Everyone Wins When We Ask Questions About Your Tax Returns
When using the services of an experienced tax professional, many people are surprised by the number of detailed questions asked and documentation requested. Put simply, a professionally qualified tax agent has a duty of care and a legal obligation to ensure the tax laws have been correctly applied to every return they lodge.
Upholding this obligation involves asking appropriate questions and, in some cases, sighting documentation that backs up the income reported and deductions claimed on your returns. In many cases, asking these questions can arrive at identifying more deductions and a better tax outcome. But sometimes it does mean informing clients that a particular expense is not deductible.
Either way, the outcome should be a high level of comfort that the final lodged tax return is correct and defendable if ever questioned by the ATO.
A recent case decided by the Administrative Appeals Tribunal (S & T Income Tax Aid Specialists Pty Ltd Trading as Alpha Tax Aid and Tax Practitioners Board  AATA 161) supported and confirmed the Tax Practitioner Board’s decision to terminate the registration of a tax agent due to claiming inflated, unsubstantiated, and/or non-deductible work-related expenses for their clients. This is in addition to the termination of the registration of one of the directors of that firm for threatening an ATO officer.
In this case, the ATO had conducted an audit of eight of the firm’s clients. All eight of the clients audited had work-related expense claims reduced and/or disallowed. On average, the ATO allowed only 18% of the work-related expense deductions claimed. Following the ATO’s complaint to the TPB the firm’s registration was terminated.
Although the list of specific deduction claims and the issues raised is very extensive, briefly the AAT commented in relation to the firm’s conduct:
“The conduct of the applicant in respect to the preparation and lodgement of the ITRs for the eight taxpayers, as detailed above, demonstrates that in 2016, the applicant failed to ensure that a tax agent service it provided, or that was provided on its behalf, was provided competently. The applicant repeatedly claimed work-related expense deductions without first obtaining or satisfying itself that there was appropriate evidence to support the claims; the applicant failed to properly ascertain through its own enquiries and failed to obtain sufficient evidence to support the required nexus between the expense claimed and earning assessable income, and the applicant incorrectly applied the relevant tax law with respect to several of the taxpayers.”
The AAT also indicated that the tax agent had essentially relied solely on the client’s verbal claims and often estimated expenses when receipts were not available.
Further, the evidence provided by the tax agent at the hearing was that even on occasions when he was not convinced an expense was deductible, he would claim it anyway, often with some small reduction “for protection”. The agent seemed to take the position that if the client was happy to take the risk, then he would claim the deduction.
This case should serve as a reminder that tax agents are required to take reasonable care to competently provide their services, including taking steps to verify claims made by clients in relation to deductible expenses and push clients to provide appropriate evidence to support the claims. Tax agents are also obliged to take appropriate steps to ensure that the tax law is being applied correctly.
The Code of Professional Conduct for tax agents includes the following principles:
- You must ensure that a tax agent service that you provide, or that is provided on your behalf, is provided competently.
- You must maintain knowledge and skills relevant to the tax agent services that you provide.
- You must take reasonable care in ascertaining a client’s state of affairs, to the extent that ascertaining the state of those affairs is relevant to a statement you are making or a thing you are doing on behalf of a client.
- You must take reasonable care to ensure that taxation laws are applied correctly to the circumstances in relation to which you are providing advice to a client.” The question that often arises is whether tax agents are required to effectively ‘audit’ their clients before providing tax agent services. The Tax Practitioners Board makes it clear that this is not a requirement, but tax agents are expected to ask clients appropriate questions, based on the registered agent’s professional knowledge and experience, and to obtain supporting documents and evidence where this is appropriate. Cases like this suggest that the threshold is reasonably high and that this is to protect the general public.
(Source: Knowledge Shop Pty Ltd The Round Up February 2021)