THE Australian Taxation Office has been accused of acting illegally by demanding tax information from prostitutes while they are working.

 The Adult Business Association, which represents legal brothels, told The Sunday Telegraph the tax office was engaging in ``bullyboy tactics''.

 Association spokesman Chris Seage said the ATO had misled the industry about its powers.

 At a meeting last December, it had implied it had the right to enter brothels and demand answers from workers about their tax status, he said.

``They tried to bluff the industry,'' Mr Seage, a former tax office auditor, said.

 ``The ATO said last December it could do that.''

 Mr Seage said the ATO backed down after he threatened to raise the matter in Federal Parliament.

 A letter from Assistant Tax Commissioner Greg Topping, dated March 14, had acknowledged sex workers did not have to answer questions unless the tax commissioner invoked his special powers.

 Mr Seage said for that to happen, the ATO had to personally serve a notice in writing on the sex worker.

 ``Generally, they're allowed 28 days to attend [and answer questions],'' he said.

 This was where the ATO ran into difficulties, because brothels generally held only a prostitute's ``working name'' and a mobile phone number, ``so the ATO will not have an address''.

 Mr Seage said information provided to Federal Parliament indicated the ATO's crackdown on the sex industry, launched 18 months ago, was failing.

 In answer to a question on notice, Assistant Treasurer Peter Dutton revealed that in NSW only 554 brothels, strip clubs or sex workers had obtained an ABN (Australian Business Number) to become tax-compliant.

 ``The ATO has conceded they have only 554 ABN registrations, and most of them would be legal establishments, not working girls,'' Mr Seage said.

 Yet the tax office had conceded on its own web site that more than 10,000 sex workers were not paying the proper amount of tax.

 ``That means 10,000 haven't got ABNs,'' Mr Seage said. ``This statistic says their project is a flop.''

 Mr Dutton also revealed the ATO had completed, or was still conducting, audits on 91 brothels and other adult operators in NSW.

 The Sunday Telegraph has learned that some have been hit with tax assessments ranging from $200,000 to $2.2 million. Much of the money allegedly owing is for GST.

 The tax office says on its website that in 2005-06, it finalised 163 audits in the industry, resulting in the payment of $19 million in GST and income tax.