FL tax controversy ALERT – PENALTIES CAN BE COMPROMISED AFTER FINAL ASSESSMENT
A Florida Division of Administrative Hearings ("DOAH") case was finalized on August 27, 2012 concerning the issue of whether the Florida Department of Revenue ("FL DOR") had the power to compromise penalties not contested until after an assessment became final. The case is Bell Industries, Inc. v. Department of Revenue, Case No. 12-2013, which originated when FL DOR attempted to levy on the taxpayer's bank account and the taxpayer responded with a simple, one page letter requesting some $23,800.41 be compromised due to reasonable cause for Florida Communication Services Tax purposes. The DOAH recommended order is interesting and many state and local tax professionals may find the result useful for their little bag of tricks when dealing with the FL DOR.
THE FACTS
The taxpayer, Bell Industries, Inc., purchased Skytel, a telecommunications company, from Verizon in early 2007. The newly purchased company had immediate filing obligations across most of the United States. The controller of the company, Mark Begle, testified that the transition of the state tax filing obligations from Skytel's systems to Bell's systems was a complete nightmare. Mr. Begle hired outside professionals to handle the compliance function. While the taxpayer's initial Florida Communication Service Tax (CST) returns were due in March 2007, the company's outside professionals did not get the first returns filed until July 2007 at which time all back taxes and interest were paid. All returns subsequent to July 2007 were filed timely until the Skytel business was sold to a third party in March of 2008. Thereafter, Bell substantially reduced personnel related to the Skytel business, including state tax personnel.
Under Florida law, filing a Florida CST return after its due date is subject to a late filing penalty under section 202.28, Florida Statutes. The FL DOR issued the first notice of delinquent return penalties in August of 2007. After several more notices, the FL DOR eventually sent out a Notice of Final Assessment mailed in September of 2007. The company also received a notice of delinquent return for May of 2008 (after the company was sold) on February of 2009. The FL DOR refused two requests to compromise the assessment on September 2007 and December 2008, claiming that the FL DOR no longer had the power to compromise after the assessment became final under rule 12-6.0033, Florida Administrative Code (F.A.C.).
In 2012, the FL DOR gave the taxpayer notice that bank accounts were about to be levied against to collect the funds. The taxpayer's controller responded to both the FL DOR Office of General Counsel with a simple one page letter explaining the facts and once again requested the penalties be compromised due to reasonable cause. The penalties made up all but $20 of the $23,800.41 assessment. The FL DOR submitted the letter to the Division of Administrative Hearings for guidance on the issue followed up by thirteen separate exhibits, testimony of Lucinda Kasten, a Revenue Specialist III, and a proposed recommended order in favor of the state. The only defense proferred by the taxpayer was the letter submitted to the Department of Revenue and Mr. Begle's appearance via teleconference to plea for the taxpayer.
THE LAW
Section 213.21, Florida Statutes (F.S.), provides in relevant part:
(2)(a) The executive director of the department or his or her designee is authorized to enter into closing agreements with any taxpayer settling or compromising the taxpayer's liability for any tax, interest, or penalty assessed under any of the chapters specified in s. 72.011(1). …
(3)(a) … A taxpayer's liability for penalties under any of the chapters specified in s. 72.011(1) may be settled or compromised if it is determined by the department that the noncompliance is due to reasonable cause and not to willful negligence, willful neglect, or fraud. … In addition, a taxpayer's liability for penalties under any of the chapters specified in s. 72.011(1) in excess of 25 percent of the tax shall be settled or compromised if the department determines that the noncompliance is due to reasonable cause and not to willful negligence, willful neglect, or fraud. [Emphasis added]
Florida Administrative Code (F.A.C.) Chapter 12-13 titled "Compromise and Settlement" implements section 213.21, F.S. Rule 12-13.003, F.A.C., provides the procedure for requesting a compromise in relevant part:
(1) Subsections 213.21(2)(a) and (3), F.S., authorize the Executive Director, or the Executive Director's designee, to enter into closing agreements settling or compromising a liability for tax, interest, or penalty under any of the chapters specified in section 72.011(1), F.S.
(2)(a) No tax, interest, penalty, or service fee shall be compromised or settled unless the taxpayer first submits a request to compromise or settle tax, interest, penalty, or service fees. ...
(2)(c) The taxpayer must establish in his or her request: ...
(2)(c)2. In regard to penalty, that the noncompliance was due to reasonable cause and not to willful negligence, willful neglect, or fraud. The taxpayer shall be required to set forth the facts and circumstances which support the taxpayer's basis for compromise and which demonstrate the existence of reasonable cause for compromise of the penalty or service fee and such other information as may be required by the Department.
Grounds for finding "reasonable cause" are set for in Rule 12-13.007, F.A.C., which provides the in relevant part:
(1)(a) The Executive Director or the Executive Director's designee, as enumerated in Rule 12-13.004, F.A.C., will make a determination of whether the taxpayer's noncompliance was due to reasonable cause and not to willful negligence, willful neglect, or fraud based on the facts and circumstances of the specific case. The standard used in this determination shall be whether the taxpayer exercised ordinary care and prudence and was nevertheless unable to comply.
