The Dangers (and Missed Opportunity) of Voluntary Tax Disclosures

Everyone makes mistakes. This is no less the case in the realm of tax, but often the consequences of mistakes in this arena can be more foreboding. If you run a business and believe you may have provided false or misleading information, mistakes, or omissions in returns or statements you’ve lodged, how do you best bring this information to the attention of the tax office? After all, you have to consider the potential penalties inherent in being caught out for not disclosing such mistakes, and weigh it against the costs of disclosure.

This is an even finer edge on which to walk when tax audits are concerned. If you know you are going to be examined by the ATO, and are aware of mistakes in your statements for the period that will be examined, you are faced not just with the dilemma of voluntary disclosing such mistakes prior to the examination. You need to consider how much you disclose, and how.

In this regard, many businesses are being caught out. They are adopting an approach to voluntary disclosure that attracts a great deal of risk.

The dangers of too little too late

Making a voluntary disclosure before an audit is slightly different to making a voluntary disclosure when no tax office examination is forthcoming.

When you’re facing a review or examination, voluntary disclosures for GST, WET and fuel schemes can be submitted it by post, or through a client relationship manager. Disclosures regarding all other taxes and superannuation can be made over the phone or directly to the tax officer conducting the review or examination. In any case, you and possibly your virtual CFO team will need to evaluate which mistakes or errors you wish to disclose. Many businesses in Australia decide to voluntarily disclose only small discrepancies.

The rationale behind this is driven by a twofold understanding. On the one hand, you know that the tax office will look favourably on the voluntary disclosures of mistakes prior to an audit, so it is important to disclose in order to mitigate possible tax audit penalties. On the other hand, you are admitting liability at your own discretion. Many business advisors and outsourced CFOs will baulk at this. So businesses tend to disclose partially, offering up a litany of smaller mistakes in the hope that this will lessen penalties and that any major issues will not be exposed during the course of the tax audit.

This is a vain hope from the point of view of the tax office. The ATO is not only unlikely to miss any major issues, but is also on the alert for businesses that voluntary disclose minor issues in order to mask the major. It is a dangerous strategy that does not build trust and transparency with the tax office, and is likely to result in penalties since the tax office is very aware of this strategy during reviews.

The missed opportunities of a delicate strategy

In fact, the tax office sees voluntary disclosures as a tool for businesses to alleviate the burden of penalties brought on by a tax audit. Simply because it can be used at a business’ discretion prior to a review does not mean it is superfluous; in fact, the choice of disclosure presents an opportunity. By voluntarily being transparent about mistakes, including significant mistakes in your statements that are likely to come up in a review or examination, you are likely to mitigate penalties. And, taking into account the protection of tax audit insurance, the penalties may well be the greater liability than the primary tax you may need to pay back on account of mistakes in your declarations.

This opportunity to mitigate the impact of tax audit penalties is delicate to say the least. How you disclose major problems with declarations very much depends on the nature of these issues. In some cases, you may well be caught between a rock and a hard place.

It is well worth noting that some mistakes can lead to prosecution. The raids the ATO performs on businesses are a stark reminder of this. Fraud and serious tax errors can have consequences that are not easily mitigated by voluntary disclosure. Understated cash sales, deliberately hidden income, false declarations, and other serious issues can lead to legal action. Since you still cannot expect to smother such issues under the cover of the voluntary disclosure of minor infractions, you will need to consider how you declare these matters very carefully. You cannot hope to hide such issues from the purvey of the auditors, but at the same time you do not wish to admit liability in such a way that you face prosecution. Hence, having an expert accounting and legal team with genuine experience in dealing with difficult tax audits is vital in such situations.

Voluntary disclosures can be a useful way to soften the impact of tax penalties that come your way during the course of a tax office review or examination. Hiding major mistakes behind the disclosure of smaller issues is an unwise tactic. However, you need to understand the nuances of how you should disclose in order to give yourself the best position in the face of a tax audit. This is why wise and experienced tax audit advice is indispensable.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.