As has been noted by our firm and in other comments in articles and message boards, the FL DOR has experienced much attrition in its auditor ranks over the last few years. There are a number of reasons and I won't go into those because they cover the board. But, in trying to address that attrition, the FL DOR has been somewhat slow to hire replacement auditors. The word on the street, though, is that they are aggressively trying to staff auditors to be able to step up audits starting in 2015.
If you have experience with FL DOR audits, especially sales and use tax audits, then you have noticed that the auditors are aggressively pushing audit time lines. This comes from directives that audits should be completed in roughly seven months from the date of issuing the Notice of Intent to Audit Books and Records (DR-840 or DR-846) to issuing the Notice of Intent to Make Audit Changes (DR-1215 or DR-1216). With this "fast break" approach, auditors are calling taxpayer just before or just after issuing the audit notice to try and schedule the audit field work. Auditors are doing this despite the requirement under the Florida Taxpayer Bill of Rights giving taxpayers the right to at least 60 days before the audit starts under section 2112.13(5), Florida Statutes ("F.S."). I have heard some auditors suggest the 60 day period is "suggested" and not required.
Almost without fail, the auditor's initial call involves questions about every facet of the taxpayer's operations and what kind of information is available. Again without fail, auditors will ask for "electronic" records. Auditors have recently been telling me that this speeds up the audit. Though I take issue with the statement, there is a bigger issue that relates to the simple and often innocently delivered question about electronic records by the auditor. The seasoned auditor can make it sound like "electronic" records make an otherwise daunting situation much better. But my personal experience indicates that you should be wary of acquiescing to the auditor's demands.
I first have to say that I am not advocating for withholding information. My position is exactly opposite that. Sections 212.12 and 212.13, F.S., provide the basis for FL DOR records requests. My caution is that electronic records are "dangerous" in auditor hands in too many instances. The danger I reference is not in the information itself, per se. The danger is in how the auditor uses the information. The auditor, in most instances, hopes for QuickBooks (or other popular accounting system) records that can be entered into its computer and filtered to all ends of the Earth to evaluate the taxpayer's records. If the taxpayer enters invoice information directly into accounting systems then the risk is somewhat reduced.
But, in too many instances, accounting systems are used by taxpayers for operational purposes beyond simply recording transactions. I have found this to be true for smaller businesses with smaller administrative staffs and those with more complicated transactions. My recent experience finds that these types of taxpayers, coupled with younger and more inexperienced auditors, invariably leads to misinterpretation of the information by the auditors. And, as is the case with this "flawed" system, the protest process almost treats the auditor's findings as infallible and the taxpayer is guilty until proven innocent. Oftentimes, this is nearly impossible to do even when the auditor's findings are completely inaccurate.
Let me explain by example. Once case I am dealing with involves a small family run business. They enter transaction information into QuickBooks to document their operations. But, as with most businesses, they are concerned about profitability and "redundantly" enter sub-component information in to track costs essentially for cost accounting purposes. Unrepresented during the audit, they cooperated in good faith with the audit and provided QuickBooks detail for the audit period. This particular auditor had been with the FL DOR less than a year when the audit was commenced.
Despite explanations from the taxpayer about its "electronic" records, the auditor (and ultimately the supervisor also) misunderstood the sub-components and assessed tax on items taxed on the invoices. As is the case now with auditors, they are evaluated and "graded" significantly on the time it takes to do the audit. Naturally, this encourages (if not ensures) errors related to hurrying to complete an audit. In this case, the auditor chose to rely on the "electronic" information instead of reviewing the invoices which broke down the taxable and non-taxable components and properly charged tax on the transactions. The auditor chose not to take the time to reconcile the invoices to the electronic records to determine the true nature of the taxpayer's electronic records. I believe this was encouraged by the auditor's supervisor for two reasons: (1) the assessment was significant and (2) the audit was completed (inaccurately) in much less time. I could go into the current trend of aggressiveness taken by the FL DOR in recent positions but that is a separate and much longer article.
Cutting to the chase, we are now working with the taxpayer to essentially re-audit their records for the audit period to show the auditor's error. Though this may sound easy, it in most cases will be difficult and time consuming. I am dealing with another taxpayer who provided electronic records to an auditor who pulled out numbers that are untraceable to the information provided to her. Imagine how difficult it would be to show the error in numbers that are almost impossible to identify from actual records!
A very common third example is when a small business uses QuickBooks to generate bids through the invoicing function. So when the business owner bids on five $10,000 jobs but gets only one, the electronic records reflect $50,000 of sales while the company really on had $10,000. While there is a function in QuickBooks for providing bids that does not affect the sales numbers, many small business owners are simply not trained enough in using QuickBooks or accounting. In this situation, QuickBooks is truly not an accounting system for the business and providing electronic records in a case like this can lead to a devastating audit assessment based on fictitious records. Unfortunately, auditors will relentlessly push business owners saying that they business owner is required to turn over all electronic records. This is simply not true. In this particular case, electronic accounting records do exist. These three brief examples show how efforts to cooperate with an audit through electronic information can backfire with costly ramifications. Once the auditor misinterprets electronic information, it is almost impossible to change their mind at the local service center level. This is made more common by the fact that auditors are now generally providing a status update for the audit in the workpapers sent to the client which start the 30 day informal field conference period. A majority of taxpayers don't look at the workpapers immediate (which are generally mailed out which also reduces the effective 30 day period) and then generally have trouble deciphering the audit findings from poorly drafted Explanation of Items for each exhibit. Again, often the result of an auditor trying to complete the audit in as little time as possible.
This unfortunate series of events leaves the taxpayer confused as to what the auditor's conclusions are and frustrated with the process generally. The taxpayer then has little choice but to involve a professional to try and undue the errors made at the audit level. I caution taxpayers and professionals alike to be aware of this risk immediately upon receiving an audit notice. Addressing the risk posed by "electronic" information can avoid headaches and expenses that don't need to be incurred. Our firm has seen this happen far too often and can assist in managing the audit process to avoid auditor error so that correct audit findings are made at the audit level which avoids the inconvenience and expense associated with the protest process. Please contact us if you have any questions with auditor demands or the audit and protest process generally. We are here to help ensure taxpayer rights are not trampled in FL DOR audits.
About the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his law degree and L.L.M. in Taxation from the University of Florida. To learn more about Mr. Parker, please visit his firm bio.
ADDITIONAL RESOURCES
WHEN A CLOSED BUSINESS ISN'T CLOSED TO FL DOR, published September 26, 2014, by Matthew Parker, Esq.
FL SALES AND USE TAX – AUDIT TIMELINE FROM THE DOR'S PERSPECTIVE, published April 6, 2014, by James Sutton, CPA, Esq.
GO TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.