One of the great fallacies that disturbs the dreams of small business owners is that an Australian Tax Office representative will turn up at the door demanding immediate access to accounting records.
In truth, the taxman never knocks unannounced. Business owners will be aware in advance if the Tax Office is on their case. It might start with a letter to "check" that tax forms have been lodged correctly, inviting the business to make voluntary disclosures.
If the Tax Office isn't satisfied with the response, it will let the business know it is under review.
This is not an audit, just a demand for further information. If the ATO is still dissatisfied after a review, the owner will be told the business is being audited.
Simon Le Maistre, a KPMG director of private enterprise and former Tax Office official, describes the process as a funnel. "They'll select a certain amount of taxpayers to be reviewed. They'll ask questions, but of all those reviewed, perhaps only about 20 per cent move to full audit."
The best way to deal with an audit threat is never to allow the tax man to get past the review stage. It is not only the quality of information that will determine the extent of inquiries, it is also the quality and tenor of the response.
Elenie Ferrier, a director at Sydney accountancy firm Masselos Grahame Masselos, says any request for information should be answered with a courtesy call back to the ATO.
"Start off on a good foot, then compile the information they need in a clear and logical fashion, which they can follow easily," she says.
"Don't be scared to provide them with more information than they have requested. The more compliant you are, the more likely they will look at you favourably."
John Brazzale, a managing partner at Pitcher Partners in Melbourne, says: "Your adviser should be involved as early as possible, dealing with the ATO's timeline. Make sure what he is doing does not disrupt your business."
Mr Le Maistre says if you are perceived to be efficient and correct, the ATO will quickly move on. "Hand over information quickly and you'll be seen to be low risk. If you've made a mistake, make a voluntary disclosure - almost certainly it will reduce penalties," he says.
Many business are targeted because they do not fit the ATO's benchmarks or "norms". Frank Brass, regional director of tax consultants H&R Block, says audit targets for the year ahead are always clearly foreshadowed in Tax Office guidance. Mr Brazzale says often it is anomalies such as why taxable income doesn't square with the accounting profit.
Ms Ferrier cites the relationship between costs and turnover. It may be items such as motor vehicle expense claims relative to turnover. "There might be a percentage of turnover the ATO would normally apply to rent, and anything outside of that may be questionable," she says.
Mr Le Maistre says low income tax rates ring the loudest alarm bells. "Other notables might be a large capital gains tax incident or a number of large international transactions," he says.