How the ATO is cracking down for tax time

In light of the almost 50,000 tips received by the ATO regarding tax avoidance or tax fraud in the 2024–25 financial year, accountants are being warned to exercise caution during this EOFY period.

According to principal lawyer at Astor Legal, Avinash Singh, there is a greater volume of cases to investigate.

While it is “unclear whether this is due to more emphasis by the ATO on these cases or whether it reflects more instances of tax fraud in the community”, it remains that the tax return period is both rife with incidents and under the microscope, perhaps more than ever before.

While over-claiming deductions is the biggest contributor to tax fraud cases, small businesses are also known to underreport income.

Singh said: “Many small businesses will attempt to reduce their assessable income or increase their deductions so that they fall into a lower tax bracket.”

“Individuals also tend to try to use deductions as a way of reducing their assessable income.”

However, he also noted that many cases of tax fraud are classified as accidental due to the difficulty of proving intent. In this way, the ATO “has shifted from a reactive approach to a proactive approach”, Singh said.

“For example, ‘data matching’ has been integrated into the ATO’s investigation process. This involved the ATO assessing the income and expenses of businesses compared to others in their industry. If the nature, amounts or percentages of deductions are significantly different to the rest of the industry, this will trigger an alert.”

In saying this, one of the biggest mistakes people make is one of the most basic: hanging onto evidence.

Holding onto receipts may not seem like a big issue at the time, but “if the ATO commences an investigation, it asks the taxpayer to justify their deductions. If there are no receipts or evidence that a deduction was a genuine business expense, then this could result in fines or even a criminal prosecution".

Beyond this, AI is affecting the guidance clients receive, which will only create issues down the road for them and any other involved parties. This goes for businesses as well, as they are not properly engaging with the process of identifying proper deductions and expenses, Singh said.

For lawyers and accountants involved in a case of fraud, Singh highlighted the importance of first identifying “the basis on which to defend the client”.

“If there is not, and it is a clear breach of the rules, then the next step is to correct the mistake, explain it and persuade the ATO that the taxpayer/business now has a procedure in place to prevent it from occurring again.”