Cash is a good way to get clobbered for taxes!
For many years, small restaurants, bars, pizza parlors, ice cream stands, and other food establishments have used all cash systems to hide their income and not pay sales tax and income tax on the full receipts. In New Jersey, the Division of Taxation has created a very aggressive system where they make up excessively high mark ons from food and liquor purchases, and absolutely slaughter businesses that don’t keep good records.
The way this tack works by the New Jersey division of taxation is they subpoena the records from the major food suppliers and liquor distributors. The tax authorities then compared the expenses listed on the tax return to what these third-party sellers reported. Often a business that is trying to hide income lessons the income reported but also lessens expenses but only slightly. The division of taxation then takes the actual expenses and uses very high multiples of the expenses to with the growth should be. Using these high multiples they then decide a phony gross income far beyond the real gross income, add sales tax and corporate or personal income tax. The result is a total disaster for the business that does I keep good records.
In New Jersey and some aggressive states, businesses use sophisticated point-of-sale systems, so the business owner can then prove with the actual income is versus the claims by the Division of Taxation. In fact the division of taxation is far behind that of many small businesses. For example, during a recent audit, a client with a very sophisticated point-of-sale system had every kind of record imaginable kept electronically. The division of taxation was upset that the actual food tickets for each order were not kept in paper format. I simply had my client prepare a computer printout report listing each item sold for the period requested. Because the information was so large, rather than printing out thousands of pages of copies of food tickets, even the auditor agreed that receiving the information in computerized format is easier.
Also, the Internal Revenue Service is far behind current practices. I have many clients, including small pizza restaurants, where 80 to 90% of their business is credit card. The IRS cannot believe that they are not hitting some cash. Nevertheless, go into any fast food restaurant, for example your local McDonald’s. Credit card machines at each cash register for the customer simply to swipe the card. Many people swipe a card for buying a soda or other very small order.
What is even more interesting, is that in some parts of our country, food service business owners are not catching on. For example, in the Poconos in Pennsylvania, many restaurants and food service establishments simply will not accept credit cards. They typically have a sign that says “cash only” and many have an ATM machine in their restaurant. Typically they either do not use their cash register or write out handwritten receipts and clearly keep poor records to hide the gross receipts. My prediction is that these businesses are going to be attacked with a vengeance because of the poor record-keeping and are going to be suffering huge expense in both audits, potential fraud claims and taxes. When any of these businesses get an audit notice from the IRS or state tax authority, they should immediately contact their tax attorney. The tax attorney will have attorney client privilege and can work with their accountant or bookkeeper in fighting the audit.