This post concerns the use of zappers in restaurant operations. It is not a “how to” guide in their “proper” use, nor is it, in any way, an endorsement of their use. In fact, if you are even thinking of employing a zapper to fill your pockets with cash stop and read this post. It is not worth the risk. You will get caught, eventually, and here’s why.
Use a Local POS Vendor
If you purchase your software and zapper from a local vendor, distributor, developer or consultant, you will get caught. If you use a zapper, you will need some technical support to ensure that your computer system does not keep any stray bits of zapped data on the hard drive. As a result, you are locked-in with your consultant or other advisor. There will come a day when that person will be caught assisting another taxpayer in the use of a zapper. One way or another, the tax authorities will gain access to the consultant’s customer list, and you will become the latest target for an aggressive tax audit.
The Ministry of Revenu Quebec has used this method of identifying restaurant tax evaders quite successfully. They have also worked with the Canada Revenue Agency to execute search warrants in other provinces. The next step (much harder) is to collaborate with tax authorities in other countries, such as the U.S.
Zappers Aren’t Perfect
Even though zappers can delete or modify specific transactions and make it appear as though they were never there, many POS systems have frequent backup sub-systems to prevent the loss of data in the event of an unexpected shut down or power loss. These backup versions of files may remain on the computer disk and may contain remnants of the original “zapped” transactions. Where the use of a zapper is suspected, a tax auditor may call in a computer audit specialist to obtain the evidence of zapper usage. Using a zapper consultant to help cleanse your computer system means you have an accomplice (see first point).
Auditors of all types (not just tax auditors) use analysis to help determine whether financial figures “make sense”. In a typical business, we compare key metrics with those of similar businesses. Where there are significant differences that have no reasonable explanation, we suspect errors or omissions in the accounting system.
Typical metrics might include the percentage of cash sales and whether this has changed significantly over the course of the audit period. An obvious one is the margin percentage for major product groups (wine, beer, liquor, food). Another might be the cost per ounce of alcohol for a variety of categories.
While most restaurants and bars do not have ready access to key metrics for similar establishments, rough guidelines are available from restaurant associations and other restaurateurs. Care should be taken to making sure you compare metrics from similar establishments. Metrics for a sports bar will be very different from those of a fine dining restaurant. Where proper comparatives are not available, you need to make sure that your margins (and other metrics) are reasonable, by comparing your actual metrics with what you should have expected given your prices, costs and other known information.
Auditors also look at the relationship between various financial figures, as a test of their reasonableness. Many financial figures are related to sales volume or dollars. To some extent, labour costs, supplies, and a variety of other expenses vary with the volume of business. An auditor will analyse these relationships over time to determine whether there may have been unreported sales. Few restaurateurs would be capable of the meticulous recordkeeping and adjustments that would be required to make sure these analyses stayed consistent at all times.
Accounting for Cash
Most businesses generate some cash sales. There is nothing wrong with this. Once the cash has been received, it becomes an asset of the business. Well run businesses ensure that all receipts (including cash) are promptly deposited, intact, into the bank accounts. Many small (and some large) businesses do not follow this sound practice. Where such funds are not deposited into the bank, it is imperative that the owner meticulously account for all cash received with proper cash disbursement records and receipts (invoices).
Some restaurateurs are known to pay some of their staff in cash, without going through the regular payroll system. This is done to try to keep the labour costs in line with the reported sales (after zapping or skimming). Another practice is to purchase some supplies or inventory with cash, perhaps using separate cash accounts with existing vendors. In each case, the restaurateur has brought in accomplices to the fraud, increasing the chance of being caught.
Owners Living Above Their Means
While typically not used in restaurant audits, it is possible to examine the owner’s lifestyle to determine whether it makes sense, given the level of income reported from the business. If the owner’s lifestyle cannot be supported by the income from the business and other legitimate sources of funds, this becomes evidence that funds have been fraudulently removed from the business. Note that this method of assessing taxes is much more prevalent in the U.S. It is also used in Canada, and elsewhere, where it is difficult or impossible to verify income by any other means.
Changes in Cash Receipts
When a zapper is first used, or a skimming operation is commenced, there will be a decrease in cash receipts reported by the restaurant. This may provide evidence that a tax fraud has taken place and prompt the auditor to examine the books and records more closely.
That said, not all sudden decreases in cash receipts are fraudulent. A significant change in the restaurant operation may be completely legitimate and reasonable, depending on the circumstances. At the end of a patio season, cash sales may drop off considerably as fewer customers pay with cash in an indoor dining room. Similarly, if business at a bar drops off relative to its dining room volume, there will likely be a significant drop in cash receipts.
Paper Guest Checks
Most guests are provided with guest checks during their visit, regardless as to whether they pay by credit card or by cash. When a customer takes the paper guest check, it is an external piece of evidence of the transactions incurred at the restaurant. If a tax auditor were to obtain copies of cash-paid guest checks for a restaurant or bar (perhaps during another audit), these could be used to match up with guest checks reported by the restaurant during a future audit.
If the auditor is unable to exactly match the paper receipt with an identical guest check in the restaurant’s POS system on that date, this will be strong evidence indicating the use of a zapper. In fact, this is exactly how a Revenu Quebec auditor stumbled upon a major tax evasion case involving the use of zappers. The auditor visited a restaurant that had been selected for an audit and paid for the meal with cash. During the audit, it was determined that the original guest check had been altered, by removing an item (the original food modifier was not zapped). Note that the guest check number must be identical too. Note also, it only takes one discrepancy to provide strong proof.
Original POS Reports
Every day a restaurant operates, a variety of POS reports may be generated. As a minimum, each server will have a shift report showing the start and end times, total sales, by category, taxes collected, receipts by type, and balance owing to (from) the house. In most cases, this is a printed report provided to the manager or owner for review. Often the server retains a copy to keep track of tips owed. In order to keep track of the server’s performance and to help identify theft, these reports must include all sales. That is, they are pre-zapped reports.
The manager or owner also prints a day end report showing the aggregate totals for all servers for the day. Other reports may include taxes collected, sales by item, inventory usage, etc… Some reports may be provided to the chef for ordering purposes or inventory management, others may be provided to the manager. Again, all of these reports are pre-zapped summaries of transactions during the day. Effectively, all of these reports are a hardcopy “snapshot” of the POS transactions actually processed by the restaurant. Even though they may be subsequently changed by a zapper, they are a permanent record that may be made available to an auditor.
Unless all of these reports are destroyed after a zapping operation, there will be a paper copy available to indicate the use of a zapper in the operation. All that is required is a simple comparison of the original report with the current, zapped report.
All it takes is one disgruntled employee who suspects the use of a zapper (or other means of skimming) to provide original POS reports to a tax authority.
Quebec has decided to take a different approach to combatting the use of zappers and other forms of technologically-assisted tax evasion. They have started a pilot project involving the use of a Sales Registration Module (SRM), which will create a permanent record of each establishment’s transactions and guest checks. The SRM will produce reports for preparing QST returns. It will allow tax auditors to easily determine whether a specific guest check has been recorded or whether it has been tampered with by any means. Every patron must be presented with a guest check, or the establishment will face substantial fines.
The full rollout of the SRM system is expected in 2011. All but very small restaurants are expected to use the new SRM, which will be provide free of charge by Revenu Quebec.
While you may get away with the use of a zapper for a while, there are too many ways you could be tripped up. When it does happen, the penalties will be severe. It is not worth taking the risk.