We know that the Commissioner has released some pretty crazy findings that Tax Agent prepared returns are more likely to incorrectly claim work related deductions than self prepared returns.
From the Commissioner’s review of the tax gap for individuals not in business he found the following:
Tax agents get it wrong 78% of the time and self preparers only 57% of the time. By the way, the results show that when tax agents get it wrong, they get it “more wrong”… 85% of the value of mistakes are in tax agent prepared returns…
But what I find most interesting is why these mistakes were made. Have a look at this chart:
51% of all the adjustments were due to, at least in part, substantiation issues.
Immediately the lobbyist for the Tax Agents roll out the excuse that this is not the Tax Agents fault. Poor Tax Agents can only rely on the representations of their clients, they say.
But they would only say that if they did not understand the tax law… Have a look at what section 900-15 of the ITAA97 says:
To deduct a *work expense:
(a) it must qualify as a deduction under some provision of this Act outside this Division; and
(b) you need to substantiate it by getting written evidence.
And for completeness sake the definition of a work expenses is “a loss or outgoing you incur in producing your salary or wages.”
Section 900-15 states that even if there is another provision in any tax act that lets you claim a work expense as a deduction, you still don’t get to claim it until you have the correct documentation. It is not that you can claim a deduction but you need the evidence to prove it, but rather it is if you don’t have the correct documentation THERE IS NO DEDUCTION AT ALL!
So when a client walks into the office of a tax agent and wants to claim a deduction for a work expense, the tax agent should say “but if you don’t have a receipt you can’t claim it and so I won’t include it in your return.”
And when I say “receipt”, I mean “receipt”. Division 900 makes it clear that a credit card or bank statement will generally not be enough… but rather than quote the ITAA97, let me quote the Commissioner…
Fact: To claim a tax deduction you need to be able to show that you spent the money, what you spent it on, who the supplier was, and when the purchase occurred. Bank or credit card statements usually won’t contain this information. The only time you don’t need these details is if record-keeping exceptions apply.
If you want to claim more than $300 of work expenses as a deduction for your client in a return, you should at least confirm there is and, if you have any professionally at all, sight a receipt.
But how is it then that 78% of tax agent prepared tax returns are wrong and the main reason they are wrong is that when they are audited (within two years as that is the amendment period) 51% of the returns with mistakes don’t have the “substantiation” required – put simply, the receipts that are required!
Its because Tax Agents say… “teacher client, did you buy any sunglasses this year and how much did you buy them for?” without asking “teacher client, do you have a receipt for any sunglasses you bought this year”. They say it this way to “get their client the highest refund” but they are doing this by ignoring the fact that section 900-15 states they are not eligible for the refund at all.
I can get anyone a higher refund if I can just ignore the law and put clients at risk…