What Happens During an ATO Audit (And How to Prepare)

Getting a letter from the ATO asking questions about your return is stressful, especially when you are busy running your own business. Most tradies and sole traders have never been through the ATO audit process, so they do not know what to expect or what to do first.

This guide walks you through what an ATO audit actually involves, what tends to trigger one, and the practical steps you can take to prepare, whether you have just received a notice or you want to get your records in order before one arrives.

What Is an ATO Audit?

An ATO audit is a formal review of your financial records to confirm you have met your tax obligations. The ATO conducts audits to verify that the right amount of tax has been paid, and they have the power to audit any taxpayer at any time.

What most people do not realise is how much data the ATO already holds before they contact you. Their systems cross-reference your return against information from banks, employers, third-party platforms, and government agencies. If something does not line up, it gets flagged.

Being audited does not automatically mean you have done something wrong. Many audits are routine compliance checks, not accusations. But they do need to be taken seriously and responded to on time.

When your bookkeeping and tax records are maintained by the same team, there is rarely a gap between what your books show and what your return says. That is the foundation of how ABBS Bookkeeping and ABBS Tax work together, one team handling your numbers from first transaction through to final lodgement.

Review vs. Audit: What Is the Difference?

Not every letter from the ATO is a full audit, and understanding which one you have received changes how you respond.

A “Please Explain” letter is a targeted clarification request about one specific item. A review is a more formal risk assessment on a particular area of your tax affairs. A full audit is a detailed, multi-year investigation of your financial records. Each requires a different approach, and mishandling any of them can trigger escalation or wider scrutiny.

The ATO usually starts with a risk review rather than jumping straight to a full audit. That review process often resolves issues quickly and simply, without things going further. If you are not sure which type of correspondence you have received, get professional advice before you respond.

What Triggers an ATO Audit?

The ATO uses data matching, industry benchmarks, and risk-based targeting to select audits. These are not random picks. The ATO’s systems are designed to spot patterns that look out of place for your income level and occupation.

Common triggers include:

• Deductions that are unusually high or inconsistent compared to what the ATO expects for your industry
• Income that does not match what banks, employers, or third-party platforms have reported to the ATO
• Business expenses that appear to include personal spending
• Habitually late lodgement of tax returns or BAS statements
• Ongoing business losses across multiple years, which can raise questions about whether the activity is a genuine business
• Undisclosed income from digital platforms, rental properties, or cryptocurrency transactions

Tradies specifically draw attention because vehicle claims, tool deductions, and subcontractor payments are active ATO focus areas. If your claims sit well outside the benchmarks for your trade, that gap is what gets you flagged.

What Happens During an ATO Audit: Step by Step

Knowing the stages ahead of time takes a lot of the anxiety out of the process.

1. Initial contact. The ATO contacts you by letter or phone, outlining the scope of the audit, the areas of concern, and what documents they need from you upfront. You typically have a set number of weeks to respond, as stated in your notice. Do not ignore this. Ignoring an ATO notice allows the situation to escalate, and the ATO can issue a default assessment if they receive no reply, at which point penalties and interest begin to accumulate automatically.
2. Information request. The ATO asks for specific records – tax returns, BAS statements, bank statements, invoices, payroll records, superannuation payments, and any other relevant correspondence. Provide only what is asked for at this stage. Volunteering unrelated records can widen the scope of the review.
3. Review and assessment. The ATO works through the documents you have provided. They may ask follow-up questions, request additional records, or arrange an interview. The ATO is required to keep you informed as their view develops.
4. Interim report. In many cases, the ATO shares preliminary findings before the audit is finalised, giving you a chance to respond before the outcome is locked in. This gives you the chance to review what they have found, provide additional information, or make a submission before the final outcome is set.
5. Final outcome. The ATO advises of their decision in writing once the audit is finalised. If penalties or interest charges apply, they will explain the reasons and give you the opportunity to make a submission for reduction or remission before anything is locked in.

More complex cases involving multiple years or business structures can take significantly longer.

What Penalties Can Apply?

If the ATO finds errors or omissions, the penalties depend on how the mistake happened.

Shortfall penalties apply at 25% for failure to take reasonable care, 50% for reckless disregard of the law, and 75% for intentional disregard. On top of that, the Shortfall Interest Charge applies to the additional tax from the original due date of assessment until the amended assessment is issued. If that amount remains unpaid 21 days after the amended assessment, the General Interest Charge takes over from there.

Timing matters here. Correcting an error voluntarily before the ATO contacts you reduces the penalty exposure significantly and puts you in a much better position throughout the process. If you suspect something in a previously lodged return needs fixing, the right move is to amend the return now rather than wait for the ATO to find it.

How to Prepare for an ATO Audit

Preparation is the difference between a quick resolution and a drawn-out, expensive process. Here is what to have in order before or as soon as you receive a notice:

• Bank statements and reconciliations that match your lodged returns dollar for dollar
• Receipts and invoices for every deduction you have claimed
• A completed logbook for vehicle claims, covering a minimum 12-week period
• Records of all income, including cash payments, side work, and any platform-based income
• Superannuation payment records if you have employees or pay your own super as a sole trader
• BAS lodgement and payment records for the period being reviewed

Cash payments with no paper trail, unexplained bank deposits, and personal spending mixed into business accounts are some of the issues that make audits hardest to defend. Getting your records clean before you need them is always easier than reconstructing them under pressure.

Should You Handle an ATO Audit Yourself?

For a simple clarification letter about one item in your return, many people respond directly through myGov without any issues. But for anything more involved, such as multiple years, business income, a formal audit notice, or anything that feels unclear, professional representation is worth taking seriously.

The way you respond to the ATO matters as much as what you say. An overly casual or defensive tone can flag a file for closer attention. Providing documents beyond what was asked can expand the scope of the review. Having someone experienced manage the communication keeps things focused and documented from the start.

The team at ABBS Tax works with sole traders and tradies across Brisbane and Logan who need to respond to ATO correspondence quickly and correctly. If you have received an audit notice or a review letter, our ATO audit help service covers you from the first response through to the final outcome.

When you lodge your sole trader tax return with ABBS Tax, your records are already maintained and in order before any ATO query arrives, because our bookkeeping and tax work sit under the same roof. There is no scramble to find documents when you need them most.

Need help with an ATO audit or review? ABBS Tax handles tax and compliance services for sole traders, tradies, and small businesses across Brisbane and Logan. Get in touch and we will walk you through your options.

This article is general information only, not tax advice. Speak to a tax professional about your specific situation.