When you lodge your tax return, you may assume that once your notice of assessment arrives, the process is finished. However, the Australian Taxation Office (ATO) has systems in place to identify tax returns and claims that may require further review.

This does not mean that taxpayers with unusual or large deductions have necessarily done anything wrong. The ATO uses data matching and analytical processes to identify potential discrepancies, including situations involving under-reported income or over-reported deductions.

For taxpayers, understanding these potential ATO audit red flags can help you make more accurate claims, maintain appropriate records and reduce the risk of problems if the ATO asks questions about your tax return.

How Does the ATO Identify Tax Returns for Review?

The ATO has access to information from a range of sources, including employers, banks, financial institutions and government agencies. This information can be compared with information reported in tax returns.

The ATO also uses analytical models to identify potential discrepancies. These may include situations where reported income appears inconsistent or deductions appear unusually high.

This means the ATO does not necessarily need to manually examine every tax return. Data matching and automated analysis can help identify returns that may warrant additional attention.

Being selected for review does not automatically mean a taxpayer has made an incorrect claim. The purpose may simply be to verify information and determine whether the reported position is correct.

What Are Tax Deduction Red Flags?

There is no single deduction amount that automatically means you will be audited.

Instead, certain patterns or circumstances may prompt the ATO to look more closely at a claim.

Potential areas of concern can include:

• Unusually high work-related deductions
• Claims that appear inconsistent with your occupation or income
• Expenses that appear partly private
• Claims without appropriate supporting records
• Information that does not match data held by the ATO
• Large or unusual changes compared with previous tax returns
• Deductions that cannot be adequately explained or calculated

The important distinction is that a red flag is not proof of wrongdoing. It is simply an indication that further information may be required.

Can High Tax Deductions Trigger an ATO Review?

High deductions can attract attention, particularly when they appear unusual compared with other taxpayers in a similar occupation or income range.

For example, John Saade of Latitude Accountants discussed a real, redacted ATO audit letter involving a management consultant who had claimed $36,911 in work-related expenses, compared with an average of approximately $2,178 for management consultants.

The difference did not automatically make the taxpayer’s claims incorrect. However, it provided a reason for the ATO to request supporting evidence and explanations.

This illustrates an important point: the size of a deduction is not the only issue; your ability to substantiate the claim matters.

If a large deduction is legitimate and you have appropriate records demonstrating how it was calculated, you may be able to explain and support the claim.

Work-Related Expenses the ATO May Examine

Work-related deductions are a common area of focus because taxpayers can claim a range of expenses when they meet the relevant requirements.

The ATO states that, generally, a work-related expense must meet three basic conditions:

1. You spent the money yourself and were not reimbursed.
2. The expense is directly related to earning your income.
3. You have a record to prove the expense.

Common categories include:

Car and Motor Vehicle Expenses

Vehicle expenses can become complicated when a car is used for both work and private purposes.

If you claim work-related vehicle expenses, you need to be able to demonstrate the work-related use and apply the appropriate calculation method.

The ATO may request records such as travel information, odometer readings, logbooks, receipts or other supporting documentation depending on the method used.

Travel Expenses

Work-related travel can include expenses such as:

• Airfares
• Accommodation
• Taxi and rideshare costs
• Public transport
• Parking
• Tolls

However, the expense must relate to eligible work-related travel, and private components generally cannot be claimed. Appropriate records are also required.

Working From Home Expenses

Working from home does not automatically make every household expense deductible.

The claim must be calculated using an eligible method and relate to work-related use.

Taxpayers should retain the relevant records supporting their calculation rather than simply estimating an amount.

Mobile Phone and Internet Expenses

Phone and internet costs can also contain both work and private use.

If you use a service for both purposes, you generally need to determine the work-related portion rather than claiming the entire bill.

Clothing and Laundry

Not every item of clothing worn to work is deductible.

Work-related clothing claims have specific requirements, particularly where the clothing could also be considered ordinary everyday clothing.

Keeping receipts and records showing what was purchased and why it qualifies can help support the claim.

Why Does Substantiation Matter So Much?

One of the biggest lessons from an ATO audit is that claiming an expense and proving an expense are two different things.

You may genuinely have spent money for work, but if you cannot demonstrate the expense and explain how you calculated the deduction, the ATO may question the claim.

For most work-related expenses, records need to show that you incurred the expense and support the amount claimed. The ATO generally requires taxpayers to keep relevant records for five years from the date the tax return is lodged.

