ATO audit: what to expect and how to handle it

An envelope or myGov message from the ATO saying it's "reviewing" your tax affairs is unsettling, even when you've done nothing wrong. The good news is that the process is structured, you have rights at every stage, and a calm, well-organised response usually leads to a faster and better result.

This guide explains the difference between a review and an audit, what happens at each step, what records you'll need, how penalties and interest are worked out, and what you can do if you disagree. It's written for individuals and small to medium businesses, as at October 2026.

Is it a review or an audit?

The ATO uses several levels of contact. Knowing which one you've received tells you how serious it is.

A review can become an audit, and the ATO will tell you in writing when that happens. It matters, because the timing of any voluntary disclosure, and the penalty reduction you get for it, depends on when you were notified.

What triggers an ATO audit?

The ATO doesn't publish a list, but the common starting points are well known:

• Data mismatches. Income reported by employers, banks, share registries, property settlements, payment platforms and crypto exchanges that doesn't match your return.
• Out-of-range claims. Deductions or business ratios that sit well outside the norm for your occupation or industry.
• Lifestyle doesn't fit income. Property, cars or overseas transfers that don't line up with what's reported.
• Specific focus areas. Each year the ATO announces areas it's watching, such as rental property deductions, work-related expenses, cash businesses and the private use of business assets. Our guides to rental property tax deductions and small business tax deductions cover what's claimable and the records behind it.
• Lodgement and payment patterns. Late lodgement, recurring losses or GST refunds that look unusual. If you're behind, our guide to overdue tax returns explains how to catch up first.
• Information from others. Tip-offs, other taxpayers' audits and information from overseas tax authorities.

Being contacted doesn't mean you've done something wrong. Many reviews confirm the return was right.

What happens in an ATO audit, step by step?

1. The first letter. It names the tax types, years and issues under review, the officer's contact details and usually a date to respond by. Read it carefully: the scope is the most important information in it.
2. Initial contact and information request. The ATO prefers to work cooperatively and will usually ask for information informally first. It may ask for documents, explanations, bank statements or business records.
3. Your response. You (or your tax agent) provide what's asked for, organised and explained. If you need more time, ask before the due date.
4. Further questions. The auditor may ask follow-up questions, interview you or your bookkeeper, or contact third parties such as banks and customers.
5. Interim findings or position paper. For most audits, the ATO tells you what it thinks before deciding, and gives you a chance to respond. Not responding can count against you.
6. Final audit position. The ATO sets out its conclusions, any adjustments, and the penalties and interest it proposes.
7. Assessment. If tax is owed, the ATO issues an amended assessment and a notice of the penalty. Interest applies from the original due date.
8. Your rights after the result. If you disagree, you can object, and then seek external review (see below).

If the ATO uses its formal powers

If informal requests don't get a response, or in more serious cases, the ATO can issue formal notices requiring you or others (such as your bank) to provide information or documents, or to attend an interview. It also has powers to access premises and documents. Formal notices are legally binding, so don't ignore one. Your accountant and, where needed, your lawyer should help you respond.

What are your rights during an ATO audit?

You have more rights than most people realise.

• To be treated fairly and courteously, and to have your circumstances considered.
• To be represented. Your registered tax agent can deal with the ATO on your behalf, and you can involve a lawyer.
• To know what's being reviewed, and why, and to be told when a review becomes an audit.
• To a reasonable time to respond, and to ask for more time if you need it.
• To comment on the ATO's findings before a final decision in most audits.
• To privacy and confidentiality of your information.
• To protection for certain advice. Under the ATO's accountants' concession, it generally won't ask for advice papers your external accountant prepared about tax matters, except in exceptional circumstances approved by a senior officer. Source records like ledgers, invoices and contracts aren't covered. Communications with your lawyer may be protected by legal professional privilege.
• To an independent review before the result is finalised, for eligible small businesses (see below).
• To object and to seek external review if you disagree with the outcome.
• To complain to the ATO, and then to the Inspector-General of Taxation and Taxation Ombudsman, if you're unhappy with how you've been treated.

What records will the ATO want, and how far back can it go?

Records generally need to be kept for 5 years (for individuals, from when you lodge the return; for businesses, from when the record was prepared or the transaction completed, whichever is later). Records for assets you still own, such as property or shares, need to be kept for as long as they're relevant to working out a capital gain, plus 5 years.

