It was kind of fun trying to come up with a decent headline for today’s article. Tips are in the news a lot, lately. Servers, and others who receive tips, don’t like handing out a portion of their tips to other co-workers and especially not to the “house” (management). Now, we find that they don’t like “tipping out” to the big house, either! It’s not like we didn’t know this, but apparently, the CRA is just starting to take notice!
CRA Auditors Charged
I’m certainly not saying that all, or even a significant number, of CRA’s tax auditors are corrupt, but this story in the Montreal Gazette highlights some very interesting issues surrounding restaurant tax audits.
The corrupt tax auditors seemed to focus on restaurants, knowing that they could “justify” large reassessments, unless the owners paid them bribes. In at least one case, the auditor asked for the bribe before auditing the restaurant! Finally, the auditors could just as easily make a restaurant appear to be reporting all of its income as it could make it look like they were evading large amounts of tax.
An RCMP investigation of Canada Revenue Agency employees has resulted in three former auditors being accused of shaking down restaurant owners for cash.
Highly Profitable Tax Auditors
While this story originates in the United States, it is just as applicable here, in Canada.
Reuters’ David Cay Johnston noted today that IRS auditors “assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year.” [bold italics are mine]
A few things to note.
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?
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.
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.
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…
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.
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”.