The Accountant’s Audit Checklist: 7 Red Flags That Could Trigger the ATO

Tax time is fast approaching and with it, a spike in ATO scrutiny. For many business owners and individuals, the word “audit” sparks instant anxiety. Nobody wants to get that dreaded letter from the ATO. Yet every year, countless individuals and businesses do, often completely unaware that their financial habits were raising red flags all along.

As accountants, we see behind the curtain. We know what triggers an audit, not just because we study the rules, but because we’ve seen what happens when people unknowingly cross the line. Sometimes it's a simple mistake. Other times, it's a well-meaning business owner trying to "save on tax" without understanding the consequences.

This post isn’t just another list of generic audit triggers. It’s a behind-the-scenes guide from our side of the desk. We’re pulling back the curtain on seven real-world red flags that catch the ATO’s eye and what you can do to stay safely off their radar.

1. Your Lifestyle Doesn’t Match Your Reported Income

A common trigger for audits arises when a taxpayer's declared income does not align with their lifestyle. For example, someone reporting an annual income of $65,000 might also be seen purchasing high-end vehicles, travelling internationally multiple times a year, and living in a high-value property. The ATO increasingly uses data-matching tools and social media to assess whether lifestyle spending aligns with income declarations. 

How to avoid it: Be consistent. If your lifestyle is funded by sources not shown on your return, like loans, family support, or asset sales, document it. Transparency matters more than secrecy.

2. Consistent Late Lodgements

Repeated failure to lodge tax returns, BAS statements, or superannuation obligations on time can signal to the ATO that a business may be struggling with compliance or, worse, attempting to avoid scrutiny. While the occasional missed deadline may not raise alarms, a consistent pattern will.

From the ATO’s perspective, late lodgements suggest a business may also be careless in its recordkeeping or underreporting income. Timeliness is not just about staying within deadlines: it reflects the credibility of your operations.

How to avoid it: Automate what you can, work with a proactive accountant, and treat lodgement deadlines like non-negotiable business meetings. Discipline is your best defense.

3. Claiming Deductions That Don’t Fit Your Industry Norms

Deduction claims that appear excessive or unusual compared to others in the same industry are often flagged. The ATO benchmarks deductions based on industries and occupations. If your deductions fall outside the statistical norm, you might stand out.

For example, if a graphic designer is claiming large deductions for motor vehicle repairs or tools typically used in construction, this raises questions. While individual circumstances may justify higher-than-average claims, it's critical to maintain thorough documentation and a logical connection between the expense and the business activity.

A good accountant will always help you claim what you’re entitled to. But an overly aggressive approach, or one-size-fits-all deduction templates, can get you in trouble.

How to avoid it: Keep receipts, note the business use of assets clearly, and avoid cookie-cutter deductions. Tailor your claims to your business reality.

4. Big Year-On-Year Fluctuations Without a Clear Reason

ATO Red Flag: One year you declare $250k in income, the next year $30k.

If your business revenue or personal income changes dramatically from one year to the next, especially without explanation, this can trigger a closer look from the ATO. While natural fluctuations occur in business, particularly in industries affected by seasonal demand or economic shifts, the key is transparency.

Auditors will be looking for valid reasons behind the decline or spike in income. Was there a business restructure? A major client loss? A shift to a new pricing model? When income changes substantially, it helps to document the reasons and be prepared to explain them.

How to avoid it: Work with your accountant to document major changes in real time. The ATO doesn’t just audit numbers: they audit stories.

5. Incorrect Reporting of Cash Businesses

Certain industries, such as hospitality, beauty, and trades, are more likely to attract ATO scrutiny due to their reliance on cash transactions. The ATO knows these sectors are prone to underreporting income because cash can be more difficult to trace.

Even if your business is fully compliant, operating in a high-risk industry places you under more pressure to maintain accurate, reconciled records. This includes aligning point-of-sale data with income reports, keeping electronic receipts where possible, and avoiding estimates or rounding errors.

How to avoid it: If you operate in a cash-heavy business, double down on accurate recordkeeping. Better yet—go digital and reduce your exposure entirely. Accepting more electronic payments means fewer red flags.

6. Excessive Work-From-Home or Vehicle Claims

Work-from-home deductions and vehicle expense claims have surged post-pandemic, prompting closer monitoring from the ATO. Claiming 100% business use for a vehicle or excessive home office deductions without detailed records is a common audit trigger. Overestimating these deductions without documentation, even unintentionally, can lead to penalties.

How to avoid it: Use the ATO’s approved methods (like the cents-per-kilometre method) and keep diaries or logs when required to support claims. Don’t let convenience become carelessness.

7. Unusual Related-Party Transactions

This is an often-overlooked area, but one that can raise serious questions. Payments made to family members, related trusts, or entities without proper documentation or commercial rationale can be seen as income splitting or tax avoidance.

For example, paying a spouse or relative a large consultancy fee without a contract or evidence of services rendered is a red flag. The ATO expects these transactions to be arm’s length, fair, and backed by real business necessity.

How to avoid it: Always document related-party arrangements, use market value, and be clear on business rationale. A good structure should help reduce tax, but it should always be defensible.

Audits Are About Patterns, Not Just Amounts

It’s a misconception that audits are triggered only by large sums. In reality, it’s patterns that raise concern such as inconsistencies, anomalies, and poor compliance behaviour.

Audits are often less about catching fraud and more about assessing credibility. Strong systems, accurate reporting, and transparent communication with your accountant build trust and keep you one step ahead.

Final Thoughts: Audit-Proofing Is a Mindset

Audit-proofing isn’t about fear. It’s about creating order, clarity, and confidence in how your business operates. You can’t guarantee you’ll never face an audit, but you can control how ready you are when one happens.

At Sapphire Bay Partners, we go beyond numbers. Our role is to help you build a business that’s resilient, compliant, and strategically positioned for growth. Whether it’s a compliance review, a system health check, or a proactive audit assessment, we’re here to help you strengthen your financial foundations before issues arise.

Ready to Bring Clarity and Confidence to Your Business?

Whether you’re a medical professional, general practitioner, specialist, or business owner, audit-proofing your operations is just one part of building a stronger, smarter financial foundation. A compliant and well-structured business doesn’t just reduce ATO risk; it creates clarity, control, and confidence in every financial decision you make.

At Sapphire Bay Partners, we specialise in helping medical professionals, practice owners, and entrepreneurs simplify complexity and achieve sustainable growth. From compliance reviews to financial strategy and practice optimisation, our team provides practical, tailored advice that supports your long-term success. If you’re ready to bring order to your finances, strengthen your structure, and protect your business or practice for the future — we’re ready to help.

Let’s build your next chapter. Schedule a consultation today to get in touch. We’ll help you create a resilient, compliant, and growth-ready financial strategy built for the future of your business or medical practice.

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General Advice Disclaimer: The information provided in this article is general in nature and does not take into account your personal circumstances, financial situation, or specific needs. It is not intended to be financial, tax, or legal advice. Before acting on any information, we recommend seeking professional advice tailored to your individual circumstances.