The ATO Risk Engine Has Had an AI Upgrade – Here's Why That Matters to You

The ATO Risk Engine Has Had an AI Upgrade – Here's Why That Matters to You.

There’s a quiet shift happening within the ATO, and it’s catching a lot of businesses off guard.

It’s called the Tax Gap Program, and it sounds like something out of a cheery government initiative catalogue. But don’t be fooled by the branding - there’s nothing fun or optional about it. The ATO is using its newly enhanced Risk Engine, now powered by artificial intelligence, to comb through business financials with greater speed, accuracy, and scrutiny than ever before.

Whether you operate as a sole trader, run a company, trust or partnership - or even have a Self-Managed Super Fund - you are not exempt from review. And while we haven’t yet had a Tax Gap audit land at SMART Business Solutions, our national network of accountants has. They’ve shared real examples, so we can prepare our clients before the ATO comes knocking.

Example: ATO Tax Gap Program - Confirmation of Audit letter

What is the Tax Gap Program?

The Tax Gap Program is the ATO’s way of measuring the difference between what the tax system should collect and what it actually collects. Think of it as the ATO’s version of loss prevention. What makes it serious? It’s no longer just about manual spot checks. The ATO now uses a sophisticated AI-powered Risk Engine to flag anomalies in business financials. It pulls data from your BAS, tax returns, general ledger, bank feeds and even third-party data like banking and industry benchmarks to look for inconsistencies and unexplained expenses. Once you're selected for review, it’s a full-blown audit - whether you like it or not.

What Does an ATO Tax Gap Audit Look Like? If you’re flagged, here’s what happens:

You’ll receive a formal letter from the ATO requesting access to your financial statements and general ledger.
They’ll run your data through their own templates, looking at line items that often get misused or abused - advertising, travel, entertainment, phone, electricity.
They’ll then request explanations - often line-by-line - asking how each deduction is directly connected to the earning of income by the business.

And they are specifically on the lookout for private expenses being “washed” through your Profit and Loss (P&L) statement. Think: kids’ phones on the business bill, private travel passed off as work-related, personal electricity bills coded to business accounts.

What Can You Do to Protect Yourself?

Here’s the bottom line: tidy up your expenses. Don’t try to push private costs through your business accounts. It’s not worth it. Not only does it skew your numbers and tax position, but now - with AI reviewing your financials - you’re not just trying to sneak it past us, your accountant. You're up against the ATO’s Risk Engine, and it doesn’t sleep.

If we prepare your BAS or tax returns, we will always challenge anything that doesn’t sit right. Not to be harsh - but because it’s our responsibility to protect you. If we see something that could raise a red flag, we’ll call it out. It’s our job to help you run a cleaner, smarter business - and that means being proactive, not reactive.

How Audit Protection can help.

Even if you’re doing everything right, audits can still happen. The Tax Gap Program isn't just targeting the dodgy operators. In fact, many businesses selected have done nothing wrong at all. But once the ATO begins an audit, the process itself can be costly.

We're talking thousands of dollars in professional time - even if you're fully compliant. That’s why we strongly recommend our Audit Management Service. This cover acts like insurance for audits. It reimburses you for the professional fees involved with managing an audit - including our time, external specialists like tax lawyers, and any compliance work that needs to be done. It applies across all your business entities, and yes - it’s tax-deductible.

You can view the full brochure and details of what’s covered here.

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In practical terms, this means if you’re audited, you're not left footing a hefty bill for something outside your control. Like any insurance, you hope you’ll never need it - but if you do, you’ll be incredibly glad it’s there.

Our Message Is Clear

If there’s one takeaway from this, let it be this: Don’t try to run non-business expenses through your business. The ATO is watching. Their AI is learning. And the cost of being caught isn’t just financial - it’s time, energy, and stress you don’t need. Be honest. Be clean. And let us help you stay ahead of the curve.

If you’re unsure about an expense, ask us. If you haven’t yet taken out Audit Protection, talk to us about adding it to your support package.

We're here to empower you to make smarter business decisions.

Audit Protection

Covering your professional fees in the event of an audit.

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