I’m going to describe a real case study and let you decide if the title of today’s blog is true. This situation occurred several years ago at a client’s restaurant in Ontario.
My client operated a small, reasonably successful, restaurant in a fashionable downtown neighbourhood. She was the head chef, general manager and office administrator. She did everything but wait on tables. I found her to be scrupulously honest in every respect. One day she received notice that her restaurant had been selected for a retail sales tax audit. She wasn’t concerned, at all. In fact, she relished the opportunity to show the auditor her impeccably accurate and organized accounting records. She knew that she had always collected and remitted the correct tax from all of her sales transactions. She recorded every single sales transaction, even the few that were settled with cash. In short, she thought it would be an impossibility that the auditor could reassess her business for any unpaid taxes. She was about to experience the the impossible!
The audit took about three days to complete, resulting in a proposed reassessment of about $7,000 (including penalties and interest) for the two-year period covered in the audit. My client was speechless! I was brought in to review the auditor’s working papers supporting the proposed reassessment.
I recreated the entire set of schedules in Excel worksheets, in order to examine the impact of small changes in the assumptions that the auditor used to identify the “unreported sales”. I spent hours with my client identifying all of the factors that contributed to reduced margins on her alcoholic beverage sales, in order to support her position as being more reasonable than the auditor’s contention that she purposely failed to report all of her restaurant’s sales. We determined that some of the alcohol and wine purchased for the restaurant was actually used in making sauces. We could estimate a reasonable amount of customer comps during each year. We could estimate the average amount of over-pouring of wine and alcohol. By making reasonable estimates for each of these factors, we were able to show that the reported sales of alcoholic beverages was, in fact, quite accurate. Was the auditor convinced?
No. To each of our claims, the auditor’s response was “you can’t prove that”. It didn’t seem to matter that the auditor could not “prove” the assumptions on which the reassessments were based. My client was outraged by the reassessments. I filed an objection to the reassessments, expecting the appeals officer to be reasonable in considering all of the factors that contributed to lower alcohol margins, rather than assuming there were unreported sales. I expected that the appeals officer would realize that the taxpayer’s position was reasonable, shifting the onus of proof back to the auditor. I was convinced that no reasonable person would find the auditor’s position to have been proven.
This time, I was outraged by the response from the appeals officer. Knowing that our only remaining alternative was to go to court to appeal the reassessments, the appeals officer confirmed the auditor’s reassessments. As the cost of going to court to appeal the reassessments would have been more than the amount of tax and penalties assessed, the case ended here. My client was forced to pay the $7,000 in order to maintain her liquor licence.
Is this a case of legalized extortion?