ATO audit red flags: what makes the ATO look closer

Common ATO tax return audit red flags include income that doesn't match what banks, employers and other third parties report to the ATO, deductions that look high for your income or job, rental claims that mix private and income-producing use, business results outside the ATO's industry benchmarks, and wealth or spending your declared income can't explain. Many of these show up in data the ATO already holds.

A red flag isn't proof of anything, and it doesn't mean the ATO will review or audit you. It may prompt the ATO to ask questions, and good records usually let you answer them quickly. This is general information, and the right approach depends on your facts. For how we help once the ATO is involved, see ATO audits, reviews and objections.

How does the ATO choose who to audit?

There's no published formula. Broadly, the ATO looks for differences between what you report, what others report about you and what is typical for similar taxpayers, and it follows up tip-offs.

• Data matching. The ATO matches third-party data against tax returns. Its Data matching page (last updated 21 October 2025) says more than 600 million transactions are reported to it each year.
• Benchmarks and risk models. The ATO compares small business returns with industry benchmarks. It says it uses benchmarks with other risk indicators, never in isolation, when deciding to review a business (ATO, How we use business performance benchmarks, last updated 17 March 2025).
• Tip-offs. The ATO accepts reports, including anonymous ones, about suspected cash skimming, off-the-books trading or unreported income.

Not every review starts with a concern about you. The ATO also uses its data to assess voluntary compliance generally, and says checking your information doesn't automatically mean it thinks you're dishonest. The first contact is often a letter asking you to explain a difference, not a full audit. See what happens in an ATO audit for the stages that follow.

What the ATO already knows about you

The Taxation Administration Act 1953 (TAA) requires some organisations to report transactions to the ATO, including government grants, property transfers, share and unit transactions, electronic payments processed for businesses, payments to contractors in certain industries, and payments to people supplying services through online platforms (TAA Sch 1 s 396-55). The ATO's published data sources also include banks, employers, share registries, motor vehicle registries, land title offices, AUSTRAC, overseas tax authorities and crypto exchanges. Our guide to ATO data matching explains how these programs work and what to do if the data is wrong.

ATO tax return audit red flags at a glance

Red flag	What the ATO can compare it with	Records that answer it
Income missing from the return	Bank, employer, share registry, platform and government data	Bank and investment statements, income statements, platform reports
Deductions high for your income or job	Your earlier returns and claims by others in similar work	Receipts, invoices, logbooks, diaries
Rental interest and repair claims	Your earlier claims, property transfer, rental bond and property management data	Loan statements, redraw history, invoices, photos
Business results outside benchmarks	Industry benchmark ranges	Sales records, banking reconciliations, stock records
Large GST refunds	Your earlier activity statements	Tax invoices, contracts, proof of payment
Lifestyle beyond declared income	Property and motor vehicle data	Loan documents, gift and inheritance records, sale records
Company money used personally	Company accounts and loan balances	Written loan agreements, repayment records
Trust distributions to lower-taxed beneficiaries	Where the money actually went	Trustee resolutions, bank records of payments

Tax return red flags for individuals

For Tax Time 2026, the ATO said it would focus on work-related deductions and omitted income, and reminded taxpayers to declare side hustles, cash jobs, interest and rental income (ATO media release, 27 April 2026).

Income that doesn't match the ATO's data

The simplest red flag is income the ATO already knows about that isn't in your return. The ATO says it checks returns for interest and investment income, employment income, government payments, capital gains on shares and property, foreign employment income, taxable grants, private health insurance details, and distributions from partnerships, trusts and managed funds, and whether an amount was simply reported at the wrong label. If the gap is real, the usual result is an amended assessment, interest and possibly a penalty.

The ATO also notices changed pre-filled figures, and says it may adjust them back where it has a high level of confidence in its own data. Correcting wrong data is fine, for example joint account interest reported against one holder only, but keep the evidence.

