If your company received a Form DR-840 Notice of Intent to Audit Books and Records for Sales and Use Tax from the Florida Department of Revenue, then you probably have a lot of questions. Whether you believe your company is clean as a whistle or you know of some potential problems that might reveal themselves during an audit, it is a good idea to at least speak to someone about your specific situation.
Whether it be your trusted accountant, CPA, or attorney, we highly recommend that you at least talk to someone that really knows how to handle a Florida sales and use tax audit as well as some of the potential issues that could arise. Even a short discussion with an experienced sales and use tax professional could reveal things that you could plan for during the audit.
Our firm adopts clients several times a month that tell us when their sales tax audit started they had absolutely no concerns. You see, it is very common for a business owner to believe everything has been done right and they welcome the auditor into their business with little concern. It is only after the audit is over that the business owner finds out that the company is facing a large sales tax assessment over something the auditor feels the company was doing wrong. Business owners are surprised that, just because a company turns over every penny of sales tax collected, it does not mean that a vendor does not have additional sales tax liabilities that could arise during a sales tax audit. The sales tax auditor will also be looking a lot more than just your sales, which again surprises many small business owners.
The purpose of this article is to give you a big picture overview of the Florida sales and use tax audit process and invite you to contact one of our Florida sales tax attorneys for a free initial consultation if you have any questions.
The DR-840 Audit Notice
This is a standardized form given to every business undergoing a Florida tax audit. It is usually accompanied by a questionnaire that has been somewhat tailored to your specific business and always includes a request to provide responses to the questionnaire within 15 days.
There are a lot of time tables in an audit: some real, some not. This 15-day period is completely made up. By law, the FL DOR Auditor cannot force you to start the audit until 60 days after the date on the DR-840 UNLESS you let them. The auditor will often call you with strong hints that you have to get start sooner. Auditors get evaluated on how many audits they close out in a year, so they are incentivized to harass you into rushing the audit.
Know your rights. If you don't want to start the audit until after the 60th day, then politely say no.
How Far Back Can the Audit Period Go?
The statute of limitations in Florida is 3 years from when the sales tax return is due or when the return was filed, whichever is later. So the audit can only go back three years. (Note: if a sales tax audit turns into a criminal investigation, then the state can go back 5 years). The issuance of the DR-840 also tolls the statute of limitations, so the state has 12 months to finish the audit.
What Records Do I Have to Provide?
The questionnaire always asks for a TON of records, many of which small companies do not even have. The auditor usually asks for so much that I expect to one day see an auditor request a photo of the kitchen sink just to be thorough. Hasn't happened yet.
You don't have to provide all the records requested, but you will need to provide a lot of records for the auditor and you should be prepared to spend some time gathering and organizing the information.
Generally speaking, I highly recommend you know exactly what you are giving an auditor and what problems there are with the records before you put the records into the auditor's hands. Items that are fair game include, but are not limited to:
- Federal income tax returns
- Sales and use tax returns
- Real estate leases for the business
- Sales records
- Fixed asset purchase records
There is a statute that requires taxpayers to provide electronic records, which the auditor is quick to remind you. However, the statute does not specify which records you have to provide. So you can be selective.
We DO NOT recommend giving the auditor an electronic copy of your accounting system, like QuickBooks. Very few businesses record all their transactions in QuickBooks correctly, but the auditors always love to try to tax every poorly recorded transaction. We've seen a high number of companies that use QuickBooks just to generate invoices, which used invoices still in the system. Imagine an auditor trying to tax every draft of an invoice you created over the last three years! This really could and does happen, if you don't control what the auditor receives.
Do I Have to Provide Any Records?
I will also warn you that not providing any records is not a good game plan. Under Florida Chapter 212, the Department of Revenue has the fully legal authority to estimate what your company owes.
I can also tell you that it never fails that, when the state has to estimate a company's sales tax liability, the FL DOR always estimates high, usually very high.In other words, you are guilty until you can prove yourself innocent under Florida sales and use tax law. I know it does not seem fair, but this is the law. We have many a client that came to our doorstep facing huge assessments after trying the "I'll give you nothing" approach. I don't recommend trying this.
What is Sampling?
Some companies only have a few sales every month while other companies might have thousands of transactions over the same period. It is likely that an auditor will want to look at every transaction if there are only a few sales a month. However, if there are literally tens of thousands of transactions during the audit period, then it would be extremely inefficient for the auditor to look at every record. Instead, the auditor will sample a few transactions to predict how well you accounted for sales and use taxes during the audit period.
The sample usually consists of 3 months of records, one month from each year during the audit period. The state has the right to sample and the auditor is supposed to ask you to approve the sample methodology by signing an approval form.