Depending on the expense, useful records may include:

• Receipts
• Invoices
• Bank statements
• Employer correspondence
• Expense calculations
• Diaries or usage records
• Vehicle records
• Travel documentation

Electronic records can also be used, provided they contain the information needed to support your claim.

What Happens If the ATO Questions Your Deductions?

If the ATO identifies an issue, it may contact you and request further information or supporting documentation.

You may need to explain:

• What the expense was
• When you incurred it
• Why it was work-related
• Whether you were reimbursed
• How you calculated the deduction
• What percentage was work-related
• What records you have to support the claim

If the evidence supports your claim, you can provide it to the ATO as part of the review.

If you discover that a claim was incorrect, it is important to address the issue rather than provide information that does not accurately reflect your circumstances.

The potential outcome will depend on the nature of the issue and the ATO’s findings.

How Can You Reduce the Risk of Problems With Your Tax Return?

You cannot guarantee that your tax return will never be reviewed. However, you can take steps to make sure your claims are accurate and properly supported.

Keep Records Throughout the Year

Don’t wait until tax time to search for receipts and reconstruct expenses.

Save receipts and invoices as you incur expenses and keep calculations or other records where necessary.

Understand What You Can Claim

An expense being connected to your work does not automatically make it deductible.

Before claiming an expense, check whether it meets the relevant tax requirements and whether any private component needs to be excluded.

Be Careful With Large or Unusual Claims

A large deduction is not automatically wrong. However, you should be particularly confident that you can explain and substantiate an unusually large claim.

If your circumstances genuinely require significant work-related expenses, keep detailed records explaining the connection between those expenses and your income-earning activities.

Review Your Return Before Lodging

Take the time to review your income, deductions and supporting records before submitting your return.

Check that your figures are accurate and that you have evidence for the deductions you are claiming.

Does Being Audited Mean You Have Done Something Wrong?

No.

An ATO review or audit should not automatically be viewed as an accusation.

The ATO uses data matching and other analytical methods to identify potential discrepancies. It also states that being contacted because information does not match does not automatically mean it considers a taxpayer dishonest.

The best approach is to understand what the ATO is asking, provide accurate information, and seek professional advice if you are unsure about your position.

How Can an Accountant Help?

If the ATO questions your deductions, having an experienced accountant review your position can provide valuable support.

An accountant can help you:

• Review the deductions being questioned
• Identify the records required
• Check your calculations
• Explain potential areas of concern
• Prepare supporting information
• Identify mistakes that may need to be addressed
• Communicate with the ATO where appropriate

At Latitude Accountants, John Saade and the team provide practical taxation and accounting guidance for Australian individuals and businesses.

The goal is not simply to maximise deductions. It is to help ensure your tax position is accurate, properly supported and aligned with your circumstances.

Frequently Asked Questions About ATO Audit Red Flags

What is an ATO audit red flag?

An ATO audit red flag is a pattern, discrepancy or claim that may prompt the ATO to seek additional information. Examples can include unusually high deductions or information that does not match ATO records.

Can a large tax deduction trigger an ATO audit?

A large deduction does not automatically trigger an audit. However, an unusually high claim may attract additional attention, particularly when compared with similar taxpayers or when supporting evidence is limited.

Does the ATO compare my deductions with other taxpayers?

The ATO uses data and analytical methods to identify potential discrepancies and tax risks. This can include analysing reported deductions and other information.

What happens if the ATO questions one of my deductions?

The ATO may ask you to provide supporting documents and explain how the expense was incurred and calculated. You should respond accurately and provide the relevant evidence.

How long should I keep records for tax deductions?

For many work-related expenses, records generally need to be kept for five years from the date you lodge your tax return. Specific requirements can vary depending on the type of claim.

Can an accountant help if my deductions are being reviewed?

Yes. An accountant can help you understand the ATO’s questions, review your supporting evidence, and assist you in preparing an appropriate response.

Need Help With Your Tax Return or an ATO Review?

Concerned that your deductions may attract questions from the ATO, or have you already received a request for information? Latitude Accountants can help you review your tax position, understand your obligations, and ensure your claims are properly supported.

Our experienced team provides practical accounting and taxation advice for individuals and businesses, helping you stay compliant while making confident financial decisions.

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article provides general information only and does not constitute financial, legal, tax or business advice. You should obtain professional advice relevant to your individual circumstances.