Work-related deductions that look high for your job

A work-related claim generally has to be deductible under the general deduction rule in the Income Tax Assessment Act 1997 (ITAA 1997 s 8-1) and, for most work expenses, substantiated with written evidence (ITAA 1997 s 900-15). Claims that are large compared with others in similar occupations and income ranges are more likely to be questioned.

Common problem areas include:

• claiming costs your employer paid for or reimbursed,
• claiming private costs, such as ordinary clothing or the private share of a phone bill,
• working from home claims without records of how the claim was worked out, and
• car claims without the records the chosen method requires.

Records to keep: written evidence for work expenses generally has to be kept for 5 years from the due date for lodging the return (or from when you lodged, if later). The period is extended if you're in a dispute with the ATO about the expense, and without the evidence the deduction can be disallowed (ITAA 1997 s 900-25).

From the 2026–27 income year, eligible individuals with salary or wages also get a standard deduction of up to $1,000 for work-related expenses without needing records. It is reduced by the work-related expenses they claim separately, and those claims still need the usual evidence (ITAA 1997 s 25-130; ATO, Standard deduction for work-related expenses, last updated 2 November 2026).

Large or unusual tax deductions

A claim that is new for you, or out of proportion to your income, can stand out: large donations, big self-education costs, investment loan interest or losses from a new side business. For individuals, losses from a business activity that fails the non-commercial loss tests are generally deferred rather than offset against salary (ITAA 1997 Div 35). Be ready to show what each expense was, when you paid it and how it relates to earning your income.

Side income from platforms

Platform operators must generally report payments to people who supply services through them, such as rides and short-term accommodation (TAA Sch 1 s 396-55, item 15). Sales of goods are excluded from that rule, but the ATO separately lists online selling platforms among its data sources. Occasionally selling your own used household items is generally not income, but buying goods to resell usually is, and ride-share or short-term hosting income is generally assessable even if occasional.

Crypto

Cryptocurrency designated service providers give the ATO purchase and sale information. For most people, selling, swapping or spending crypto can have capital gains tax consequences, so a gap between exchange records and the return is an obvious flag. Keep full exchange histories, wallet addresses and the cost of each acquisition. See crypto reviews and audits.

Foreign income

Australian residents are generally taxed on income from all sources, in or out of Australia (ITAA 1997 s 6-5(2)). Under the Common Reporting Standard, Australian financial institutions report accounts held by foreign residents so the information can be exchanged with other countries (TAA Sch 1 Subdiv 396-C), and the ATO in turn exchanges information with its treaty partners about income Australian residents earn overseas. Overseas interest, rent and wages are common omissions. If the real question is whether you were a resident at all, see tax residency disputes with the ATO.

Red flags for landlords

Rental claims often draw attention because they are large, recur every year and often mix private and income-producing use.

Interest on loans used partly for private purposes

Interest is generally deductible to the extent the borrowed money is used to produce assessable income (ITAA 1997 s 8-1). What usually counts is how the money was used, not which property secures the loan. Common problems:

• redrawing on the rental loan for a car, holiday or school fees, then claiming all the interest,
• refinancing and drawing extra funds for private use, and
• claiming all the interest on a split or combined loan when only part of it funded the rental.

Records to keep: loan statements from the start of the loan, the redraw and offset history, and a reconciliation of which part of the balance relates to the rental.

Repairs or capital improvements

You can deduct repairs to a rental property, but not capital expenditure, and if the property is only partly used to produce income, only a reasonable part of the repair cost (ITAA 1997 s 25-10). Work that improves a property rather than restoring what was already there, or fixes defects that existed when you bought it, is generally capital. Capital costs may be recognised over time through capital works deductions (ITAA 1997 Div 43), depreciation or the CGT cost base, but not as an immediate repair claim. Large "repairs" in the first year of ownership, or just before a sale, are common flags.

Records to keep: invoices describing the work, before and after photos, quotes, and the condition report from when you bought or first leased the property.

