Sunday, July 19, 2015

Restaurants and Taxes

New York newspapers reported the other day that a former Congressman was sentenced to eight months in prison for one count of tax fraud related to the operation of a restaurant he co-owned.

The eatery, pictured above, is now closed.  The 20-count indictment resulted from a federal investigation that was initiated to look into the man's political fundraising.

It ended up focusing on his restaurant.  The man admitted that he had underreported restaurant sales and wages and that he had filed false business and personal tax returns for three years.   

He argued that all restaurants engage in such practices.  Some quotes:

      "You're not going to have a restaurant in Manhattan with delivery boys and not 
      pay them off the books. The truth is I should've closed."

      "I'm the only restaurant owner in all of New York to be criminally prosecuted" 
      for paying workers under the table.

In fact, he was nearly right.  His lawyer had combed through federal records and found 200 similar prosecutions of restaurant operators in the Eastern and Southern federal districts of New York that resulted in fines but no prison time.  

The prosecutors countered with seven (7) cases in the same districts that had resulted in prison terms; apparently the longest was six months, shorter than the sentence handed down to the former Congressman.

(We could discuss whether politicians should be held to higher standards than everyday citizens, but I'm not sure our political class could stand the scrutiny.)

Restaurants and Fraud

The restaurant business is a challenging one.  Many restaurants barely break even, and many go broke.  There are several locations in my town that have seen three or four dining concepts tested and failed in the last 10 years.  I don't think this is unusual.

In a tough business like that, it is tempting to cheat and there are many ways to do so.  Here are a few:  You can inflate your food costs with the help of cooperative vendors.  You can operate two credit card accounts, claiming one for tax purposes and the other not.  You can hire illegal immigrants off the books, paying them less and saving payroll tax expense.  You can tear up receipts for bills paid in cash and put the cash in your personal bank account.   

Last month, New Jersey officials prosecuted the owner of one restaurant for wire fraud and nonpayment of sales taxes.  That restaurant closed, but it was an exception.

Last year, two owners of another Jersey restaurant pled guilty to filing fraudulent tax returns between 2005 and 2008, cheating the federal government of almost $300,000 of taxes.  The restaurant opened in 1994, and you don't have to be a cynic to suspect that the business did not operate on the up-and-up for its first 11 years.  That restaurant is still open.

About 10 years ago, a longtime restaurant in my town was similarly charged and paid similar tax arrears and a penalty.  That restaurant also is still in business, but I don't think I know anyone who eats there. 


Several weeks ago, the Significant Other and I met the younger person in Manhattan for Sunday brunch.  The day was pleasant, and the food was good.  We had a nice time.

When the check came, the SO pulled out his credit card and put it on the tray.

"I'm sorry.  We only take cash," said the waiter.  So we gave the guy cash.

Still annoys me to think about it. 

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