(b) The exercise of ordinary care and prudence may be demonstrated by facts and circumstances as stated in writing by the taxpayer. Additionally, in those cases when a Department employee has information or knowledge supporting the taxpayer's assertion of ordinary care and prudence, a finding of reasonable cause may be based upon such additional information or knowledge, provided the finding of reasonable cause is documented to reflect such information or knowledge. ...
(d) When evaluating the facts and circumstances relevant to penalties imposed pursuant to a billing not resulting from an audit, the Department shall consider:
1. The timeliness of payments made by the taxpayer during previous reporting periods;
2. The materiality of the tax deficiency to which the penalty relates within the context of the amount of the same taxes correctly reported and remitted;
3. Whether the taxpayer has initiated controls or other actions related to the errors that resulted in the billing and related penalties in order to promote better compliance in the future; and
4. Whether the tax was collected and not remitted to the state by the taxpayer.
(2) Reasonable cause is indicated by the existence of facts and circumstances which support the exercise of ordinary care and prudence on the part of the taxpayer in complying with the revenue laws of this state. Depending upon the circumstances, reasonable cause may exist even though the circumstances indicate that slight negligence, inadvertence, mistake, or error resulted in noncompliance. Consideration will be given to the complexity of the facts and the difficulty of the tax law and the issue involved, and also to the existence or lack of clear rules or instructions covering the taxpayer's situation.
Rule 12-6.0033, F.A.C., titled "Protests of Assessments Issued by the Department Regarding Tax Returns," provides in relevant part:
(1)(a) A taxpayer may secure review of an assessment issued by the Department regarding tax returns, other required filings, and billings by implementing the provisions of this section. When a taxpayer has pursued review under the provisions of either Rule 12-6.002 or 12-6.003, F.A.C., or both, or has failed to comply with the time limitations or has exhausted the review rights in those rules,the taxpayer shall not have the right to pursue review under this section. The assessment procedure under this rule and review of such assessments regarding tax returns, other required filings, and departmental billings shall not preclude an audit of taxpayer books and records, and shall not preclude audit assessments or other assessments for tax deficiency. ...
THE RECOMMENDED ORDER
Administrative Law Judge Lawrence P. Stevenson should be commended for looking through the Department of Revenue's thorough arguments, exhibits, and testimony as well as the taxpayers extremely simple explanation and plea for relief of penalties to find what the law really provides. While finding for the state in that the levy against the company's bank account was valid, Judge Stevenson found for the taxpayer in that the Department of Revenue's reliance on rule 12-6.0033, F.A.C. was misguided. The court agreed that Rule 12-6.0033, F.A.C., does provide a time limit on administrative protest of the facts and legal reasoning of a proposed assessment - namely until the assessment becomes final. However, the court went on to recommend that the time limitations in rule 12-6.0033, F.A.C., are limited to the administrative rules in Chapter 12-6 and do not limit the Director of the Florida Department of Revenue from entering compromises of tax, penalties, or interest as provided for in section 213.21, F.S., or rules 12-13.003 or 12-13.007, F.A.C. As such, Judge Stevenson provided a recommended order that the Department of Revenue belay the execution of the bank levy until the taxpayer has a reasonable period of time in which to submit a request for settlement or compromise pursuant to rule 12-13.003, F.A.C.
AFTERTHOUGHT
As is often the case when dealing with the Florida Department of Revenue, many positions taken by our comrades at the Florida Department of Revenue are based on what someone has told them the law provides without actually reviewing the law. Combine this with the fact that the Florida Department of Revenue already takes a very taxpayer unfriendly view of the law and businesses are left with a very hazardous administration of the tax laws in the state of Florida. More likely than not, if an issue arises on audit that is remotely gray, then a taxpayer has to spend the time, effort, and financial resources to fight the issue at the administrative level. For Bell Industries, Inc., the company literally had to get in front of an administrative law judge before someone actually was willing to read and interpret the law correctly.
It is also worthy of note that if you read the proposed recommended order provided to the court by the Florida Department of Revenue [downloadable below], our comrades are once again claiming that a "proposed assessment" is not final until after the period to protest the proposed assessment is over despite the fact that the Department of Revenue argued the exact opposite in Verizon Business Purchasing, LLC v State of Florida, Department of Revenue, Case No. 2011 CA 1498 (Decided June 1, 2012).
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. 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.
AUTHORITY
Section 202.28, F.S.
Section 231.21, F.S.
Rule 12-6.0033, F.A.C.
Rule 12-13.003, F.A.C.
Rule 12-13.007, F.A.C.
COURT DOCUMENTS
Bell Industries, Inc. vs. Department of Revenue, DOAH Case No 12-2013, Recommended Order, August 27, 2012.
Letter from Mark Begle, Controller, Bell Industries, Inc. to Office of the General Counsel, Department of Revenue, dated March 21, 2012 (request of abatement of penalties).
Respondent's Proposed Recommended Order, DOAH Case No. 12-2013 (not accepted by the court)
ADDITIONAL RESOURCES
FL tax controversy ALERT – VERIZON – FL DOR MISSES SOL WITH "PROPOSED ASSESSMENT", by James Sutton, CPA, Esq., February 17, 2012.
© 2012 All rights reserved - James H Sutton Jr