Most taxpayers would rather avoid receiving a letter from the Australian Taxation Office (ATO) about an audit. But what actually puts someone on the ATO’s radar?

According to Jacob Fahmy, several red flags can attract ATO attention, and they don’t necessarily mean someone has deliberately done anything wrong. The ATO has access to information from employers, banks, investment providers, insurance companies, rental agents and other third parties, allowing it to build a broader picture of a taxpayer’s financial position.

From a lifestyle that appears inconsistent with reported income to unusually large refunds and poor lodgement history, certain situations can prompt the ATO to ask further questions.

Understanding these potential red flags can help you stay compliant, maintain proper records and respond confidently if the ATO ever comes looking.

What Can Put You on the ATO’s Radar?

The ATO uses information from a range of sources and data-matching programs to identify discrepancies and potential compliance issues. Here are five red flags taxpayers should understand.

1. Your Lifestyle Doesn’t Match Your Reported Income

One of the biggest questions the ATO may ask is whether your reported income makes sense when compared with your assets and lifestyle.

The ATO’s lifestyle assets data-matching program can provide information about certain high-value assets, including:

• Expensive cars and motorcycles
• Boats and aircraft
• Caravans and motor homes
• Horses
• Fine art and other valuable assets

Information obtained through data matching can include details such as the insured value, purchase price, registration information, make and model, and financing arrangements.

For example, someone reporting an annual income of $30,000 while owning several high-value assets may attract questions about how those assets were purchased.

That does not automatically mean there is a tax problem. There could be a completely legitimate explanation, such as an inheritance, a loan, a partner’s income or proceeds from selling another asset.

The important thing is being able to explain where the money came from and having documentation to support your explanation.

2. Your Tax Return Doesn’t Match Third-Party Information

The ATO may already have information about your finances before you lodge your tax return.

Employers report salary and wage information through Single Touch Payroll, while banks, investment providers and other organisations can report information relating to interest, dividends, shares, property and other transactions.

The ATO also uses various data-matching programs covering areas such as:

• Employment income
• Bank interest
• Shares and dividends
• Property transactions
• Rental information
• Cryptocurrency transactions
• Government payments and other third-party data

If the information reported by a third party does not match your tax return, the ATO may contact you to understand why.

Sometimes the discrepancy is simply an error. Information could have been reported incorrectly, duplicated or recorded under the wrong circumstances.

However, it is still important to review discrepancies promptly and provide accurate information when asked.

3. You Have a Poor Lodgement History

Repeatedly missing tax returns or Business Activity Statements (BAS) can create another potential compliance issue.

If you have outstanding lodgements, repeatedly lodge late or ignore communications from the ATO, you are creating a compliance history that may attract further attention.

The ATO uses data matching to identify taxpayers who appear to have an obligation to lodge but have not done so. Continued non-compliance can potentially lead to stronger action, including penalties and default assessments.

One common misconception is that you should avoid lodging a tax return because you cannot afford to pay the resulting tax bill.

These are two separate issues.

If you owe tax but cannot pay the full amount immediately, there may be options for managing the debt, including payment arrangements where eligible. Not lodging your return, however, can create an additional compliance problem.

What Should You Do If You’re Behind?

If you have outstanding returns or BASs, it is generally better to address them rather than continue ignoring the problem.

Start by:

• Identifying which lodgements are outstanding
• Gathering your financial records
• Working out what you actually owe
• Lodging the outstanding returns
• Discussing payment options if you have a tax debt

The sooner you understand your position, the sooner you can start dealing with it.

4. You Claim a Large or Unusual Refund

A large tax refund is not automatically a problem. However, an unusually large refund compared with your normal tax position may prompt the ATO to verify the claim.

This can apply to both individual tax returns and business activity statements involving significant GST refunds.

The ATO has systems designed to identify potentially high-risk refund claims and may hold a refund while checking whether the claim is legitimate.

