Why Restaurants Get Audited
If you’ve ever wondered why one restaurant gets slammed with a sales tax audit and another doesn’t, this is for you. In this candid interview, CPA Raffi Yousefian sits down with CPA Mark Stone, founder of Sales Tax Defense, former New York State tax auditor, and one of the most trusted experts in sales and use tax for hospitality businesses, to unpack the real reasons restaurants land in audit territory.
With over 30 years of experience handling sales tax audits, appeals, and litigation, Mark brings an insider perspective and practical fixes. He and Raffi met through NYSRA, and both have deep industry knowledge with technical tax defense, so this conversation reflects what really happens behind the scenes.
Spoiler alert: it’s not just about the numbers… it’s about how you report them.
Why Restaurants Get Audited
Restaurants aren’t audited randomly; there’s usually a clear trigger. Most of the time, inconsistencies or unusual patterns in financial reporting alert the state’s auditing system. Knowing what these patterns look like can help you steer clear of trouble.
Raffi: Mark, let’s start from the top. What’s the biggest reason restaurants get audited?
Mark: Simple, numbers don’t match up. The state uses data analytics, looking at patterns, industry averages, and trends. If your numbers stray from what’s typical, they’ll dig deeper. For example, showing significantly higher cash sales compared to nearby competitors can set off alarms.
Raffi: So, it’s about patterns more than absolute numbers?
Mark: Exactly. It’s all about how your data compares with industry benchmarks. Sudden changes or irregularities in these benchmarks will trigger scrutiny.
Also, if you show them a point-of-sale system, they’re usually pretty good with accepting it. I experience that restaurants with a point-of-sale system and report from a point-of-sale system don’t get audited.
Key takeaway: Audits aren’t random; discrepancies in data spark scrutiny.
Top tip: Regularly compare your figures to industry benchmarks to identify and address anomalies early.
The Ratios That Trigger a Sales Tax Audit
Auditors aren’t guessing; they’re analyzing specific financial ratios carefully. These ratios serve as indicators, quickly alerting auditors if your restaurant’s reported numbers don’t match industry standards.
Mark: Much like the IRS, New York State has—I call it the secret sauce that nobody has the recipe for. The IRS calls it a DIFF score. And the DIFF score is a data analysis thing. They know that certain ratios should tie in. For example, New York State looks for a restaurant’s sales to be 12 to 15 times the rent.
Raffi: They’re also watching your sales-to-purchase ratio (on your income tax returns) closely, right?
Mark: They look for a restaurant’s sales to be 4 or 5 times the cost of goods. If your sales are only 2 times the cost of goods sold, that income tax return will trigger a Sales Tax audit. If your sales are only 5 times your rent, that return will trigger a Sales Tax audit.
But if you’re reporting from your POS system, your reported sales are probably going to be higher because you’re probably reporting most of your sales. So your ratios will be right. So you probably won’t get audited. So it’s not that they respect the POS system that much more. They do respect it. But more importantly, it helps you avoid audits because your ratios don’t raise red flags.
Mark: Another big one is the cash-to-credit ratio. Most restaurants in your area (NYC) run about 90% credit and 10% cash. Suddenly, you’re showing 60% cash? Red flag. Auditors know cash-heavy businesses might be understating sales.
Key takeaway: Specific ratios like cash-to-credit and sales-to-purchase are audit triggers.
Top tip: Monthly ratio checks help identify red flags and address them proactively.
Bank Deposits ≠ Sales, And Auditors Know It
One of the most common mistakes restaurants make is using their bank deposits to estimate taxable sales. On the surface, it sounds reasonable—but it’s a trap. Your bank statement doesn’t reflect what’s subject to sales tax, and treating it like it does can throw your reporting way off.
Raffi: Mark, why is using bank deposits as sales such a common—and dangerous—mistake?
Mark: Deposits include non-sales amounts like loans, refunds, transfers from other accounts, and non-sales-related income. If treated as sales, your taxable sales appear inflated, creating suspicious fluctuations and triggering audits.
Raffi: So, how should restaurant owners handle this?
Mark: Keep meticulous records to clearly separate actual sales from other deposits. Labeling every deposit correctly is critical.
Key takeaway: Bank deposits rarely match your actual taxable sales.
Top tip: Clearly separate your taxable sales from other income streams in your bookkeeping.
When Inconsistency Triggers an Audit
Consistency is the best safeguard against audits. Small discrepancies happen, but ongoing inconsistencies invite scrutiny.
Mark: If your POS says $10,000 in sales last week but your tax return says $8,500, you’re creating audit risk. Repeated discrepancies make an audit inevitable.
Raffi: What’s the fix?
Mark: Systems integration. Your POS, bookkeeping, and tax returns must align consistently. It might feel tedious, but it’s essential.
Raffi: Any practical tips for achieving consistency?
Mark: Implement regular monthly audits internally. Compare your sales records, POS data, and tax filings carefully. Address any inconsistencies immediately, and document your adjustments clearly.
Key takeaway: Persistent inconsistencies across systems are a primary audit trigger.
Top tip: Perform regular, detailed cross-checks between your POS, bookkeeping, and tax returns to catch and correct discrepancies early.
Final Thought
The scariest part of a sales tax audit is often the part you didn’t know you were getting wrong. Most restaurant owners aren’t trying to cheat the system, but mistakes, mismatches, and mislabelled numbers can still set off alarm bells. What triggers an audit isn’t just what you earn; it’s what your records say you earned, how consistent they are, and whether they match the patterns the state expects to see.
If you run clean numbers, reconcile regularly, and catch errors before the state does, you’re giving yourself the best possible defense.
Next up: Part Two – Recordkeeping, POS, and Multi-State Risk. We’ll look at what happens when your systems don’t talk to each other, the traps hidden in POS setup, and why expanding across state lines can open up a whole new can of sales tax worms.