The ATO can generally only amend an assessment within a limited period, usually 2 or 4 years from the assessment depending on the type of taxpayer and the income year. There's no time limit where the ATO considers there's been fraud or evasion.

What an auditor typically asks for:

If records are incomplete, say so honestly and explain what you can reconstruct. A gap explained is far better than a gap discovered.

What happens at the end of an ATO audit?

There are four broad outcomes.

1. No change. The ATO is satisfied and closes the case.
2. An adjustment in your favour. It happens: audits sometimes find missed deductions.
3. Additional tax, plus shortfall interest charge (SIC) and possibly a penalty.
4. A referral, in rare and serious cases, for further investigation.

How penalties are worked out

If there's a tax shortfall, the base penalty depends on your behaviour:

If you took reasonable care, or had a reasonably arguable position, there may be no penalty at all, even if the tax was wrong. The base penalty can be increased by 20% if you obstruct the ATO, and reduced if you make a voluntary disclosure: by 80% if you tell the ATO before it notifies you of an audit (for shortfalls of $1,000 or more; nil penalty for smaller shortfalls), or by 20% if you disclose after being notified but in a way that saves the ATO significant time.

Interest on audit adjustments

Shortfall interest charge applies to the extra tax from the date it would have been due under your original assessment to the day before the amended assessment issues. For October to December 2026, the SIC rate is 7.51% a year. After the amended assessment's due date, any unpaid amount attracts the higher general interest charge. Neither SIC nor GIC incurred from 1 July 2025 is tax deductible. You can ask the ATO to remit SIC and penalties where the circumstances justify it; see our guide to penalty and interest remission.

What can you do if you disagree with the result?

Our ATO objection agent drafts the objection, checks the deadline against the notice and sets out each ground with its evidence. Your accountant tests the arguments, decides whether an objection is worth making, and signs off before anything is lodged. Our ATO audit and disputes service covers the whole process.

How to handle an ATO audit: what we recommend

• Don't ignore it, and don't rush. Note the response date, then take the time to understand what's being asked.
• Call your accountant before you call the ATO. Especially before any interview.
• Answer the question asked. Provide what's requested, organised and explained. Don't flood the ATO with unrelated material, and don't leave gaps.
• Be accurate, not defensive. If a mistake has been made, the way it's handled affects the penalty.
• Consider a voluntary disclosure of any other errors you know about, ideally before the audit is formally notified, because the penalty reduction is far larger.
• Ask for more time if you need it, before the deadline passes.
• Keep a record of every call, letter and document provided.
• Think about the next step early. If the position isn't going your way, your rights to independent review and objection have tight time limits.

Mistakes we see in ATO audits

• Over-explaining on the phone. Casual comments get noted and relied on.
• Missing the response date. Silence makes the ATO more likely to use formal powers or rely on its own estimates.
• Sending records that don't reconcile. If your bank statements, accounts and BAS don't agree, fix the reconciliation before sending.
• Not responding to the position paper. For small businesses, failing to engage can also rule out an independent review.
• Arguing law without evidence. A reasonably arguable position needs the facts to support it.
• Assuming the audit stays in its lane. The ATO can extend its review to other years if it finds the same issue.

How BPAG helps with ATO reviews and audits

We take the first call and keep it calm. Most audits go better when an experienced accountant controls the flow of information.

• We read the letter with you and explain exactly what's being asked and what's at stake.
• We triage the issues. Our tax email triage agent identifies every issue raised in ATO correspondence, rates the risk and routes it to the right specialist; your accountant decides the response.
• We prepare and organise your records, reconcile them and explain them, so the auditor sees a clear picture.
• We deal with the ATO for you, including meetings and calls, with every conversation written up so nothing is lost.
• We protect your options, from voluntary disclosures to independent review and objections.

The agents draft. A qualified accountant reviews and signs off everything, and nothing goes to the ATO without a person approving it. Where legal professional privilege or a possible prosecution is involved, we work alongside your lawyer. If you want certainty before a big transaction rather than after, a private ruling is often the better route, and our tax strategy and planning service helps you set things up so the questions have clear answers.

General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.