Nobody wants to receive an audit notice from the Australian Taxation Office (ATO). Yet each year, thousands of Australians are flagged for audits because their tax returns trigger red flags in the ATO’s sophisticated data-matching system.

Understanding these ATO tax return audit red flags can help you lodge accurately, reduce stress, and decide if a tax accountant review is necessary before submission.

What Triggers an ATO Audit?

The ATO cross-checks information from employers, banks, investment platforms, and government agencies. Returns that appear inconsistent, unusual, or out of line with peers can trigger an audit.

Common triggers include:

• Discrepancies between reported income and lifestyle
• Rounded numbers or estimates in deductions
• Higher-than-average deductions for your profession
• Missing or underreported income

Top 6 ATO Tax Return Audit Red Flags

1. Lifestyle Doesn’t Match Declared Income

The ATO can detect inconsistencies between your reported income and lifestyle. Social media posts showcasing luxury holidays, new cars, or property purchases can raise questions if they don’t align with your declared earnings.

2. Rounded Numbers and Estimates

Claiming exact, neat amounts for deductions, such as $5,000 or $10,000, is a common red flag. The ATO expects variation in legitimate expense claims.

3. Higher-Than-Average Deductions

Deductions exceeding industry norms often trigger audits. Examples include:

• Work-related travel and vehicle expenses
• Home office claims
• Clothing and laundry for uniforms
• Self-education expenses
• Tools and equipment

4. Income Discrepancies

Failing to declare all income sources is a serious issue. The ATO receives:

• Payment summaries
• Bank interest statements
• Dividend reports
• Cryptocurrency transactions
• Undeclared income from side jobs, rental properties, or investments can trigger audits.

5. Excessive Rental Property Losses

Claiming repeated losses on rental properties raises questions about genuine investment vs. personal use.

6. Cash Business Discrepancies

Cash-based businesses reporting income below industry benchmarks attract attention, especially in hospitality, construction, or beauty services.

Important Dates to Remember

Most individual tax returns are due October 31. Using a registered tax agent extends this to May 15 of the following year. Rushed submissions increase errors, and late lodgement can incur penalties.

Consequences of Mistakes

An audit can be costly:

• Shortfall interest charges on unpaid tax
• Administrative penalties ranging from 25% to 75% of the shortfall
• Prosecution in severe cases of evasion

Even honest errors require correcting your tax, paying interest, and responding to ATO requests.

Signs You Need a Tax Accountant Review

Professional review is recommended if:

1. Your tax situation is complex – multiple income sources, rental properties, capital gains, foreign income, or business ownership.
2. You’re claiming significant deductions – particularly items that trigger common audit red flags.
3. You’ve missed previous returns – catching up requires planning and penalty management.
4. You’ve received ATO correspondence – representation can affect outcomes.

Benefits of Professional Tax Review

Working with an ASIC Registered Agent ensures:

• Identification of legitimate deductions you may have missed
• Compliance with ATO documentation requirements
• Representation during ATO queries
• Strategic advice for future tax planning
• Reduced risk of triggering audits

Year-Round Tax Compliance Tips

Maintain good records throughout the financial year:

• Keep receipts and invoices for all claimed expenses
• Document business purpose for travel and vehicle use
• Maintain logbooks for work-related vehicle claims
• Track working-from-home hours accurately
• Declare all income, including small amounts

A tax return calculator is helpful, but professional advice ensures audit-safe compliance.

Bottom Line

Understanding ATO tax return audit red flags is crucial. While simple returns might be safe, complex financial situations benefit from professional review.

The cost of professional advice is often far less than penalties, interest, and stress from audits.

Speak to TaxByte Accountants, a trusted tax accountant in Sydney and tax accountants in Melbourne, before lodging your return to ensure full compliance, maximise legitimate deductions, and minimise the risk of ATO red flags.