Travel and second-hand assets

Individual investors, and many trusts and self managed super funds, can't deduct travel related to a residential rental property, such as inspection trips (ITAA 1997 s 26-31). Individual investors also generally can't depreciate second-hand assets that came with a residential rental, such as an oven or air conditioner (ITAA 1997 s 40-27). Both rules have exceptions, including for costs incurred or assets used in carrying on a business, and for certain entities such as companies.

Holiday homes and private use

Expenses for a property rented out for only part of the year generally have to be apportioned, and are deductible only to the extent they relate to earning rent (ITAA 1997 s 8-1). If the property is also your holiday home, the ATO's view for individual investors is stricter. Ownership costs such as loan interest, council rates, land tax and repairs are generally not deductible at all under the leisure facility rule, unless you use the property, or hold it for use, mainly to earn rent (ITAA 1997 s 26-50; ATO ruling TR 2026/1, paras 30–43, 94).

The ATO says it won't devote compliance resources to applying that view to expenses incurred before 1 July 2026, unless there is avoidance, fraud or evasion, but it will apply the view if asked to amend an assessment or give a private ruling (TR 2026/1, paras 138–140). Keeping the property free for family use in peak periods, setting the rent above comparable properties or not seriously marketing it all count against it being genuinely available for rent, or held mainly to earn rent (TR 2026/1, para 41; PCG 2026/2, para 17).

Rental income and property sales

The rent is checked too. Platforms report payments to short-term hosts (TAA Sch 1 s 396-55, item 15), and states and territories report property transfers (item 3), which the ATO can compare with any capital gain or loss reported on a sale. Under its rental bond data-matching program, the ATO also collects bond records from state and territory bond authorities, including the landlord's details and the rent payable (ATO, Rental bond data-matching program protocol, last updated 10 January 2025, covering years up to 2025–26). Under a separate program it collects data from property management software companies, including rent and expense transactions and the landlord's bank account, for 2018–19 to 2025–26 (ATO, Property management data-matching program protocol, last updated 26 August 2024).

Records to keep: purchase and improvement records (contract, duty, legal costs and capital works) until 5 years after it becomes certain no further CGT event can happen to the property, which usually means 5 years after you sell (ITAA 1997 s 121-25).

Red flags for small businesses

The ATO says it looks more closely at small businesses that don't declare all their income or over-claim expenses, don't lodge and pay on time, pay employees in cash without meeting their tax and super obligations, use business funds for private spending, or keep poor records (ATO, What attracts our attention in small business, last updated 9 February 2026).

Results outside the small business benchmarks

The ATO publishes small business benchmarks for many industries, using ratios such as cost of sales to turnover. It compares each return with the range for the business's industry, which it works out from the industry code, the description of the main activity and the trading name.

In an example on its benchmarks page, the ATO describes a supermarket selected through risk modelling whose cost of sales ratio was well above the range. The audit found sales and banking records hadn't been reconciled for several years. Unusual figures often have legitimate reasons, though: a new business still building sales, an unusual pricing model, high wastage or a one-off event. Write down the reason before anyone asks.

Cash takings

Cash leaves less of a trail, and the ATO says it is focused on businesses that don't report, or under-report, cash income, or that pay for business goods or wages in cash (ATO, Businesses using cash to dodge obligations, last updated 1 October 2026). Payment system administrators must report the electronic payments they process for a business, such as card payments (TAA Sch 1 s 396-55, item 9). Reported sales close to card takings, in an industry where many customers pay cash, can stand out.

Records to keep: daily takings records showing cash and card separately, point-of-sale reports, banking reconciled to sales, and records of cash used for expenses or taken as drawings.

Paying workers and contractors in cash

Beyond the withholding liability itself, a business generally can't deduct a payment to an employee or director if it was required to withhold and didn't, or didn't report the withheld amount as required (ITAA 1997 s 26-105). The same applies to a payment to a contractor who didn't quote an ABN where withholding was required. There is an exception if you voluntarily tell the ATO before it notifies you of an examination.

