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Pizza parlors and tax audits: 3 ways to reduce the risk

As the year ends, many small business owners are doing more than just buying presents for family members. They are getting their paperwork in order to make sure their businesses are ready for the coming tax filings. While gathering this information, it can help to know some basic, proactive steps business owners can take to reduce the risk of a tax audit.

There are certain tips that cater to specific business types. As such, this piece will focus specifically on those who run a small restaurant business, like a pizza parlor.

Why are restaurants like pizza parlors different than other small businesses?

Transactions in these types of businesses often involve a great deal of cash. This is true even with society’s shift in reliance from cash to credit cards.

To make things even more difficult, the Internal Revenue Service (IRS) has been accused of targeting pizza parlors. In 1995, the agency released a report explaining how the agency will compare the numbers from pizza ingredient suppliers to calculate estimated sales figures. If the agency’s estimations do not correlate with the restaurant’s reported figures, an audit is likely.

What can pizza places do to reduce this risk?

A proactive approach will not only reduce the risk of an audit but will also serve to set the business up for success in the event of an audit. These tips will help:

  • Organized paperwork. Although true of any business, keeping good records is particularly important when operating a cash heavy business like a pizza parlor. This can include copies of register tapes (if still in use) and sales records.
  • Regular reviews. A thorough business owner likely already conducts regular reviews. A monthly review of the business’ financial status can help to better ensure proper reporting.
  • Outsource. For those who are not keen on bookkeeping, outsource the task. Use of a professional accountant on a regular basis can help to better ensure the business’ numbers are reported accurately.

It is also important to take advantage of legal methods to reduce the business’ tax obligations. Tax deductions and credits are available. Take them as appropriate but be prepared to back up the claims with the needed paperwork.

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