So, what do we care about U.S. tax audits? Plenty. What happens in the U.S. (and abroad) tends to happen in Canada, too.
Recently, the New York State Department of Taxation and Finance hired 300 additional auditors in an effort to generate an additional $200 million of sales tax revenue. While they say they’re just trying to make the system fair for all taxpayers, the reality is that auditors are becoming increasingly aggressive, and restaurants are high on the list of their targets.
As described in a recent article, Mark Supples, the owner of Mother’s restaurant in Allentown, spent five years and more than $150,000 fighting the state over claims that he owed more than $535,000 in sales taxes. He commented, “They come in with the attitude that we’re automatically guilty, that we’re criminals, and that it’s just a question of how much we’ve stolen.”
The Buffalo Tap Room & Grill in Tonawanda was accused of not paying $330,000 in sales tax on unreported sales of $4 million over a three-year period.
“It’s causing a huge financial burden on them to prove their innocence,” said William DeLuca, who runs Mr. Bill’s Restaurant & Bar in Cheektowaga.
The article goes on to describe how the audit process severely impacts restaurants. Even honest restaurateurs, who report all of their sales, can be presented with whopping tax bills from tax audits. The fight for exoneration can take years and significant accountant and legal fees, with no guarantee of succeeding. This uncertainty makes it difficult to make necessary investments to ensure the survival of their business. Winning the fight can leave the restaurant in dire financial circumstances. Losing often means bankruptcy.
U.S. audit practices are virtually identical to those employed in Canada. Both attempt to examine the restaurant’s financial records, but these are, inevitably, found to be “inadequate” for the purposes of assessing taxes accurately. This opens the door for the auditor to use an alternative, indirect method of estimating the restaurant’s sales. I’ve discussed these in several previous posts that you can read on this blog.
The difference, in recent times, is that the tax auditors are becoming much more aggressive in their audits of restaurants. Usually, this takes the form of unrealistic assumptions that are used to project sales from purchased alcohol. In both countries (and most others), the onus is on the restaurateur to prove that the audit assumptions are unreasonable. It is not enough to simply give a different assumption that estimates sales in the restaurant’s favour.
The restaurateurs’ anger stems from their belief that they are being unfairly targeted by the tax authorities. Tax recordkeeping requirements for small businesses, including restaurants, are quite stringent and costly. For this reason, few restaurants are able to comply. Consequently, they face more frequent audits and the tax authorities use indirect audit techniques to “verify” reported sales. Tax assessments place the onus on the taxpayer (restaurant) to prove (with evidence) that the auditor’s assessment is incorrect. The amount (and quality) of evidence necessary to disprove the auditor’s position is higher than the level of support used by the auditor, which places an unfair burden upon the restaurateur.
It is no wonder they are angry! I suspect we’re going to see a significant increase in angry restaurateurs in Canada, too.