Audits – 1.40%
Stamp Duty – 1.40%
Total: 48.65%
As official reviews, audits, investigations and inquiries of taxpayer lodged returns and their taxation affairs in general continue to remain prevalent, the best course of action is to ensure that your accounting firm has a comprehensive tax audit insurance solution such as Audit Shield in place.
Audit Shield is an end-to-end tax audit insurance solution that covers accountants’ professional fees and the fees of experts, should your client be subject to ATO or other government revenue authorities’ initiated audit activity in relation to lodged returns or financial compliance obligations.
Thousands of accounting firms have made the decision to implement Audit Shield. These accounting firms benefit, as they are not out of pocket for the additional work they need to undertake on behalf of their clients. They also avoid an awkward conversation regarding additional, yet necessary, professional fees incurred because of tax audit activity.
Audit Shield is a win-win and no net-cost solution for your accounting firm.
Contact Accountancy Insurance
We would love to hear from you.
About Accountancy Insurance
Thousands of accounting firms offer our tax audit insurance solution, Audit Shield to their clients. Find out why.