Auditproofing – Average Costs

So far, I’ve discussed the POS system and how to maintain it for accurate reporting, how to document your sales mix for all audit periods, and the importance of maintaining an accurate history of your menu prices.  Taken together, these bookkeeping tasks are crucial in helping the restaurateur determine, and properly support, accurate weighted average prices.  This is a crucial component of the mark-up calculation performed during a typical audit.

Now we’ll take a look at the actual cost of the alcoholic beverages purchased for sale.

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Auditproofing – Tracking Menu Changes

As a restaurateur, you probably have a general idea how your menus and prices have changed over the last few years.  Unfortunately, only having a “general idea” can land you in a big pot of trouble when your restaurant is audited.  This post reviews a few of the methods of documenting key changes to your menu and prices.  When the time comes, you will have accurate, credible information to support your actual margins and document the reasons for variances from the expected margins.

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Auditproofing – Know Your Mix

This is the second post in the series on auditproofing your restaurant from an unfair audit.  Most restaurants and bars with weak internal controls (almost all independent establishments), will be audited by the Canada Revenue Agency (CRA) or a provincial tax authority using an indirect audit approach.  In most cases, this approach will be the mark-up method, which seeks to project the sales level that was likely to have been generated based on the amount of alcoholic beverages purchased by the establishment.  As we have seen in other posts, this audit method involves making a number of assumptions about the operation.  Determining what these assumptions should be, can be quite complicated.

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Auditproofing – POS Housecleaning

Today’s posting is the first in a series of articles about “auditproofing” your restaurant.  By this, I mean taking proactive steps to help ensure that your restaurant or bar is not unfairly reassessed for sales and income taxes when it is audited by the CRA or provincial tax ministry.  Please check back regularly for other methods of auditproofing your business.  If you have any questions, please post comments to the articles, and I will do my best to respond.  If you prefer, you can email your questions to me.

Most restaurants have a computerized point of sale (POS) system to keep track of items ordered by each guest, send orders to the kitchen or bar, and process guest check settlements.  Most systems can keep track of many other important transactions, such as discounts given (by type and employee), voids (with reasons, by type and employee), ingredient usage, and many others.  From a tax perspective, the POS system keeps track of every item ordered and calculates the appropriate sales tax.  Just like your car, the POS needs to be maintained properly.

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How Much is Too Much?

This post concerns customer comps or promotional drinks served by restaurants and bars.  The issue is:  how much is too much?

Most restaurants and bars offer promotional drinks to their customers from time to time.  Sometimes it is to acknowledge frequent visits, high spending or special occasions.  Other times it may be to “compensate” a customer for a service or quality issue.  In either case, the customer receives a free (complimentary) drink.  All restaurateurs know that this is an effective method of promoting and growing a restaurant business.  However, if you don’t keep track of these types of promotions properly, customer comps could be your downfall.

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5,000 Tax Auditors on the Prowl

In a National Post article last December, CRA warns business owners on Tax Cheating Software, it disclosed that the CRA has dedicated 5,000 employees to the task of finding unreported income and ensuring that sales taxes are remitted properly, “even when sales records are missing.”  This is a thinly disguised warning to restaurants (and other cash businesses) that CRA is about to descend on your business, using indirect audit methods to identify unreported income and the sales taxes that should have been remitted.  The reference to tax cheating software refers to sales suppression software, also known as “zappers”.

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You’ve Been Selected

You will find out about your upcoming audit, when you receive an officious telephone call from the auditor assigned to your establishment.  He or she will try to schedule a start date for the audit within the next couple of weeks.  They don’t like to give you too much time to get ready for their arrival, but they have some scheduling flexibility.  It all happens very quickly (in the space of a minute or so).  Even seasoned tax professionals begin to sweat!

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Is Your Restaurant Going to be Audited?

If you operate a restaurant or bar that serves alcohol, you can be certain that you will come face to face with one or more government auditors, about every four years.

Why?  Provincial and federal tax authorities truly believe that under-reporting sales is rampant in the hospitality industry.  Tax authorities are statute barred from reassessing returns more than four years old, in most jurisdictions.  So, every few years, you can expect a visit from the provincial sales tax auditor, who will audit two to four years’ worth of sales returns during each visit.  Canada Revenue Agency audits GST returns, but not nearly many or as often as the provincial authorities audit RST returns.  Undoubtedly, this is because there are far more GST registrants than RST vendors, and the GST registrants are much larger tax collectors.  However, with the coming harmonization of Ontario and BC sales taxes with the GST, both provinces’ licensed restaurants should expect a dramatic increase in sales tax audits (covering both taxes).

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Welcome!

Welcome to my new blog that should be a ‘must read’ for restaurateurs and their financial advisors.  My primary focus is on the audit procedures and practices used by Canada Revenue Agency (GST and income taxes) and the various provincial tax authorities (Retail Sales Tax & income taxes).  I am particularly concerned about the very significant risk that these practices  present to your restaurant.  To my knowledge, there are no other blog (or web) sites addressing this vital topic.  At the present time, I will remain anonymous, to avoid possible recriminations that may result from my comments.

As a successful restaurateur, I have been audited by CRA and the provincial government several times.  As a Chartered Accountant, I have been involved, helping other restaurants through their audits and subsequent appeals of their reassessments.  It can be an extremely frustrating, time-consuming, and expensive experience dealing with government auditors and the inevitable reassessments.  And it is getting worse!

In this blog, I will explain the various practices employed by tax auditors and how you can avoid an unjust reassessment.  Not only can you expect to save thousands of dollars in additional taxes, you may be able to significantly reduce your professional fees incurred to fight these insidious tax reassessments.  In Ontario, to obtain or renew your liquor license, your sales tax account must not be in arrears.  An audit will usually result in a reassessment for additional taxes, along with penalties and interest.  In most cases, the reassessment comes as a complete shock to the restaurateur.  Whereas CRA reassessments can be appealed, resulting in a suspension of immediate collection efforts, there is no such provision for Ontario taxes.  They will aggressively pursue collection efforts as soon as the reassessments are issued.  If your license is up for renewal, you must pay the entire amount of reassessed taxes, even though you will be appealing them. 

In July, 2010, Ontario and B.C. will be “harmonizing” their provincial sales taxes with the federal GST.  This has a number of implications for restaurants and other businesses.  Provincial auditors will be out if full force during the next four and a half years, as they attempt to audit as many businesses as possible before the sales tax years become statute barred from subsequent reassessment.  This will be their last kick at the cat, so to speak.  All indications are that they will not let this opportunity go by.    After that, you can expect to see more frequent visits from CRA auditors.  When they make a reassessment, it won’t be for 5% GST shortfalls, it will be for 13% HST shortfalls (Ontario).

With over 30 years’ experience as a CA, and 15 as a restaurateur, one can feel that he has seen it all!  But, I know that I haven’t.  I’m sure there are many new horror stories that would be of interest to my readers.  If you have such a story, please do tell us about it, so that we can all learn from the experience.  Obviously, you should write these stories anonymously.  If you are more comfortable sending the details to me in an email, please send them to bartaxca@gmail.com.  You can be assured that I will keep any private information in the strictest of confidence.