I’m a small independent operator with five employees, so why would the IRS seek me out?
After attending a recent IRS Nationwide Tax Forum in Dallas last summer, I returned with plenty of reasons the IRS would seek you out. First, the government needs to balance its budget and has fully staffed itself with new employees over the past few years. In addition, the IRS has upgraded its technology to integrate with many agencies, such as states, social security, banks, mortgage institutions and much more.
More importantly, restaurants are classified as a targeted “cash business,” and the IRS knows this category has a significant amount of underreported income, thus decreasing the tax revenues received. The IRS has sought out professionals in the private sector to teach and train their revenue agents about the cash pitfalls in restaurant operations and have developed many procedures to estimate the amount of expected income that should have been reported although there appears to be no evidence of cash.
Net sales are the focus point in underreporting income. Take the time to match up your POS system reports, your sales tax returns, your corporate tax returns and your accounting records, and create a simple spreadsheet that ties them together. Match your sales to banking cash and credit card deposits on a daily basis. At the end of the month, have an explanation for any excess deposits to your restaurant operating bank account that exceed your net sales, and be able to prove to the taxing agencies that these deposits are not taxable sales. Remember that the IRS can request all of these documents for inspection upon an audit of your restaurant operations.
Employment taxes are a target area due to the increased complexity and error rate in processing payroll regarding paying taxes and filing the appropriate tax returns. In this area, use a tested system that monitors all taxes and filings due based on the dates you create payroll checks so that you don’t get behind. All employment taxing agencies have the technology and manpower to start sending notices, and these take time and effort to clear up. Specifically, the IRS has a database that triggers a notice if returns or expected payments are not timely filed, and the penalties and interest add up quickly. Stay on top of this and do not ignore letters from any taxing agencies. Many times, these are errors and need only a simple response.
Can a disgruntled employee damage my business in the eyes of the state?
If you pay any of your employees in cash, you are giving control to them to eventually hold a hammer over your head if they threaten to report you to the state for hiring practices. Most state agencies have files that are opened and must be closed based on some sort of investigation if an employee or hired help follows the correct channels and reports discrepancies in wage reporting. Get some tax advice regarding independent contractor vs. employee classification, and scan your records to ensure all hired help is classified correctly. My experience is that the problem children always turn out to be the ones you are trying to help along in life—but not paying them correctly, more often than not, creates poor business practices and exposure to taxing agencies down the road.