Contractor payments are visible too. Businesses supplying cleaning, courier or road freight, security, investigation or surveillance, or IT services that pay others to provide those services must report the payments (TAA Sch 1 s 396-55, items 11–14). Businesses mainly in building and construction also report payments to contractors for building and construction services (TAA Sch 1 ss 405-5, 405-10; Taxation Administration Regulations 2017 reg 70). The ATO can match those reports against the contractors' own returns.

Large or unusual GST refunds

A GST refund that is large compared with your usual activity statements may be held while the ATO checks it. The Commissioner can retain a refund where it is reasonable to require verification, having regard to factors including the likely accuracy of the information, the effect on your financial position, and how consistent the claim is with information you have given before (TAA s 8AAZLGA). The ATO must tell you within set time limits that it is holding the refund, and you can object to that decision.

Records to keep: tax invoices, contracts, proof of payment and a short explanation of the transaction behind the refund. GST records generally have to be kept for at least 5 years (TAA Sch 1 s 382-5).

Late or missing lodgements

Lodging late can attract a failure to lodge penalty (TAA Sch 1 s 286-75). If a return hasn't been lodged, or the ATO isn't satisfied with one, it can make a default assessment of the amount it judges to be your taxable income (Income Tax Assessment Act 1936 (ITAA 1936) s 167). To challenge it you generally have to object first, and in the Administrative Review Tribunal or the Federal Court you carry the burden of proving the assessment is excessive or otherwise incorrect and what it should have been (TAA ss 14ZZK, 14ZZO). Bringing lodgements up to date, ideally before the ATO asks, is usually the first step.

Using company money personally

Under Division 7A of ITAA 1936, payments, loans and forgiven debts from a private company to a shareholder or their associate can be treated as dividends (ITAA 1936 ss 109C, 109D, 109F). A loan is generally not treated as a dividend if it is fully repaid before the company's lodgement day for the year (ITAA 1936 s 109D), or if before that day it is put under a written agreement meeting the minimum interest rate and maximum term requirements (ITAA 1936 s 109N). Some repayments, such as those funded by a new loan from the company, may not count. Large debit balances in a director's loan account and private expenses paid by the company are typical flags. See ATO reviews of Division 7A loans.

Records to keep: loan agreements signed on time, records of interest and repayments, and clear records of which amounts are wages, dividends or loans. More generally, a business must keep records that record and explain all relevant transactions, and generally retain them for 5 years (ITAA 1936 s 262A).

Red flags for wealthy individuals and private groups

For larger private groups and wealthy families, the ATO generally looks at the group as a whole: how the companies, trusts, super funds and individuals fit together, and how money moves between them. Under its tax performance programs for private groups, it uses data matching and analytics to link wealthy individuals to their associated entities and considers the group of entities together (ATO, Private groups tax performance program, last updated 13 July 2026).

Lifestyle that doesn't match declared income

Property, cars and spending out of step with declared income are a red flag at any level of wealth. If the ATO isn't satisfied with a return, it can make a default assessment based on its own judgment of your taxable income (ITAA 1936 s 167). In practice that can mean comparing the growth in your assets and spending with your declared income, often called the asset betterment method, leaving you to show where the money came from (see, for example, Gashi v Commissioner of Taxation [2013] FCAFC 30 at [3], [9], [11]). Loans, gifts, inheritances, asset sales and savings are legitimate explanations, but they need documents.

Trust distributions

Distributions to family members on lower tax rates, where the money is in fact kept or used by someone else, can attract a review under section 100A of ITAA 1936. If a beneficiary's entitlement arises out of a "reimbursement agreement", the beneficiary is treated as never having been entitled, and the trustee is generally taxed on that income at 45% instead (ITAA 1936 ss 100A(1), (4), 99A; Income Tax Rates Act 1986 s 12(9)).