We recommend that you DO NOT sign the sampling agreement. The state is going to sample whether you approve or not. The only thing that changes if you sign the agreement is that your company gives up the right to challenge whether the sample months are representative of the audit period. By not signing the agreement, you retain the right to challenge. Only a well-informed taxpayer knows that they can simply refuse to sign the agreement. You are now well informed.
4 Major Areas of Focus for the Audit
Almost every Florida sales and use tax audit will focus on 4 major areas as follows:
- Sales: This part of the audit will focus on whether you properly collected and remitted sales tax on taxable transaction and whether you can prove that you were justified in not taxing any transaction that escaped tax. Exempt transactions are a large focus for the auditors, so make sure your exemption and shipping paperwork is in order.
- Real Estate Rental: Florida is the only state in the country that imposes a sales tax on the rental of real property, including between related parties. If your business operates at a location in which the building or property are not owned by the same exactly legal entity as the operating business, then there is a high likelihood that you have sales tax on commercial rent concern. For example, the building and property are owned personally by the business owner or by a related entity. Even if no rent is technically paid, there could be implied rent, which can be subject to tax too.
- Fixed Asset Purchases: Every business that buys equipment, autos, furniture, computers, etc. wants to take a federal income tax deduction for these large purchases. The problem is that all these types of purchases are usually also subject to Florida sales or use tax. So the auditor will want to see your federal income tax return depreciation schedule to easily identify these types of large purchases. You will need to provide invoices for each of the fixed assets purchased during the audit period and they hopefully reflect sales tax paid.
- Other Expenses: It surprises companies going through a Florida sales and use tax audit for the first time when they find out that sales tax is imposed not only on the company's sales, but also on potentially all the company's expenses as well. Does your company buy office supplies online? Do you pay sales tax to the vendor or remit use tax to the state on these purchases? The "other expenses" category can be a mind field for businesses because may time the company does not retain the records to prove that sales tax was paid on the purchase. A simple claim that you never used your resale certificate does not work. The auditor has the full authority to presume you are guilty – and they do regularly.
Did Not Remit All The Sales Tax Collected
We get questioned quite often about the consequences of unreported sales tax; in other words the company did not report and pay all the sales tax it collected. This part of the conversation is often the hardest and most shocking.
Florida has very hard punishments for sales tax fraud, with under-remitting as low as $301 becoming a 3rd degree felony punishable by up to 5 years and jail and $5,000 in fines. Because we are attorneys, your conversations with our lawyers are confidential even if you decide not to hire us. Our firm handles criminal sales tax investigations as well as criminal sales tax defense before the state attorney's office. We understand and know how to navigate the mind field of being accused of Florida sales tax fraud and can help.
If you received a Florida sales tax audit notice and have known underreporting, then I highly suggest you talk to a qualified tax professional with experience in sales tax fraud.
Summary
If you have never been through a Florida sales and use tax audit before, then it can be very expensive learning experience. Very few companies escape a sales tax audit without owing some money. A few-thousand-dollar assessment is considered a good result by the end of most audits. However, I've seen many with assessments in the hundreds of thousands of dollars, even for small businesses. This is not something to be taken lightly.
Hopefully I have provided you some useful information that will help you navigate the audit process. If you have any questions or need Florida sales tax audit help, then please use the phone number or contact information at the top of this page to contact one of our attorneys today for a free initial consultation.
ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM the Law Offices of Moffa, Sutton, & Donnini, P.A. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA SALES AND USE TAX CONTROVERSY & CRIMINAL DEFENSE. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.
ADDITIONAL RESOURCES
FL TAX ALERT – USED CAR DEALERS TARGETED!!!!, January 19, 2013, by James Sutton, CPA, Esq.
CLOSE BUSINESS TO AVOID LARGE FL SALES TAX ASSESSMENT?, July 7, 2013, by Jams Sutton, CPA, Esq.
WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA?, May 1, 2012, by James Sutton, CPA, Esq.
TAMPA JEWELRY STORE MANAGER ARRESTED FOR SALES TAX THEFT, August 30, 2012, by James Sutton, CPA, Esq.
MIAMI AUTO REPAIR SHOP OWNER ARRESTED FOR SALES TAX, August 25, 2012, by Jerry Donnini, Esq.
FT. MYERS BUINESS OWNER ARRESTED FOR FAILING TO REMIT ONLY $8,000 IN SALES TAX COLLECTED, August 11, 2012, by James Sutton, CPA, Esq.
FL DOR'S GREATEST WEAPON – REVOCATION OF DEALER'S SALES TAX CERTIFICATE, August 6, 2012, by Jerry Donnini, Esq.
CRIPPLING PENALTIES UNDER FLORIDA SALES AND USE TAX LAW, July 19, 2012, by James Sutton, CPA, Esq.