You may not be aware, but there is a Taxpayer Bill of Rights in Canada. There’s even a CRA Guide. I have to admit, I’ve rarely had occasion to look at it, until recently. Today’s post covers several key taxpayer rights that are likely to be trampled upon during an audit. This is especially true for audits of restaurants and bars.
Disproving Audit Assumptions
During a typical audit, the tax auditor interviews the taxpayer about the business operations and various factors that influence sales, such as portion standards, selling prices, theft, spillage, own-use and over-pouring. If the auditor exercises sound judgment, the taxpayer’s assertions will be considered prima facie evidence that the assumptions are reasonable in the circumstances. These assumptions form the basis for most audit assessments of restaurants and bars. What if they’re just plain wrong?
U.S. Tax Audits Draw Anger
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.”
Perfect Pour = Unreported Sales (and Taxes)?
Huh? Do you mean that if I never over-pour drinks, my establishment can still be accused of under-reporting my sales (and taxes) during an audit? That can’t be right! Can it? Unfortunately, it IS true for almost every restaurant and bar in Canada! Today’s post explains how this happens and what you can do about it.
Most restaurants and bars use shot glasses or portion control pourers to accurately measure the amount of liquor that goes into cocktails, mixed drinks and shots. Meticulously training bartenders and monitoring pouring, you’re fairly confident that your pouring is fairly accurate, if not “perfect”. Even if it is, your establishment will be over-pouring all of your liquor drinks by at least 4%!
Why?
Continue reading “Perfect Pour = Unreported Sales (and Taxes)?”
Theft = More Taxes
Most restaurateurs know they lose the cost of the pilfered product, but few understand that they may be responsible for the sales and income taxes (plus penalties and interest) that would have been incurred had the stolen product been sold. Significant tax liabilities often arise from sales (and income) tax audits of restaurants and bars. This can occur anytime purchased wine, beer and liquor is not sold, and one of the most common (and largest) causes of these items not being sold is theft and fraud.
CRFA Publishes Licensee Pricing Calculators Using The New HST
Recently, the Canadian Restaurant and Foodservices Association (CRFA) published three calculators to help restaurateurs determine the effect on the new HST, effective July 1, 2010, on their prices. The calculators cover wine, spirits and beer. I’ve included the links, below. You can read more and find a discussion on their use and potential effects on your menu pricing in July, here.
The Real Threat
Despite what has been published in the press and disclosed by the CRA and the Ministry of Revenue Quebec (MRQ), the use of zappers has not reached epidemic proportions in the restaurant industry. Zappers have been around since the mid-1990s, though most of the usage seems to have been confined to Quebec. In fact, the vast majority of the convictions for sales tax evasion have occurred in Quebec. For background on the use and abuse of zappers, please read this, this, and this. The unfortunate thing about all of this attention is that it may draw our attention away from a far larger threat to our operations. The indirect audit approach.
New Linked-in Group for Restaurateurs and Advisors
A new Linked-in Group has been started to discuss issues of interest to Canadian restaurateurs and advisors.
Here is a short description for the group:
This is a group for discussing issues related to operating a restaurant or bar in Canada. It can also be used to ask for information or assistance from other members. It is open to all restaurateurs and advisors in the hospitality industry.
If you would like to join the discussion, please visit www.linkedin.com and search groups for “Canadian Restaurateur”. Request to join the group. Tell your fellow restaurateurs about this group and this blog!
How to Get Caught Using Zappers
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.
Restaurant Tax Fraud – Then and Now
Recently, we’ve begun to hear a lot more about tax evasion in the restaurant industry. More specifically, we’re talking about technologically-assisted tax fraud, using zappers or phantom-ware. It made the news, again this past week, when it was disclosed that the Canada Revenue Agency had found more than $40M of unreported tax in the restaurant industry attributed to the use of zappers. Today’s post looks at the issue of tax fraud in the restaurant industry and tries to determine how “rampant” it might be.
While tax fraud can occur in many different ways, when we talk about the restaurant industry, it usually takes the form of cash sales “skimmed” off and not reported for tax purposes.