A ‘Please Explain’ letter is a targeted clarification request, a Review is a risk assessment on a specific area, and an Audit is a formal multi-year investigation. Each requires a different response strategy, and mishandling any of them can trigger escalation, penalties, or extended scrutiny from the Australian Taxation Office (ATO).
Understanding which type of correspondence you have received determines your immediate actions, evidence requirements, and whether professional representation is necessary. At Blackwattle Tax, our tax advisory team regularly guides mid-market businesses through ATO compliance activities, from initial letters through to formal audit defence.
This guide explains the differences between these three ATO communication types and provides strategic response frameworks for each.
The Three Levels of ATO Scrutiny
The ATO uses escalating levels of engagement based on perceived risk and the nature of discrepancies identified through data-matching programs that cross-reference information from banks, employers, government agencies, and sharing economy platforms.
Feature | Please Explain Letter | Review | Audit |
Intensity | Low (often automated) | Moderate | High (dedicated case officer) |
Scope | Single item or discrepancy | Specific area (e.g., rental claims) | Comprehensive, multiple years |
Typical Duration | 2-4 weeks | 1-3 months | 6-18 months |
Escalation Risk | Medium if ignored | High if errors found | Penalties and amendments |
First Action | Verify data, respond precisely | Gather area-specific records | Engage a professional immediately |
The ATO’s data-matching program pulls records from over 650 million transactions annually across banks, property registers, share registries, health insurers, and online platforms. Discrepancies between this data and lodged returns trigger correspondence.
Please Explain Letters: The Early Warning
‘Please Explain’ letters are compliance checks targeting specific discrepancies. They are often automated responses to data-matching anomalies and represent the ATO seeking clarification before deciding whether further action is warranted.
Common Triggers:
- Missing bank interest income not reported on returns
- Work-related expenses are significantly higher than occupation averages
- Rental property income or deductions inconsistent with third-party data
- Cryptocurrency or sharing economy income not declared
- Private health insurance rebate mismatches
How to Respond
Step 1: Read the scope carefully. Identify exactly which item, year, and amount the ATO is questioning. Do not assume they are asking about anything beyond the specific discrepancy mentioned.
Step 2: Compare their data against yours. The ATO may have information you forgot to include, or their data may be incorrect. Bank interest statements, employer payment summaries, and platform income reports should match what they have received.
Step 3: Provide only what is requested. Submit receipts, logbooks, or invoices that directly address the query. Use myGov or your registered tax agent within the 28-day deadline.
Step 4: Amend if necessary. If the ATO is correct and you made an error, lodge an amendment immediately. Voluntary disclosure before ATO action significantly reduces potential penalties.
Mistakes to Avoid
Ignoring the letter allows the ATO to automatically adjust your return and apply penalties. Oversharing unrelated information can expand the scope of their inquiry. Casual or defensive tone in responses can flag the file for closer attention.
ATO Reviews: The Risk Assessment
A Review is a more formal examination of a specific area of your tax affairs. Unlike a ‘Please Explain’ letter, Reviews involve a compliance officer actively assessing whether your claims are substantiated and whether an Audit is warranted.
Common Focus Areas:
- Rental property repairs versus capital improvements
- Work-from-home expense calculations and evidence
- Motor vehicle claims and logbook substantiation
- GST classifications and input tax credits
- Related party transactions and Division 7A compliance
Response Strategy
Cooperate promptly but precisely. Reviews are designed to be less adversarial than Audits. Professional, organised responses often result in the matter being finalised without escalation.
Verify all records before submission. Cross-check your documentation against the claims made. Identify any gaps in evidence and address them proactively rather than waiting for the ATO to find them.
Consider voluntary disclosure. If your review of records reveals errors the ATO has not yet identified, disclosing them voluntarily demonstrates good faith and reduces penalties from 75% to as low as 5% of the tax shortfall.
Keep scope tight. Answer only what is asked. If the ATO requests rental property records for 2024, do not volunteer information about 2023 or other income streams unless directly relevant.
When to Involve a Professional
Reviews involving complex areas like Division 7A loans, capital gains tax calculations, or international transactions benefit from professional representation. A registered tax agent understands how to frame responses, what evidence carries weight, and how to negotiate scope boundaries.
ATO Audits: The Formal Investigation
An Audit is a comprehensive examination of your financial affairs, typically covering multiple income years and involving a dedicated ATO case officer. Most Audits escalate from Reviews, though high-risk indicators can trigger immediate Audit action.
Audit Characteristics:
- Assigned case officer with direct contact details
- Formal notification letter specifying years and areas under examination
- Requests for bank statements, contracts, invoices, and third-party confirmations
- Lifestyle and asset matching against declared income
- Position paper outlining preliminary findings before final determination
Audit Response Plan
Engage a registered tax agent or tax lawyer immediately. Do not attempt to manage an Audit without professional representation. The language, evidence presentation, and negotiation strategy significantly affect outcomes.
Diarise all deadlines. Standard response periods are 28 days, but extensions are negotiable for complex matters. Request extensions early and in writing, explaining why additional time is necessary.
