THE PIZZA INDUSTRY It has been suggested that skimming may be common in the pizza industry
Examinations have also revealed that several taxpayers took cash out of the drawer without reporting the amount as income. There is virtually no audit trail to determine the amount of funds spent for business and personal expenses. When it is time to make a deposit, some taxpayers would pocket some of the cash and deposits only that portion necessary to cover those expenses to be paid by check. It was found in many cases that business expenses as well as personal living expenses were paid with cash taken from the cash drawer. Audits in Providence have uncovered as much as $700 per week in cash being taken out of the cash drawer.
Furthermore, the project group also found that many pizza restaurant owners are aware of the Government's need to establish certain facts to fully develop the unreported income issue. Most of the individuals encountered by the project group appeared to live modestly with no apparent great accumulation of assets. Therefore, examiners should be alert to look beyond this to develop the underrporting income issue.
The following situations are indications of poor sales records.
1. Gross receipts on the tax return come from monthly summary sheets. The amounts are all even, round amounts with no further backup.
2. Gross receipts per return come from monthly sales tax returns filed with the state. The sales tax returns are the only records of gross receipts.
3. Taxpayer computed receipts based on deposits to the bank accounts, yet failed to report the deposits made to personal accounts and cash payouts.
4. Taxpayer has absolutely no documentation to support the income reported on the tax return.
the agent should look for the following:
1. Personal living expenses well above reported income
2. Assets acquired possibly with skimmed receipts
3. Accumulation of funds in various bank accounts with no reported income
4. A low gross profit percentage 5. Assets such as automobiles, personal residence, etc., could be indications of unreported income
6. Other lavish expenses with no nontaxable source of income.
the total number of pizzas and grinders sold can be determined from the amount of ingredients purchased, and the restaurants income can, therefore, be reconstructed.
The following explains the steps in the reconstruction of pizza and grinder income.
1. Determine the total number of pounds of flour and cheese purchased and the number of cans of pizza sauce purchased.
2. Multiply the total number of pounds of flour and cheese by 16 to calculate the total number of ounces of flour and cheese, respectively.
3. Multiply the total number of cans of pizza sauce by 105 ounces (the total number of ounces in a #10 size can).
4. Divide the total ounces of flour, sauce and cheese purchased by the respective average weight of each ingredient per laboratory results.
5. The result is the total estimated number of pizzas sold based on flour, cheese or sauce purchased. The three methods (flour, cheese or sauce) should closely approximate pizza sales and should be relatively close. Attempt to use the lower, more conservative number of pizzas sold. If there is a large discrepancy between the three methods, there is a chance that not all of the suppliers have been identified, or possibly some products were purchased with cash.
6. Multiply the units sold by the average menu price of a large and small cheese pizza to arrive at pizza sales.
The most common problem identified during the examination of the pizza restaurants is the cash wages paid “off the books.” This appears to be a common practice in the restaurant business. Many times, employees are paid with cash taken from the cash register and there are no payroll or time records maintained.
The obvious problem here is the avoidance of taxes. The owner avoids the payroll taxes, but in addition, the employee avoids paying tax on the wages. It is nearly impossible to run a restaurant alone.
One method is to use the purchase invoices to identify employees who were not on the payroll but were signing the daily purchase delivery slips.