Many restaurant owners think they’re protected from the tax auditors, simply because they have a good accountant. While that’s true in some cases, just about every restaurant that gets hit with a tax audit reassessment (and usually a large one at that) had a “good accountant”!
In Canada, every restaurant that appealed tax audit reassessments in court had an accountant. In the U.S., many states publish details of tax appeals by restaurants (informal tribunal appeals, roughly equivalent to Canadian appeals by Notice of Objection). There are literally thousands of cases and virtually every one had an accountant. In the vast majority of cases, the restaurants lost their appeals. I’m sure most of these restaurants thought that their accountant would protect them from these tax reassessments.
A restaurant is the definition of a “cost conscious” business. To survive, owners have to count pennies, constantly. Usually, this means negotiating and bargaining with all suppliers, including accountants and bookkeepers. Accountants and bookkeepers record transactions based on POS reports, invoices, cheques and other information. They check to make sure everything balances and the numbers look okay. Then, they prepare financial statements and tax returns based on their accounting. Rarely do they investigate the reasons why your sales were less than expected.
In a cost conscious industry, even good accountants can’t justify the additional time required to properly (proactively) protect their clients from tax audits. Why incur additional cost, if an audit isn’t imminent? Most restaurateurs won’t pay for it anyway, unless they can be convinced that it will be cheaper in the long run.
Unfortunately, the true cost of this cost consciousness isn’t felt until the audits take place. By then, it is usually too late to properly prepare for the audit. Documentation and evidence that is needed to prove your innocence likely wasn’t gathered in the first place. So, it isn’t available to help you during the audit. Unfortunately, most credible evidence cannot be recreated, if it wasn’t obtained when the transactions occurred.
Defending against audit reassessments, without proper evidence, is both difficult and costly. A “good” accountant should be helping you identify and gather the information that will be needed for future audits. Failing that, you will need alternative evidence, gathered after the fact. Unfortunately, this evidence is usually weaker and less likely to prevent an audit reassessment. And, it’s much more expensive in terms of accounting and legal fees. You’re also much more likely to get a large tax bill at the end of an audit and be unable to successfully appeal it.
There is only one, cost-effective way to protect your restaurant from the tax auditor.
You (not your accountant) need to be continuously gathering the information you will need to prove you were not hiding sales (and taxes). Financially, your time is “cheaper” (out of pocket) than that of your accountant’s. You’ll need your accountant to help prepare for future audits (using this information) and represent you during the process, but not to gather information.
You just need to know what to gather, so you will be prepared for future audits.
A One-time Proactive Tax Audit provides you with the roadmap to being properly prepared for future audits, at the least possible cost.
My website has additional information for restaurant owners about accounting and tax issues.