This is particularly important when claiming substantial deductions or GST credits. You should be able to demonstrate:

• Where the refund amount came from
• What purchases or transactions created the claim
• That the expenses actually occurred
• That the relevant GST was correctly calculated
• That you have invoices and supporting records
• That the figures reconcile with your accounting records

The ATO’s focus on refund integrity has increased following major fraud cases such as Operation Protego, which involved fraudulent GST refund claims.

The lesson is simple: if you are asking the ATO to pay money back to you, make sure you can support the claim.

5. Someone Has Provided a Tip-Off

Not every ATO investigation begins with something identified in a tax return.

The ATO also receives tip-offs from members of the public, including customers, employees, businesses and others who believe someone may be engaging in tax misconduct.

A tip-off could relate to allegations such as:

• Undeclared cash income
• Hidden business income
• False deductions
• Unreported transactions
• Other suspected tax or superannuation misconduct

Tip-offs can also be anonymous.

A tip-off by itself does not necessarily establish that someone has done anything wrong. However, it can provide the ATO with a starting point for checking other information available to it.

This is another reason why maintaining accurate financial records is so important. If an allegation is incorrect, good documentation can help demonstrate what actually happened.

How the ATO Builds a Picture of Your Finances

The biggest takeaway from these five red flags is that the ATO does not necessarily rely on a single source of information.

It can potentially bring together information from:

• Your tax returns and BASs
• Employers
• Banks and financial institutions
• Investment providers
• Insurance companies
• Property and rental information
• Government agencies
• Cryptocurrency data
• Other third-party sources
• Public tip-offs

Individually, each piece of information may appear insignificant. Together, they can provide the ATO with a broader picture of your financial circumstances.

That is why consistency matters.

If your reported income, transactions, deductions, assets and financial records tell the same story, you are in a much stronger position if the ATO asks questions.

What Can You Do to Reduce ATO Compliance Risks?

You cannot control every piece of information the ATO receives, and you cannot prevent someone from making a tip-off.

What you can control is the quality of your own records and compliance.

Consider making sure you:

• Lodge tax returns and BASs on time
• Keep accurate financial records
• Retain invoices and receipts for deductions
• Reconcile your accounting records regularly
• Review pre-filled and third-party information
• Check that income and transactions are reported correctly
• Keep documentation for significant asset purchases
• Address ATO correspondence promptly
• Seek professional advice when something does not look right

The goal is not to hide from the ATO. It is to make sure that if the ATO ever asks questions, you can explain your numbers and support them with proper documentation.

Frequently Asked Questions About ATO Red Flags

Does having expensive assets automatically trigger an ATO audit?

No. Owning expensive assets is not automatically a tax problem. However, if your reported income appears inconsistent with your assets, the ATO may ask questions about how those assets were funded.

Can the ATO see my bank and investment information?

The ATO receives information from various third parties, including financial institutions and investment providers. This information may be used in data-matching and compliance activities.

What happens if my tax return does not match ATO information?

The ATO may contact you to clarify the discrepancy. Sometimes the difference is caused by an innocent error or incorrect third-party reporting. You should review the information and provide an accurate explanation.

Should I lodge my tax return if I cannot afford the tax bill?

Generally, lodging and paying are separate issues. If you have a tax debt that you cannot pay immediately, discuss your options with your accountant or the ATO rather than simply failing to lodge.

Can someone anonymously report me to the ATO?

Yes. The ATO accepts tip-offs, including anonymous reports. A tip-off does not automatically mean you have done something wrong, but it may lead to further checks depending on the information provided and other available evidence.

Speak With Latitude Accountants

If you are concerned about your tax compliance, have outstanding lodgements, have received an ATO letter or simply want to make sure your records are in order, getting professional advice early can make the situation easier to manage.

Latitude Accountants provides proactive tax, accounting and advisory services designed to help individuals and businesses stay compliant and make better financial decisions.

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📧 info@latitudeaccountants.com.au

Disclaimer

This content is general information only and does not constitute financial, tax, accounting, legal, property or business advice. Every individual’s and business’s circumstances are different. Speak with a qualified adviser about your specific situation before making financial or tax decisions.