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Tax enforcement on menu for restaurants

On Behalf of | Sep 29, 2020 | Tax Law |

Restaurants and other businesses have struggled to remain in business during this pandemic. But this has also led to tax shortfalls and budget deficits for state and local governments. In this environment, restaurants can anticipate audits and aggressive tax collection after the pandemic and elections.


Restaurants improve their ability to defend against high tax assessments and civil penalties by learning about the sales tax environment, keeping good records, and taking active measures. Preparation may limit tax exposure away from its owners and officers as individuals and help avoid criminal prosecution.

Auditable records

Restaurants often keep daily sales ledgers of cash and credit totals. These may be divided into taxable sales, non-taxable sales, and tips. This can be sufficient for accountants to prepare sales tax returns, but auditors may require more detailed information.

Auditors may require guest receipts or point of sale print outs identifying individual sale transactions. Without this information, auditors can use alternative methodology to estimate taxable sales.

Another auditor methodology is to compare the owner’s records against the industry average for ratios of credit card receipts from 1099-K forms to gross sales. This is usually gathered from confidential information reported by other area restaurants.

Many times, this ratio will be higher than the industry average and lead to a higher tax bill and penalties. But restaurants have different business operations, serve different cuisines, and have different types of patrons. Because these assessments are based on confidential information compiled about other restaurants and not on the audited restaurant’s records, these assessments may exceed that restaurant’s ability to pay.

Personal tax assessments

A responsible party assessment may be levied against the owner if the business has an assessed sales tax liability. If a business collects a sales tax but does not send it to the state, auditors may attribute the tax liability personally to the owners if they are responsible parties. This may also happen if the business did not collect the tax but has an audited sales tax liability.

A fact-based analysis might help avoid or reverse responsible party determinations against owners.

Tax funds

Sales taxes are trust funds and their misuse may be prosecuted as theft. Restaurants should keep separate bank accounts for collected sales tax and avoid commingling of funds. Collected sales tax should be timely remitted to the government even of the restaurant owner or operator needs the money for other expenses and intends to repay it.

Restaurant and other busines owners may reduce the potential consequences of aggressive tax enforcement by seeking legal representation. An attorney can assist owners and operators in audits and help reduce exposure to civil or criminal legal liability.