An ATO audit is something most taxpayers would prefer to avoid. Understanding what attracts the Australian Taxation Office's attention can help you prepare accurate returns and keep the records needed to support them.
The ATO uses information from employers, banks, government agencies, investment platforms and other sources to check what individuals and businesses report.
Differences between that information and your tax return may lead to further enquiries. Other factors, including unusual claims or compliance concerns, can also prompt closer examination.
An enquiry does not automatically mean you have made a mistake. The ATO may simply need more information to confirm your position.
What is the difference between an ATO review and an audit?
The ATO can examine tax affairs through different compliance activities. Not every contact is a formal audit.
ATO review
A review may focus on a specific issue, transaction or item in a tax return. The ATO may ask questions or request supporting documents.
ATO audit
An audit involves a more detailed examination of tax affairs. It may cover particular transactions, tax obligations or multiple periods.
The scope and process depend on the circumstances. A review can resolve an issue without progressing to a formal audit.
How does the ATO identify tax discrepancies?
The ATO operates data-matching programs that compare information reported in tax returns with information received from third parties.
Sources can include banks, employers, share registries, property authorities, online platforms and other government agencies.
The ATO also uses analytical methods to identify possible underreported income and overstated deductions.
A discrepancy may be investigated, but the ATO's own guidance explains that a mismatch does not automatically establish dishonest conduct.
You lodge a tax return. Employers, banks and other organisations also provide information to the ATO.
Data matching and risk assessment identify potential discrepancies requiring further consideration.
You may receive a request for clarification, records or an explanation of a claim.
The ATO may accept your explanation, seek more information or take further compliance action.
Seven common factors that may attract ATO attention
1. Income that does not match third-party records
One common reason for an enquiry is a difference between income reported in your tax return and information the ATO receives.
This can involve wages, bank interest, dividends, managed fund distributions, rental income or income from online platforms.
Some income may not appear in your pre-filled tax return when you begin preparing it. You remain responsible for reporting all assessable income.
Interest income missing from a return
You hold savings accounts with two banks. You include the interest from one account but overlook the other.
If bank reporting identifies additional interest income, the ATO may ask why it was not included.
Checking annual bank statements against your tax return can help identify the omission before lodging.
2. Work-related deductions that cannot be supported
Work-related expenses must satisfy the applicable deduction rules and record-keeping requirements.
You generally need to have incurred the expense yourself, not been reimbursed and have a sufficient connection between the expense and earning your income.
Claims for vehicles, travel, tools, uniforms and working from home can require different supporting evidence.
A large deduction is not automatically incorrect. The important question is whether the claim is allowable and supported.
See RJS's guide to working-from-home and travel tax deductions for related considerations.
3. Rental property income and expenses that do not reconcile
The ATO collects rental-related information from property managers and other sources.
Its rental property data-matching guidance identifies errors involving omitted properties, incorrectly reported rent and capital expenses claimed as ordinary repairs.
If you own a rental property, reconcile the annual agent statement with your return.
Check that you report gross rental income and do not claim an expense twice.
You should also distinguish ordinary repairs from capital improvements and apply the correct rules for private use.
4. Business income that differs from payment records
Business reporting can be compared with information from merchant facilities, payment platforms and other third parties.
Businesses receiving cash, card and electronic payments should have systems that record all sales accurately.
Differences can arise from refunds, timing, fees or the way payment systems record transactions.
Keep reconciliation records explaining those differences.
Card receipts do not match reported sales
A café receives $420,000 through its card terminal during a financial year.
Its accounting records show a different figure because some payments were refunded and settlement dates crossed the reporting period.
The difference may be explainable. Daily sales records, merchant statements and refund reports can help demonstrate why the figures differ.
5. GST, PAYG withholding or superannuation discrepancies
Businesses have obligations beyond their annual income tax returns.
Activity statements, GST records, payroll reporting, PAYG withholding and superannuation obligations should be consistent with underlying transactions.
Inconsistent figures, missed lodgements or unpaid obligations may prompt enquiries or other compliance action.
If your business has outstanding tax liabilities, see ATO Tax Debt: What to Do When Your Business Owes Tax .
6. Capital gains that have not been reported correctly
Selling shares, investment property, cryptocurrency or other CGT assets may create a reporting obligation.
The ATO receives information about many asset transactions through third-party reporting and data-matching programs.
A sale does not always result in tax payable. Exemptions, losses, discounts and other rules may affect the calculation.
Keep acquisition dates, purchase costs, disposal documents and records supporting any exemption or concession.
7. Unusual transactions or arrangements requiring explanation
Certain transactions may receive closer examination because of their nature, complexity or potential tax consequences.
Examples include related-party dealings, private company payments, trust distributions and business restructures.
