FL SALES AND USE TAX – AUDIT TIMELINE FROM THE DOR'S PERSPECTIVE
Given how stealthily complex Florida sales and use tax can be for most businesses, a sales and use tax audit can be a very expensive educational lesson for business owners. Our firm spends a lot of time writing articles on specific sales and use tax topics and even very industry specific topics with the goal of helping business owners and taxpayers alike avoid getting hurt by a misunderstanding of Florida sales and use tax law. This is the first article in a series that aims to help business owners and tax professionals understand the Florida sales and use tax audit process. In this article, we focus on the audit timeline. Using a schedule mandated to the auditors, we will briefly help to uncover the mystery behind why auditors demand things at certain times – and arm you with the information necessary to push back when appropriate.
The Auditor's Audit Schedule
DAY 1 - ISSUANCE OF DR-840
This is beginning of the nightmare, for many taxpayer. This notice is legally required before a sales and use tax audit can begin and the audit may only look back 3 years from the date of the audit notice. The DR-840 asks for everything including the kitchen sink and includes a place for the taxpayer to voluntarily expedite the audit process. Otherwise, the audit is not supposed to start for sixty days after this notice. Many people get pushed by auditors to waive the 60 day period, but only do so if you are comfortable that your records are good and you know what you are getting yourself into.
DAY 60 - 60 DAY WAIVER EXPIRES
The audit must officially begin between the 60th day and the 120th day from the issuance of the DR-840. The sixtieth day is when the auditor will really start pushing to begin reviewing records. Yes – the auditor does have a right to ask for bank statements, federal tax returns, and (to some extent) electronic records. Just be very conscious of what you are giving the auditor. If you are not very familiar with the nuances of sales and use tax law in Florida, then it is a good idea to at least speak to a tax professional who is before handing over records. All too many taxpayers believe "everything is fine" and try to handle the audit themselves, only to find out they were doing many things wrong. And yes, the auditor does have the right to request a tour of your business. Just make sure you know what the auditor is looking for before (s)he visits your business. One on one conversations in your business without preparation can often lead the auditor down many paths you don't want them to go.
DAY 120 -AUDIT NEEDS TO COMMENCED BY THIS DATE OR "WE LOSE STATUTE"
If the audit does not officially start by 120 days after the issuance of the DR-840, then the audit notice is voided and the state losses the right to review the 1st 120 days of the audit period. This what is meant by "WE LOSE STATUTE" above, and it is a firing offense for an auditor. So they take it very seriously. If you get very pushy phone calls and letters around the 90th day, this is why. In fact, the auditors are specially told "IF YOU DO NOT HAVE ACCTG RECORDS BY DAY 90 - 95 NEED TO SEND DR-54; DEMAND FOR RECORDS AND BE READY TO ISSUE A DR-1215 BY DAY 120." The auditor does not have the authority to extend this 120 day mark, but it is a little known secrete that the taxpayer can request to extend the 120 day timeline and then the DOR has the power to grant the request. The request must be in writing. Alternatively, you can get enough records to the auditor so the audit can be considered "started." Simply sending 2 or 3 years of federal income tax returns is usually enough to satisfy the auditor's supervisor. Note – not giving anything will result in the state making a very "high" estimate of what the business owes – and the state has the statutory presumption of correctness in estimates. The taxpayer then has the burden of proving them wrong. So it is in the taxpayer's best interest to be very informed but cooperative with the state.
DAY 210 - LAST DAY FOR FIELD WORK
This is one of those dates that creates a whirl wind of pressure on the auditor and confusion for the taxpayer. Many times that auditor has been silent for a month or two, then the taxpayer gets a phone call or threatening letter saying "after multiple requests for records, we have not received x, y, & z documents." Often, the auditor didn't make multiple requests, but the letter is a good CYA for the auditor with his/her supervisors. Either way, the pressure is on for the auditor to get the audit wrapped up and the taxpayer will feel the pressure build. The taxpayer should note – while it is presented as if the end of the world is about to happen, there are several more opportunities to present information and argue with any potential assessment at this stage of the game.
