[IMGCAP(1)]Back in May 2013, I wrote an article for Accounting Today, “Taxing Times for the Restaurant Industry.” References to it popped up in a few blogs and law firm websites shortly thereafter, so it appears someone was reading! In that article, I spoke about Form 1099-K, the IRS-mandated procedure for reports issued by credit card companies to taxpayers that accept credit cards for payment.
Our interest in this was simple. The IRS has a mechanism to compare Form 1099-K to gross receipts and can create audit leads. In the restaurant industry, which I believe is the primary target of this entire 1099K experiment, the same example used in May 2013 works as well today. Let’s say there are two restaurants, located in the same area, both with $1 million in gross receipts: The first has 75 percent credit card sales, whereas the second has 95 percent credit card sales. As a practitioner, which is the “audit lead?” The second, of course.
While an easy selection, why should it be? What is a reasonable benchmark? If an auditor says, “Your client’s credit card to gross receipts percentage is too high,” that is based on what authority? A study done in Vegas? Miami? I would suggest that the 1980s are long past, and plastic (i.e., the credit card) is here to stay. Yet, this is an audit approach used by the IRS and finessed to a fine art by the Commonwealth of Massachusetts. It simply has no merit, unless that “benchmark” is made available and can be analyzed by representatives and practitioners alike.
Our office has represented a lot of food service establishments, all over the Northeast. This is pertinent information. So we submitted a Freedom of Information Act request to the IRS, specifically requesting research data related to credit card to gross receipts as it relates to the restaurant industry, preferably allocated by region, if at all possible.
Well, we got our answer from the IRS. Our “request was denied, for law enforcement purposes.” We quickly ascertained that we were going to get no help from the IRS.
We believe this was unfortunate, albeit not surprising. At least they didn’t lose the emails! With the IRS getting budget cut after budget cut, one would think that releasing this data would be a wonderful aid, especially for practitioners. At least then we would know when to ask more questions.
For example, perhaps a client is subject to theft. Perhaps it’s in a business area, with patrons using credit cards almost exclusively. There are a myriad of explanations to address a variance—but a variance to what? The IRS is not forthcoming. Finally, perhaps a practitioner should know when it’s time to walk, frankly. Or at least warn a client of a potential discrepancy. Self-audit. The IRS refusing to reveal this data does nothing to help the voluntary compliance that is unquestionably more necessary with the IRS’s limited resources.
We believe this information will eventually be released via litigation. By Grace, we do pretty well with our restaurant cases. Thus the need to litigate at the Tax Court level has never materialized. However, at the Tax Court level, if a taxing authority uses a credit card to gross receipts test as part of its analysis, that data will need to be produced at the litigation level.
In the interim, we continue to strongly urge any of the restaurant trade associations to gather this information and publish it for its members. It is as important, if not more so, than the other multitude of “trends” these associations release, the vast majority of which are interesting, but much less relevant to what is really happening.
It’s been over one year since we first made this request, and we are aware of no such data being compiled as of yet. We also urge the IRS to reconsider its poor decision to refrain from releasing this data, gathered from taxpayers, for the benefit of taxpayers.
Paul Mancinone is a CPA and attorney at law, and represents businesses and individuals before the IRS. His office is located in Springfield, Mass.