If you have been following the posts on this site (and several others on the internet), you know that your restaurant or bar business faces a serious risk when it is audited by CRA or the provincial auditors. In most cases, your licensed business will be audited, it is just a matter of when.
As a restaurateur that will be subject to an audit, you have a number of choices concerning how you will respond:
- Wait until the audit is complete and file an objection (appeal)
- Attempt to refute the auditor’s assumptions during the audit, in hopes of minimizing or eliminating the additional taxes
- Provide credible, accurate information at the beginning of the audit that will “force” the auditor to develop assumptions that will support the sales previously reported
The first two options will have varying degrees of success, depending on the accuracy, consistency and credibility of the information you are able to obtain to support your filing position. These will also be the most expensive options – by far. In the first case, once the audit is complete, the onus of proof is on you to prove that the auditor has used factually incorrect assumptions and/or has erred in the approach used to determine that there were additional taxes owing. It is not enough to show that different assumptions would lead to a finding of no unreported sales. The reasons why the “true” assumptions are more appropriate must be supported with factual evidence. When you are trying to obtain this type of evidence, in many cases years after the fact, it may be impossible to disprove the auditor’s assumptions. Even where you are able to obtain this evidence, it will be a very costly venture.
In the second option, you have an opportunity during the audit to change the auditor’s assumptions, before the findings are finalized. In this case, you will be trying to refute the assumptions that the auditor made based on your comments during the initial interview and the documents you provided to the auditor at the beginning of the audit. This information and the assumptions made by the auditor become the “facts” that will determine whether there were any unreported sales. You have a much better chance of refuting the auditor’s assumptions during the audit than you have once the audit is finalized. However, you must still provide evidence why the auditor’s assumptions are incorrect for your particular restaurant or bar. If necessary, you may ask for a review by the auditor’s supervisor. In order for this approach to be successful, you will undoubtedly require a consultant that is experienced in these types of audits. This can be a very expensive option, too, because all of the information gathering and analyses that would be required to appeal an unfair assessment will have to be done prior to the end of the audit. This will give you about 30 days to perform all of this work, which may not be long enough to do it properly.
The Best Option
It should be clear by now that the only way to effectively protect your business from an unfair reassessment of sales and income taxes is to be proactive. Ideally, you want to be prepared for the day the auditor walks into your restaurant. You need to know exactly which assumptions the auditor will be making and the numerical values that will properly support the sales figures that were previously reported. You will need to know the reasons why your actual margins differed from the theoretical margins, for the entire audit period (usually four years). Effectively, you need to audit your own business before the auditor arrives. Ideally, you should be doing this continuously.
You can do most of this preparation yourself. You may wish to retain an accountant or consultant to help set up internal controls over inventories, purchases, sales and receipts. Ongoing monitoring and analysis of the controls can usually be performed by the restaurateur, at little or no cost other than your time. It may be advisable to have the restaurant’s independent accountant monitor the controls and help document the margin variances on a quarterly basis. The results of this work will provide the restaurateur with the answers to the questions that the auditor will ask at the initial interview. Most importantly, the restaurateur will be able to support these statements with evidence in the form of analyses done prior to the audit taking place. To the extent that an external consultant or accountant is involved in the analyses, the information should be considered more credible than uncorroborated internal reports. The onus will be placed on the auditor to find evidence that your statements are untrue, in order to make an audit finding of unreported sales.
While there is a cost of implementing these internal controls, in almost every case, there should be significant savings that far outweigh the costs. The ongoing savings will be through a reduction of staff theft and improved margins. There will be a major bonus when the business is audited and there is a finding of no unreported sales.
Your business will be audited in the future. While you do have options, in terms of favourable outcomes, you really don’t. You must be proactive to protect your restaurant or bar from an unfair (and very expensive) audit. The relatively low cost of controlling your costs and monitoring margin variances will be more than offset by an increase in profitability and a substantially reduced risk of an adverse audit finding.