Auditors Don’t Know Your Business

Here’s a bold statement:  tax auditors don’t know your business.

It’s true!  You know it, I know it, even the tax auditors know it!

As a result, you may think you have an advantage over the tax auditors.  Unfortunately, you don’t.  What tax auditors lack in knowledge they make up for by making assumptions about your restaurant.  Often, these assumptions are nothing more than the tax authority’s decisions to use certain “standards”.  For example, the “industry average” shrinkage allowance for draft beer (or liquor, or wine).  Here’s a surprise:  there isn’t one!  In almost every case, the tax auditor makes assumptions that are not favourable to your tax position, leading to large tax reassessments.

Auditors gather information from you (and other sources), and use this to form their assumptions.  Once they’re made, it’s up to you to refute them, if they are wrong.  The only way to refute an auditor’s assumption is to build a prima facie case against it.  This requires credible evidence and facts to show that, on the balance of probabilities, the auditor’s assumption is unreasonable, incorrect or even arbitrary.  As you can imagine, this is usually an expensive proposition, especially if you don’t already have the necessary evidence at hand.

A far better solution is to “help” the tax auditor form reasonable (accurate) assumptions at the very beginning of the audit.  To do this, you must have credible evidence to support assumptions that will ultimately show that you have not been hiding sales and evading taxes.  The only way, to know if your supportable assumptions will show your innocence, is to do a pre-audit analysis, similar to the type of analysis the auditor will conduct during the audit.  Here, your (and your accountant’s) superior knowledge will come in handy!

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