The Tax Office is facing calls for curbs on the "draconian" powers it uses to target small businesses.

The Australian Taxation Office has used disturbing and heavy-handed tactics to target small businesses, and — by the admission of its own Deputy Commissioner — the powerful institution sometimes gets it wrong.

A joint investigation by Four Corners and Fairfax can reveal mistakes are being made on as many as one in 20 tax cases according to an independent estimate — often with huge financial impacts to the taxpayers involved.

The ATO has been accused of playing judge, jury and executioner on cases, with small businesses, academics and tax experts calling for increased oversight and independent scrutiny of the office.

Contractor Kathryn Little knows first-hand how frightening and powerful the ATO can be. On September 11, 2017 they called her and essentially took away her ability to make a living.

"My world literally fell apart. I had the rug pulled out from under me by the ATO."

"I received a call from the Australian Taxation Office (ATO) saying, 'we are cancelling your ABN (Australian Business Number) today'," she told Four Corners.

"I asked how they could do this with no notice. I said 'what about the other firm I work for? I need my ABN to work for them'. The woman on the phone said 'that's not our problem'."

Ms Little is single, in her late 40s and a few years ago she suffered from a severe mental illness which forced her to quit her job as an environmental scientist.

She bought a caravan, travelled the country and picked up contract work, such as transcribing.

When the ATO cancelled her ABN, a number allocated to all businesses to allow the tax office to track payments and GST, it took away her ability to work as a contractor.

"My world literally fell apart. I had the rug pulled out from under me by the ATO. I was gobsmacked."

Ken Phillips (pictured) is a small business advocate who runs non-profit group Self Employed Australia (SEA) and has been working in the sector for more than 20 years.

He describes those who get embroiled in the ATO's web as akin to being "cooked slowly, until you are roasted and you are dead."

"You would have to describe this as an institution in Australia that has powers beyond any other institution. They can enter your home without a warrant, they have powers that exceed that of the police, they can sell your house from underneath you," he said.

Barrister Graeme Halperin (pictured below), a tax specialist who has been representing small businesses for 30 years, told Four Corners the ATO's powers could be described as "draconian".

"People are brought up to believe they have the presumption of innocence, that they have the right to remain silent, if they're questioned by the authorities, that the authorities are obliged to read them their rights, if they get into trouble, and that their assets can't be confiscated by the authorities. Now, in the world of tax, none of those things is true."

Kathryn Little was one of more than a dozen contractors, most of them single mothers, carers or people with serious health conditions, who the ATO called that day in September to inform them their ABNs had been terminated.

Their ABNs were cancelled because of an association with Adelaide-based transcription business OutScribe, which was in the ATO's sights after being told in May last year its business model was being audited.

Annette Pike, who runs OutScribe, says the ATO decided in September her company should have been classifying contractors as employees.

"In one short word, I would describe what they're doing as evil."

"It (the ATO) didn't say why, so we objected, and during the review process the ATO cancelled the ABNs of the contractors without warning or explanation," Ms Pike said.

The ATO had not finished its own business audit process when it cancelled the ABNs, triggering the crisis for Ms Little and the other contractors.

"In one short word, I would describe what they're doing as evil," she said. "It's malicious and it's vengeful."

Ms Pike, 52, a single mother with three children, says revenue is down by 30 per cent and her business' reputation has been damaged.

"Some people accused us of being sham contractors, which is shocking," she said.

Ms Pike insists she followed an industry-wide business model for transcription and she complied with all the guidelines and evaluation criteria laid out on the ATO website.

In December, the ATO agreed to reinstate the contractors' ABNs pending the outcome of the audit. OutScribe's case is still under review.

Deputy ATO Commissioner Deborah Jenkins (pictured) conceded tax office staff do make mistakes.

"We are human, we are absolutely. About 20,000 humans, and humans make mistakes," she said.

"I feel for small business. Tax is probably the last thing they want to be talking to people about. They're trying to run their business, they're trying to look after their families, and often generations of small businesses. For us it's about, we do make mistakes, but come and talk to us about those mistakes and we can work through a system of understanding how we can do it better next time."

Key ATO watchdog, the Inspector General of Taxation, Ali Noroozi told the joint Four Corners and Fairfax investigation that in roughly 5 per cent of cases — or one in 20 — the tax office gets it wrong.

"I think it's perhaps in 5 per cent of the cases or so, an organisation that size may not get it right. Even one case is too many, and that's why it is important to have the right checks and balances in place."

Ms Jenkins said that estimate may not be accurate.

"A mistake can be that you didn't call someone back, or a mistake can be that maybe you got the law wrong, or a mistake can be that you didn't do something in time. I think that figure seems a little bit high, but for us, it's about what you do when you make a mistake and owning up to those mistakes and trying to make it right," she said.

Earlier this week, a public servant turned whistleblower was raided by officers from the AFP and the ATO over his involvement in the Four Corners/Fairfax investigation.

Watch "Mongrel bunch of bastards", the Four Corners/Fairfax investigation into the Australian Taxation Office on Monday at 8.30pm.

Credits

Reporting: Adele Ferguson

Design: Alex Palmer

Photography: Mathew Marsic and Tony Hill

Digital production: Stephen Hutcheon and Brigid Andersen