DAY 220 - LAST DAY FOR ORIGINAL DR-1215
The DR-1215 is called "Notice of Intent to Make Audit Changes" and it is usually many pages long. I've seen them exceed than 100 pages long. The DR-1215 spells out everything the auditor things you might owe with details of exactly what is potentially taxable. Page 1 is a summary page that includes the tax, penalties, and interest potentially due, which can result in cardiac arrest for many. Remember, this is merely an estimate. The DR-1215 is also the perfect road map for exactly what the taxpayer has to do to reduce the tax assessment. The document is broken out into Schedule A (sales tax on sales to customers) and Schedule B (use tax on purchases). The DR-1215 gives you the right to request a conference with the auditor within 30 days to review what changes should be made.
DAY 260 – LAST DAY FOR REVISED DR-1215
The auditor is under a LOT of pressure at this stage to close out the audit. Many auditors have regional rules that they can only modify the DR-1215 once, so be cautious. When you get the auditor information to reduce the potential tax assessment, make sure you give them everything at once because they many only make changes once. Remember to utilize the conference if the auditor has not made the changes you believe are justified. Also, request a waiver of all penalties.
DAY 295 – LAST DAY TO MAKE AUDIT ADJUSTMENTS BEFORE ISSUANCE OF NOPA
The Notice of Proposed Assessment (NOPA) is issued out of Tallahassee. It is the document signaling that the audit is over and initiates the timeline for your administrative protest rights. According to the FL DOR's schedule, this is the last day to make changes to the audit before the NOPA is issued. In reality, changes to the final amount due can be made in between the time the audit is sent to Tallahassee for review and the time the NOPA is issued. The auditor merely needs to send the additional information up to the DOR agent in Tallahassee assigned to review and issue the NOPA.
DAY 305 - PREFERRED LAST DAY TO ISSUE NOPA
Three hundred and sixty five days after the issuance of the DR-840, the statute of limitations runs out for the audit period. The state must have a final assessment before the 365th day. However, once the NOPA is issued, it does not become a final assessment until 60 days later. So, the NOPA must be issued 60 days prior to the days prior to 365th day. This is why the FL DOR's schedule shows that the NOPA should be issued on or before the 305th day.
DAY 365 - STATUTE OF LIMITATION EXPIRES EXCEPTIONS; YOU WILL NEED TO HAVE A DR-872 FROM TAXPAYER NO LATER THAN DAY 295. IF YOU DO NOT HAVE A DR-872 BY DAY 295; THEN NO FURTHER REVISIONS CAN BE MADE DUE TO THE FACT THE WE COULD LOST THE STATUTE OF LIMITATION.
There is a process by which the taxpayer and FL DOR can agree to extend the statute of limitations through both parties approving a DR-872 Extension of Statute of Limitations. An execution of this document will allow the audit timeline to be extended past the 365 day mark for whatever length of time the parties agree. The extension is usually either 6 or 12 months. If the taxpayer wishes more time to get records together, then the extension is usually in the taxpayer's best interest. But if the issue is something the taxpayer believes the auditor will not listen to reason on, then an extension may not do anyone any good. For legal arguments, it is often better to close out the audit and take up on administrative appeal, known as a protest.
If you or your clients received an audit notice and you would like to take advantage of our free initial consultation policy, then please don't hesitate to contact our offices by phone or email.
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 of the firm and his primary practice area is Florida sales and use tax controversy. Mr. Sutton worked in the State and Local Tax department of a "big five" accounting firm for a number of years and has been an adjunct professor at both Stetson University College of Law since 2002 teaching State and Local Taxation and Boston University LLM of Tax program since 2014 teaching the sales and use tax portion of a Consumption Tax class. You can read more about Mr. Sutton in his firm BIO.
ADDITIONAL RESOURCES
FLORIDA SALES TAX AUDIT HELP, by James Sutton, CPA, Esq., dated July 14, 2013
CLOSE BUSINESS TO AVOID LARGE FL SALES TAX ASSESSMENTS?, by James Sutton, CPA, Esq., dated July 7, 2013
BROWARD COUNTY AUTO DEALER ARRESTED FOR SALES TAX THEFT, by Jerry Donnini, Esq., dated April 24, 2013