A reimbursement agreement is one that provides for someone other than the beneficiary to benefit, entered into for a purpose that includes reducing someone's tax. It does not include an agreement entered into in the course of ordinary family or commercial dealing (s 100A(7), (8), (13)), and whether that exception applies is often the real dispute. A common flag is a distribution to an adult child whose share is then paid to a parent or used for the parent's expenses. See section 100A trust reviews.

Records to keep: trustee resolutions made on time, records showing each beneficiary's entitlement was paid to them or applied for their benefit, and notes of the family or commercial reasons for the distributions.

Payments to related parties

If you run the business yourself or in a partnership, payments to relatives, such as wages to a spouse or children for work in the business, are deductible only to the extent the Commissioner considers reasonable (ITAA 1997 s 26-35). For a private company, remuneration paid to a shareholder, director or their associate that is more than the Commissioner considers reasonable is not deductible and the excess is treated as a dividend (ITAA 1936 s 109). Keep records of the duties, the hours worked and how the pay compares with what you'd pay someone unrelated.

Does amending a tax return trigger an audit?

Not necessarily. The ATO says that if you haven't reported all your income, or have made a mistake, you should correct it or amend your return. An amendment that produces a large refund may still be checked like any other claim.

The ATO's time to amend an assessment runs from the day it gives you the notice of assessment, not from when you lodged. It is generally 2 years for most individuals and small and medium businesses (for medium businesses, income years starting on or after 1 July 2021) and 4 years for other taxpayers, including many trust beneficiaries, with no limit where the Commissioner is of the opinion there has been fraud or evasion (ITAA 1936 s 170(1)). See how far back the ATO can audit for who gets which period.

Timing also matters for penalties. Voluntarily telling the ATO about a shortfall, in the approved form, before it notifies you that it is examining your affairs generally reduces the base penalty by 80%, or to nil if the shortfall is under $1,000 (TAA Sch 1 s 284-225(2), (3)). See making a voluntary disclosure to the ATO.

What happens if a review finds a problem?

The usual result is an amended assessment, interest and, often, an administrative penalty. For income tax, shortfall interest charge applies to the extra tax from the original due date until the day before the amended assessment issues (TAA Sch 1 s 280-100), and general interest charge applies to anything not paid once it falls due. Neither can be deducted for income years starting on or after 1 July 2025 (ITAA 1997 s 26-5(1A)).

The base penalty is generally 25%, 50% or 75% of the shortfall, depending on whether it came from a failure to take reasonable care, recklessness or intentional disregard of the law (TAA Sch 1 s 284-90), and it can be increased or reduced. See what happens in an ATO audit for the penalty rules and your rights, and ATO penalties and penalty remission.

What to do if the ATO contacts you

1. Work out what kind of contact it is. A data-matching letter, a review request, an audit notice and a formal notice to give information or documents (TAA Sch 1 s 353-10) carry different weight. A formal notice is compulsory, and failing to comply can be an offence.
2. Note the deadline. If you need more time, ask in writing before it passes.
3. Check the contact is genuine. If unsure, contact the ATO through its official channels, not a number or link in the message.
4. Gather the records for what has been flagged. Answer the question asked, accurately and completely. Don't guess.
5. Talk to your accountant, and get legal advice in a significant review. Early explanations are hard to walk back. Confidential communications with a lawyer for the dominant purpose of legal advice may be protected by legal professional privilege.
6. Consider a voluntary disclosure if you find a mistake. It can still reduce penalties after the ATO has made contact.
7. Keep every record. Never move, alter or destroy documents once the ATO is asking questions.

Next step

Send us the ATO letter or message, the return or activity statement it relates to, and a short note on what you think the ATO is asking about. If the ATO hasn't contacted you but you're worried about a return you've lodged, send that return and a note of the concern. In a first call we'll tell you what kind of issue it is, how long you have and what to gather.