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.

Continue reading “Taxing Theft”

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?

Continue reading “Rampant Restaurant Fraud”

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.

Continue reading “The Real Threat”

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.

Continue reading “Restaurant Tax Fraud – Then and Now”

It’s Going to get a Whole Lot Worse!

I don’t want to scare you, but I feel it is my duty as a fellow restaurateur and as an accountant.  After reading this headline, many of you will think this blog entry is going to be about the economy and how it will affect your restaurant business.  As for the economy, I think the worst is behind us, but there is another threat to your business that is going to be a lot worse in the next few years.  Let me explain…

Continue reading “It’s Going to get a Whole Lot Worse!”

Zapper Update

Today’s Toronto Star ran an article about restaurants hiding cash income.  You can find it here:  Restaurant probe finds $40M in ‘phantom’ sales.

Until recently, most detective work surrounding the use of zappers had been focused in Quebec.  Now, we find out that the CRA has been involved in a two year, national probe of the restaurant industry.  So far, they’ve found about $40 million of unreported income, though they expect to find much more by next March when the study is completed.

Continue reading “Zapper Update”

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.

Continue reading “Auditproofing – Average Costs”

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.

Continue reading “Auditproofing – Know Your Mix”