Prepare comprehensive evidence packs. Organise bank statements, contracts, payroll records, and supporting calculations into indexed folders. A clear presentation demonstrates professionalism and reduces processing time.
Never create, alter, or destroy records after receiving an audit notice. Document integrity is legally protected. Creating false records or destroying evidence constitutes obstruction and carries severe penalties beyond any tax shortfall.
Position Papers and Outcomes
Before finalising an Audit, the ATO issues a position paper outlining their preliminary findings, proposed adjustments, and penalty calculations. This document provides an opportunity to challenge their interpretation of facts, applicable law, or calculation methodology before the final determination.
Effective position paper responses address each ATO finding with evidence, legal authority, and alternative interpretations. This stage often determines whether shortfall penalties apply at 25% (failure to take reasonable care), 50% (recklessness), or 75% (intentional disregard).
For businesses facing ATO audit activity, preparation before the notice arrives dramatically improves outcomes.
Common Pitfalls That Trigger Escalation
Certain behaviours consistently transform minor inquiries into major investigations:
Oversharing beyond scope. Providing years or income streams not requested invites additional scrutiny. Answer precisely what is asked.
Inconsistent numbers across documents. Bank statements, invoices, and tax returns must reconcile. Discrepancies suggest unreliable records or deliberate misstatement.
Missed deadlines without communication. Failing to respond or request extensions signals non-cooperation and justifies escalation.
Unindexed document dumps. Submitting hundreds of unsorted files without clear organisation frustrates case officers and extends review periods.
Speculative explanations. Guessing at answers or providing information you are not certain about creates problems when the ATO verifies your statements against other sources.
Preventing ATO Attention: Practical Compliance Hygiene
The most effective ATO strategy is avoiding scrutiny through sound compliance practices throughout the year.
Maintain 5-year records. Australian tax law requires documentation supporting all claims for five years from lodgement. Organised, labelled evidence in digital folders makes responding to any ATO inquiry straightforward.
Reconcile before lodgement. Cross-check bank feeds against accounting records, verify employer payment summaries, and confirm rental property schedules match loan statements and body corporate records.
Review high-risk areas annually. Work-from-home claims, motor vehicle deductions, rental property improvements, CGT events, and cryptocurrency transactions attract disproportionate ATO attention. Ensure these areas have complete evidence before lodgement.
Consider audit insurance. Many professional indemnity and business insurance policies include audit insurance covering professional fees for responding to ATO compliance activities. Check your coverage and claim process before you need it.
Your Rights If You Disagree
ATO determinations are not final. If you disagree with an assessment or penalty decision:
Internal review allows you to request reconsideration by a different ATO officer not involved in the original decision.
Formal objection must be lodged within specific timeframes (generally 60 days for individuals, 4 years for amendments) and requires detailed grounds for disagreement.
External review through the Administrative Appeals Tribunal or Federal Court is available if internal processes do not resolve the dispute.
Professional representation is strongly recommended for any formal dispute process.
Book Your ATO Response Strategy Session
Blackwattle Tax provides tax compliance support for businesses navigating ATO correspondence. Our Chartered Accountants have managed reviews and audits across construction, professional services, property, and technology sectors.
Whether you have received a ‘Please Explain’ letter, Review notification, or Audit notice, professional guidance ensures your response protects your position and minimises escalation risk.
Book now to discuss your ATO correspondence and response options.
Frequently Asked Questions
What is the difference between an ATO review and an audit?
A Review examines a specific area of your tax affairs (such as rental deductions or work-from-home claims) to determine if further investigation is warranted. An Audit is a comprehensive, formal investigation covering multiple years and requiring detailed evidence across your entire financial position.
Are ‘Please Explain’ letters from the ATO serious?
Yes. While they appear informal, ignoring them allows the ATO to automatically adjust your return and apply penalties. They often precede Reviews if responses are inadequate or reveal broader compliance issues.
Should I get a tax agent to respond to the ATO?
For ‘Please Explain’ letters with straightforward answers, self-response through myGov is appropriate. For Reviews involving complex deductions or any Audit notification, professional representation significantly improves outcomes and prevents inadvertent escalation.
What is an ATO position paper?
A position paper is the ATO’s preliminary findings document issued during an Audit before final determination. It outlines proposed adjustments, penalty calculations, and the legal basis for their position. Taxpayers have the right to respond and challenge findings before the assessment becomes final.
Can I ask for more time to respond to the ATO?
Yes. Extensions are routinely granted for reasonable requests made before the deadline. Contact the ATO or your tax agent in writing, explaining why additional time is necessary and proposing a realistic alternative deadline.
How long do ATO audits take?
Simple Audits may conclude within 6 months. Complex matters involving multiple entities, international transactions, or significant adjustments can extend to 18 months or longer. Extensions, objections, and settlement negotiations further extend timelines.
Disclaimer: This article provides general information only and does not constitute legal or tax advice. For personalised guidance, consult a registered tax agent.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.