Running a restaurant is a demanding job. You have to deal with managing inventory, employees, health inspections and paying taxes. To increase their take-home pay, some restaurant owners underreport sales when filing taxes. However, this is a form of tax evasion, and the penalties can be severe.
Examples of restaurant tax evasion
If you built your restaurant from scratch, you might feel like you should keep more of your profits instead of paying it to the government. The following are only a few examples of how restaurants were busted for tax fraud:
- Falsifying tax documents by downplaying sales from the restaurant
- Underreporting income by hiding cash receipts
- Keeping two sets of books, one of which has false entries and utilizing that set of records to generate financial statements
- Failing to report or skimming cash transactions
- Claiming false or overstating deductions
- Including personal expenses under business expenses
- Paying relatives who are not employees or did not render any services
Penalties for tax evasion
Keeping an inventory or financial records that do not make sense may also put you at risk for a task audit. The Internal Revenue Service (IRS) rewards whistleblowers with a portion of the money they recover from tax evaders, so it may only be a matter of time before you are caught.
When someone willfully avoids paying their tax bill or underreports their restaurant’s income, they are engaging in tax evasion, a criminal offense. If you are caught, you may face up to five years in prison and a $500,000 fine.
You could still be held accountable even if you underreported your income by mistake or because you are unfamiliar with the tax regulations. Because businesses have more opportunities for deducting tax, the IRS may scrutinize you and your restaurant more closely than the average citizen.
It is common for many small businesses to make a mistake or fall behind on tax payments. Fortunately, there are ways to repay your back taxes and penalties or legally reduce your tax bill. If you feel like you cannot afford to pay your taxes and penalties, consider filing for an extension, setting up a payment plan with the IRS or consulting a tax attorney.