A False Sense of Security

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.

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Beware Harried Ontario Tax Auditors!

When the Ontario government repealed the Retail Sales Tax (RST) in favour of the new Harmonized Sales Tax (HST), it transferred audit and collection activities to the Canada Revenue Agency.  Unfortunately, that doesn’t mean Ontario restaurants can forget about the old RST!

Ontario is still responsible for auditing the old RST for periods up to June 30, 2010.  Under the Statute of Limitations, Ontario has up to four years to audit the RST.  Actually, they can go back more than four years, if they can show fraud or misrepresentation or if they obtain a waiver from the taxpayer.

Many of these Ontario auditors will be transferring to the CRA in 2012.  So, they are racing to complete audits of most Ontario RST vendors.  This is especially true for Ontario restaurants, which have always been a target of the Ministry of Revenue.

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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.

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Qualities of a “Good” Restaurant Accountant

Here are the top five qualities of a “good” restaurant accountant:Drowning in paperwork

  1. Understands your restaurant and uses this knowledge to offer strong advice for improving your operations and finances;
  2. Analyses sales, expenses and margins to identify problems and improve profitability;
  3. Provides sound tax advice to legitimately maximize your deductions and minimize your taxes;
  4. Ensures that you comply with all tax laws, and
  5. Knows how to document and prove your margins to a tax auditor.

The last point deserves a bit of an explanation.

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Taxing Theft

We all know that some amount of alcohol will be pilfered.  Don’t you love that word?  Pilfered.  Sounds like a mere pittance.  It is anything but.  As a rule of thumb, the cost of the theft will be about three times the cost of the alcohol that is, ah, pilfered.

If you’ve been following recent posts on my sister blog, Canadian Restaurateur, you may have noticed a theme. Theft.  All restaurateurs know that theft is a significant issue that requires our constant vigilance.  The cost of the stolen product is bad enough, but if you also have to pay tax (plus penalties and interest) on the retail value of the stolen product,  it becomes a huge issue.  Everyone knows it isn’t right that a restaurateur should have to pay tax “as if” the stolen alcohol had been sold. Unfortunately, that isn’t the way it works in most tax jurisdictions.

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Rampant Restaurant Fraud

The Canada Revenue Agency released some details of their 3-year pilot study (it was only supposed to run two years) of fraud in the restaurant industry.  While not many details were released, you can read the Globe and Mail article, Taxman finds rampant restaurant fraud.

The media’s interpretation of the details that were released is a bit misleading.  Of the 424 restaurants that were subject to scrutiny, it was determined that 143 of them exhibited evidence of fraud by erasing evidence of cash sales from their electronic POS systems.  This is how they arrive at the “one-third” of all restaurants fraudulently hide sales from the taxman. Further, almost $1 million of hidden sales were revealed for each fraudulent establishment ($141 million).

So what’s misleading about that?

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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?

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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.”

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