These arrangements are not automatically improper. Their tax treatment depends on the relevant legislation and the facts.
Maintain agreements, valuations, resolutions and other documents explaining the transaction and its commercial purpose.
ATO audit triggers at a glance
| Area | Potential issue | Records to review |
|---|---|---|
| Employment income | Differences from employer or other reported income. | Income statements, payment summaries and bank records. |
| Work deductions | Claims without sufficient evidence or work connection. | Receipts, logs, diaries and calculations. |
| Rental property | Missing rent, duplicate claims or incorrect capital deductions. | Agent statements, invoices and loan records. |
| Business income | Sales not reconciled with merchant receipts. | Sales reports, bank statements and refund records. |
| GST and payroll | Reporting differences or missed obligations. | BAS, payroll reports, invoices and ledgers. |
| Capital gains | Disposals omitted or gains calculated incorrectly. | Purchase and sale documents, cost-base calculations. |
What happens if the ATO contacts you?
The first step is to establish what the ATO is asking and the timeframe for responding.
Read the correspondence carefully. Confirm the relevant financial year, tax item or transaction.
If you are unsure whether a message is genuine, verify it through an official ATO contact channel or your registered tax agent.
Your response should address the specific questions and include appropriate supporting evidence.
If the ATO's information is incomplete or incorrect, explain the difference using your records.
If you identify an error, discuss the correction and any relevant disclosure options with your accountant.
Can you reduce the likelihood of an ATO audit?
There is no way to guarantee that the ATO will not review your tax affairs.
Accurate reporting and organised records can reduce avoidable discrepancies and help you respond when questions arise.
- Reconcile all income sources before lodging.
- Check pre-filled information against your own records.
- Claim only expenses that satisfy the deduction rules.
- Keep records supporting how each deduction was calculated.
- Reconcile business sales, GST and payroll reports.
- Record rental income and expenses accurately.
- Document asset purchases, sales and capital gains.
- Review trust and related-party transactions.
- Correct identified errors rather than leaving them unresolved.
- Ask your accountant to review complex or unusual transactions.
How long should you keep your tax records?
The retention period depends on the type of record and the relevant tax law.
Individuals generally need to keep records supporting their tax returns for five years after lodging, subject to exceptions.
For many business records, the general requirement is five years after the record was prepared or obtained, or the relevant transaction was completed, whichever is later.
Some records must be retained for longer. Capital gains tax records, for example, may need to be kept throughout asset ownership and after disposal.
Digital records can be suitable if they are accessible, readable and meet the applicable requirements.
Frequently asked questions
Does a large tax refund trigger an ATO audit?
A large refund does not automatically result in an audit. The ATO may examine claims where information appears inconsistent or requires supporting evidence.
Does the ATO audit every taxpayer?
No. The ATO uses a range of compliance activities, including data matching, risk assessment, reviews and audits. Not every taxpayer receives a formal audit.
Can the ATO see my bank transactions?
The ATO receives specified information from banks and other financial organisations through reporting and data-matching arrangements. It also has statutory information-gathering powers. This does not mean every transaction is routinely examined.
Can I be audited if an accountant prepared my return?
Yes. Using a registered tax agent does not prevent an ATO review or audit. You remain responsible for providing complete and accurate information.
What if I made an honest mistake on my tax return?
You may need to amend your return or provide an explanation. The outcome depends on the circumstances, including the nature of the error and applicable penalty rules.
How far back can the ATO audit?
The relevant periods depend on the tax type and legal circumstances. Amendment periods are not the same as the ATO's ability to seek information. Fraud, evasion and other exceptions can affect time limits.
Can I ask my accountant to respond to the ATO?
Yes. A registered tax agent can help review the ATO's request, gather records and communicate on your behalf where appropriately authorised.
Related RJS articles
Good records make an ATO enquiry easier to manage
An ATO review does not automatically mean your return is incorrect.
What matters is whether you can explain your tax position and provide appropriate evidence.
Reviewing your income, deductions and business records before lodging can help identify errors while they are easier to correct.
If the ATO contacts you, address the request promptly, understand the issue and obtain advice where needed.
Received a letter from the ATO?
Your RJS accountant can help you understand an ATO review or audit, assess the information requested and prepare a response supported by your tax records.
Speak to an RJS AccountantSources and further reading
Australian Taxation Office: How We Use Data Matching
Australian Taxation Office: How We Undertake Data Matching
Australian Taxation Office: Rental Property Data Matching
Australian Taxation Office: Business Record-Keeping Requirements
Australian Taxation Office: Supporting Documents for an Audit
Related RJS reading: Don't Rush Your Tax Return
Information current as at October 2026.
This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional adviser.
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